What caught my eye this week.
I always stress to friends who know of my investing obsession that – from the position of pure cost-benefit analysis – my stockpicking has been an unproductive waste of time.
Me and The Accumulator thrashed this out in debate years ago. I invest actively for the fun and challenge, I said. He wasn’t convinced.
And it’s true, I probably wouldn’t do it if I didn’t – naughtily, preposterously – think I had a chance of beating the market.
Luckily, I have done, the way I measure it, over the medium to long-term. (Unitised and against a few 100% equity benchmarks, but I don’t adjust for risk, which could make things look better or worse, depending on the year).
2020 has been particularly ridiculous. Everything has worked! It usually doesn’t. Luck has loomed large, too. It doesn’t always, either! It went against me in late 2018 / early 2019, for example, and I spent the year trying to claw back and making things worse.
Swings and roundabouts.
The point is I always caution my friends it’s only in recent years (especially this year) that earning an extra 1%, 5% or for much of the time even 10% has compared at all favourably to trying to earn more money from a traditional route.
I started with mid five-figures in savings less than two decades ago. I’ve never earned a lot, by the standards of my peers. Compound interest takes time. The metaphor is a slow rolling snowball for a reason.
Even putting more effort into monetizing that perennial underachiever, Monevator, might have been more profitable.
The irony of alpha
Nick Maggiulli did his usual brilliant job tackling all this in a post this week. Explaining why You Don’t Need Alpha, Nick writes:
How many people have earned alpha (net of fees) consistently for multiple decades?
Conservatively, I would say there have been a couple hundred throughout history.
Being one of those people (or trying to select them ahead of time) is near impossible.
More importantly, how much will that alpha change your financial life even if you do happen to acquire it?
For a little bit of annual alpha, the answer is very little.
For example, let’s assume that the market will return 4% a year (after-inflation) going forward and you can earn 1% above this (net of fees) over the next 10 years. How much more money would you have 10 years from now?
About 10% more.
Obviously you can play with these figures. You can model higher (and even more unlikely) alpha.
More – cough – realistically you can run the experiment for 30 years. It does add up.
But then you spent 30 years trying to beat the market when you might have been doing something else instead.
Where’s my novel, eh? That’s what the teenage me would want to know.
The irrelevance of alpha
I should mention my friends have typically needed little persuasion that I’ve wasted my time obsessing over the stock market.
I was living like a graduate student well into my 40s. My friends didn’t see the sports cars they expected from an obsession with the stock market. (Because they didn’t understand that compounding your own modest wealth sensibly takes time. If you need a sports car in a hurry, get hold of other people’s money and take a cut…)
There was a particularly delusional air about proceedings as my last rental place was run down before I finally bought my flat.
“Where did it all go wrong?” they gently wondered.
The other reason they need little persuasion I’ve been a dud is I try to mostly talk about my mistakes and bad calls.
Superstitious! It’s grounding.
And… luck, luck, luck.
But despite all this I don’t feel I’ve wasted my time pursuing alpha. While I didn’t end up trying to launch/run a fund (another story) it’s led me in interesting directions, career-wise.
It also resulted in this blog, which judging by the generous feedback is my best contribution to the world so far.
Finally, shepherding my nest egg so closely has really made me care about my nest. I’ve added more eggs over time than perhaps I would have, too, and I’ve been careful – big picture – not to break them.
“It is the time you have wasted for your rose that makes your rose so important.”
Have a great weekend.
Freetrade: How to build your portfolio – Monevator
From the archive-ator: Six reasons small cap shares can supercharge your returns – Monevator
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1
Inheritance tax receipts fall for first time in a decade due to £1m own home limit – ThisIsMoney
House prices bounced back in July but beware a ‘false dawn’, says Nationwide – BBC
Cut in stamp duty has only really benefited London, says Zoopla – Guardian
US economy plunges at a titanic 32.9% annualized rate in second-quarter – Market Watch
Universal Credit requires £8bn overhaul, says cross-party report – Guardian
The role of gold; a less than perfect inflation hedge – Advisor Perspectives
More on gold: Sad Old Man Rocks making new high – The Reformed Broker
Products and services
Will superfunds come to the rescue of UK pensions? [Search result] – FT
Savers warned not to be fooled by very short-term teaser rates of 1.45% – ThisIsMoney
Car finance commission to be banned. How much will you save? – Which
Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade
Argos to stop printing catalogue after almost 50 years – Guardian
F&C flags 50th year of rising dividends after flat but furious first-half – CityWire
Active Non-Transparent ETFs: What are they good for? [US but relevant] – Morningstar
Homes with curve appeal [Gallery] – Guardian
Comment and opinion
Avoiding the ugly scramble – Morgan Housel
How to sell a house – Finumus
Be aware the ‘I love me’ affect – Klement on Investing
The permanent portfolio is on a roll – The Irrelevant Investor
The 4% budget: Spending flexibility is more important than withdrawal rate – Vanguard blog
How much should you spend on an engagement ring? – A Wealth of Common Sense
Isaac Newton and the perils of the financial South Sea – Physics Today
A billionaire created a perfect experiment by erasing $34bn in student debt – Bloomberg
Holidays in the sun are not a human right, people – Simple Living in Somerset
Naughty corner: Active antics
Stranger things: Evaluating the value/growth divergence – Verdad
Smithson IT closes in on £2bn: A deep dive – IT Investor
Why famed Wall Street veteran Paul Tudor Jones got into Bitcoin – Institutional Investor
A deep dive into the seasonality factor – Dual Momentum
Cullen Roche interviewed by The Investor’s Podcast [Podcast] – Pragmatic Capitalism
Half a year of wall-to-wall media coverage and people still wildly misunderstand the Covid-19 statistics – in particular the (tiny) risk of dying young – Advisor Perspectives
R rate may be > 1 in England; possible exponential spread for first time since May – Guardian
Visiting people at home banned in parts of Northern England – BBC
Boris Johnson postpones wider easing of lockdown measures in England – CNBC
The global struggle to produce enough disinfectant wipes to meet demand – Slate
Kindle book bargains
[Note: These deals are only available until the end of Friday 31 July]
Drink?: The New Science of Alcohol and Your Health by Professor David Knutt – £0.99 on Kindle
The Economics Book: Big Ideas Simply Explained by Niall Kishtainy- £1.99 on Kindle
When Genius Failed: The Rise and Fall of Long Term Capital Management by Roger Lowenstein – £0.99 on Kindle
The Hidden Life of Trees by Peter Wohlleben – £0.99 on Kindle
Off our beat
Regulating technology [Deep dive] – Benedict Evans
How digital adverts subsidize the worst of the Web – Wired
What changes [financially and otherwise] in the first year of marriage – New York Times
Thinking for oneself – Farnham Street
“The absolute fundamental skill that underpins your success is your ability to spend less than you earn. This is surprisingly difficult for a great many people, but without this you’ve got literally nothing.”
– Pete Matthew, The Meaningful Money Handbook
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