What do you believe to be true that's actually false?
By Alan Steel
Published in The Scotsman
Saturday 17 March
Having just officially qualified as an angry old man I hope I can be forgiven for reminiscing about my younger days and having a swipe at those who write about investments who just regurgitate stuff that might have made sense once upon a time.
Once a time upon a time I had grannies. Grannies are important. They're great sources of wisdom. My grannies let me into a few secrets which served me well over the years. Secrets like - 'you never know what's in front of you' - and 'once you get a reputation for getting up early every morning, you can sleep in all day'.
Some years ago another wise old head - this time in the investment world - said, 'Always ask yourself, what do you believe to be true that's actually false?'
Let me give you a couple of examples. Like an old rickety pier I was on in Florida, I was established in 1947. Since then there have been nine occasions when the US Budget surplus has peaked and then fallen. And there's also exactly nine occasions when US Budget deficits have peaked and fallen. Now we all know we're constantly told that deficits of any kind are bad for stockmarkets.
But let's check the facts. Take the so-called good guys first - the surpluses. The average three year cumulative performance of the US S&P 500 Index with dividends reinvested, since 1947, is only 9.2%. The worst performance is from the peak surplus of 1999, when over the next three years the Index fell, including reinvested dividends, by 40%!
Now let's look at the so-called bad boys - the deficits. The average three year cumulative performance in the same Index, after deficits peaked, is 36% and the best three year was from the beginning of 2003 - up 38%. Some difference.
Here's another one - don't invest in Active Funds because you can't beat an Index! More specifically we're always told that 85% of fund managers cannot beat an Index, presumably leaving only 15% who can.
I don't know where this number comes from because it's been the same statistics over the last seventeen years. Seems remarkably constant. Does anybody ever check the numbers? Last week somebody in the National Press repeated this myth - 85% of managers can't beat the Index, so just invest in Trackers.
I checked the numbers. I looked at UK Equity Income fund managers and their performance figures over the last ten years compared to the total return from the
FTSE. 67% of managers beat it! Hey - that's over four times as many. But what's in an Index?
It's made up of loads of shares, in a wide range of sectors, and typically is dominated by a few mega companies. Do you know the Capital Value of three companies in the FTSE is 40% bigger than the 50 least valuable shares?
On any day 50% - 60% of the shares may fairly reflect the value of the companies, and the rest are either grossly overvalued or undervalued.
What's the best way to make money? According to Warren Buffett it's Buy Cheap and Sell High. And that's what the best fund managers do. They don't try to match an Index because they don't want the overvalued stuff. Who would? Actually if you think about it a Tracker Buys High and Sells Cheap!
Here's a final thought though - if it were indeed the case only 15% of managers beat an Index, why not just invest with them? Take Neil Woodford for example. His High Income Fund beats the pants off the FTSE - up 144% in ten years versus the FTSE's 60% total return.
Billions of folks' hard earned savings lie wasting away in Trackers because of false beliefs. I know where my grannies would invest.
For publication by The Scotsman
On Saturday 17 March