$200 Party, page-130

You make my argument for me - that being that very very few investors outperform the market on a sustainable basis over time, and that most would be better advised investing in a low-cost index fund.

That is exactly the advice I give to anyone who asks me about creating wealth in the stock market.

And it is not just a matter of "beating the Index" that needs to be measured if one wants to invest for one's own account, but what elevated idiosyncratic risk (what the asset consultants term "tracking error") attends any outperformance that might be generated.

So if one is going to beat the Index, it had better be by a decent margin to account for the tracking error one is certain to be taking on.

I know of a number of private investors who have beaten the Index over long periods of time - not just by a few hundred basis points per annum, but by double-digit percentages.

These are the only sorts of returns which I think - on a risk-adjusted basis - justifies investing for one's own account.

But the common trait of these private investor out-performers is that they are high-conviction investors; researching deeply and thoroughly and when they see something they really like, they stick 70% or 80% of their capital into the 5% or 10% of top investment idea stocks in their portfolio.

To do this requires - by definition - higher-than-average portfolio turnover and rotation from stocks that have become expensive, into stocks that are sufficiently under-valued to justify taking punchy, hairy-chested bets.

So take CSL as a case in point: not selling CSL 18 months ago when it was as expensive as it had ever been (by several standard deviations) and using the proceeds (even after-tax) to buy other stocks that were ridiculously cheap at the time has been a major wealth creating opportunity cost (CSL has under-performed the broader market by close to 50%, let alone some individual high-quality stocks which have more than doubled while CSL has fallen).

There is no way any investor will be able to beat the market with that sort of ALPHA anchor embedded into his/her portfolio (unless the portfolio positioning of the expensive stocks is not very meaningful, in which case it begs the question of "Why bother having an immaterial individual stock position, to begin with?")


"Most retail investors are at a significant disadvantage to professional investors in terms of research and tools."

This is a bit of a myth.

From first hand experience spanning an extended period of time, the institutional imperative introduces a lot of inefficiency into the investment process.

In a great number of ways, investing free of the constraints of the institutional straight jacket - with its bureaucracy, box-ticking, going-through-the-motions, report-writing, fund administration, marketing, meetings with gatekeepers and clients, business development issues, internal presentations, internal meetings, people issues (investment professionals have a certain diva attitude about them, making them difficult to manage), having to engage with brokers who add very little value - is a competitive advantage compared to being an institutional investor.

In fact, I know of a number of individuals whose investment performance was far better once they had retired from professional investing, than it was when they were full-time portfolio managers!

Not just that, but I meet up routinely with a group of private investors - who have never worked in a professional investing setting - to exchange views and I can tell you that I would every day give my money to most of them to manage, than I would to any professional investment manager, despite professional investment managers having all the "resources and tools" at their disposal.

Those resources and tools are not all they are cracked up to be; often they are merely "noise", which crowds out independent thinking.

In fact, I have given some of my family money to one such private individual to manage.

No names, no pack drill, but here is his performance history (this is just one quite anonymous and anassuming guy, not managing hundreds of millions of dollars, helped by an offsider.... no pomp, no status, no superannuation clients, no engagement with asset consultants...just investing his family capital along with that of a few of his associates):




He has beaten the All Ords by 18%pa, and the ASX200 (including franking credits) by around 13% pa, over that period.

I know that the way he achieves those sorts of investment returns is that he willfully sells stocks whenever he assesses them to be expensive, and he recycles the proceeds into stocks which he assesses to be cheap.

It's hard to contemplate investing with a view to maximising one's personal wealth while at the same time tying up capital in stocks which are expensive when there are investment alternatives that are cheap.

My clear sense is that MQG is today where CSL was 18 months ago - well-loved and expensive.


PS. Your reference to having a mere smattering of CSL and MQG after exceptional share price performance cannot be, due to the laws of basic arithmetic. Unless, of course, you started off with a really teeny investment in each of those stocks which outperformed to the point of reaching smattering-size representation in your portfolio. (In which case what is the point of making a mere teeny investment to begin with)?

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