Intelligent Investing™ Capital Asset Management

Investing can be a strange old business that makes otherwise intelligent people behave in – let’s just say – less than logical ways.

Fuelled by a rapidly rising market, Bitcoin, tech stocks, Tesla, are delivering fantastic returns for their investors. However, those who are not in these sectors or stocks can suffer a severe sense of missing out – FOMO – which risks tempting them into more speculative areas of investing. 

Let’s look at the evidence.

Professor Hendrik Bessembinder https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447 revealed that of the US$47 trillion of shareholder wealth created in the US equity market between 1929 and 2019, half was generated by around 25,000 companies and the other half by around a mere 80 companies.

This presents investors with two choices

  1. Pick the 80 great firms and ignore the other 25,000 using your analytical skills to work out who they are and try to shoot the lights out on performance
  2. Recognise that markets appear to be pretty good at reflecting information into prices, and the risk of missing out on these 80 (i.e. <0.5%) stocks is simply too great to risk.

How many investors were smart enough to own Amazon in the early days?  Well, anyone who owned a US (or global) equity index fund!

Why active management fails

An active fund manager selects try to outperform the market by selecting the companies they believe will deliver the best performance.  It is a tricky business, for which they get rewarded handsomely. 

The investor has to try and pick the manager who they think has picked the right companies and will continue to pick the right companies in the years ahead, not just in the past. 

We know from a long-running (20-year) study by Standard & Poors https://www.spglobal.com/spdji/en/research-insights/spiva/ that around 90% of professionally managed US, international, and emerging markets funds failed to beat appropriate market benchmarks after costs.

We also know that there will be some funds that have seemingly stunning past performance, which may be down to skill or luck.  As the old saying goes:

‘Markets make managers’

Any manager overweighting US tech stocks will have performed well in the past few years, yet what does the future hold? Will these companies be among the 80 winners of the future, delivering returns higher than the expectations already baked into current prices? The truth is no one knows.

Own the world

We believe that a well-diversified, low-cost approach to capturing market returns gives our clients the best opportunity of growing and protecting their wealth so that they can make a successful transition to and through retirement.

And of course, by owning all of the companies in the market they are guaranteed to own a share in the next Apple, Amazon, or Tesla.

To find out how we can help you invest intelligently click here

  

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