The Evidence-Based Investor

Author Archives: TEBI

  1. Why don’t fund trustees listen to Warren Buffett?

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    Fund trustees have a fiduciary responsibility to act in the best interests of those they invest on behalf of. But Warren Buffett, the world’s most famous investor, says they’re failing in that duty by not using low-cost index funds. So why don’t trustees follow Buffett’s advice?

     

    Warren Buffett is generally accepted as the world’s most successful living investor. His company Berkshire Hathaway, of which he is still the chairman and CEO at the age of 93, produced market-beating investment returns for decades. Buffett’s net worth is estimated to be around $115 billion, and he has already donated more than $50 billion to charitable causes.

    Thankfully, Buffet has willingly shared with investors the lessons he has learned over the course of his career, mainly through his famous annual letters to Berkshire Hathaway shareholders.

    The advice he has given has been consistently unequivocal. In a nutshell, Buffett says, investors should:

    1. Keep things simple
    2. Focus on the long term;
    3. Stay humble;
    4. Keep calm in volatile markets; and
    5. Avoid active investing.

    People are often surprised by that final tip. After all, Buffett made his name through active investing.

    As Murray Coleman recently explained, there are reasons to explain Berkshire Hathaway’s historical outperformance. Suffice to say, the company has failed to beat the broader stock market since the global financial crisis, and, in his most recent letter, Buffett warned that Berkshire has virtually “no possibility of eye-popping performance” in the years ahead.

    READ THE FULL ARTICLE HERE

     

    PREVIOUSLY ON TEBI

    Here are some other recent posts you may have missed:

    Public pensions are failing investors and taxpayers

    Surviving ten years is a challenge for active funds

    Three takeaways from the work of Eugene Fama

     

    JOIN THE CONVERSATION

    So what do you you think of this content? Follow TEBI’s founding editor Robin Powell on social media and join the debate. We would love to hear your views. We’re on Twitter, LinkedIn and YouTube.

     

    © The Evidence-Based Investor MMXXIV

     

     

  2. The next NVIDIA? Don’t waste your time looking

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    There can’t be many equity investors who haven’t dreamed of picking the next Google, Amazon or NVIDIA. If you buy into a stock like that before it takes off, and hold on to it for a long time, the profits you can make are astronomical. But, in practice, how hard is it to do that?

    If you read investment magazines or follow certain influencers on social media, the impression you’re given is that it’s perfectly realistic. There’s always someone telling us how much money they made on, say, BAE Systems, the FTSE 100 stock whose price, at the time of writing, has risen by more than 200% over the last five years.

    The fact, however, that others have made a fortune on a particular stock in the past can blind you to the harsh reality that the odds of repeating their success yourself are heavily stacked against you.

     

    Markets are highly efficient

    So why is that? Well, the main reason is that stock markets are very efficient. All available information is already reflected in market prices. Prices move up and down in response to new information, which is, by definition, unknowable. That’s unless, of course, you’re an inside trader, in which case you’re risking a heavy fine and a prison sentence. Without inside information, no one can predict with any certainty the direction of a stock.

    Yes, you could argue that markets are not perfectly efficient and that there are examples of stocks that are either overpriced or underpriced. That may well be true, but it’s not the point. Because prices reflect all known information, identifying mispriced securities in advance is impossible to do on anything like a consistent basis.

    READ THE FULL ARTICLE HERE

     

    PREVIOUSLY ON TEBI

    Here are some other recent posts you may have missed:

    DIY financial advice is a big risk

    The power of doing nothing

    Diversify, diversify, diversify

     

    HAVE YOU READ THIS BOOK?

    Robin Powell and Jonathan Hollow have been friends since childhood and share a passion for helping people understand the world of money, savings, pensions and investments.

    Now they’ve authored a book called How to Fund the Life You Want, which explains in plain English what you need to know to pay for the life you want to lead.

    The book is published by Bloomsbury and is primarily written for a UK audience.

    It’s available to buy on Amazon, on Bookshop.org, and in all good bookshops. There’s an eBook and an audio book version as well.




     

    © The Evidence-Based Investor MMXXIV

     

     

     

     

  3. The cost of not owning the Magnificent Seven stocks

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    There’s been plenty of publicity in recent months about the Magnificent Seven. No, I’m not talking about the classic Western starring Yul Brynner, Steve McQueen and Charles Bronson, but the seven big technology firms that have been dominating the US stock market: Alphabet (Google), Amazon, Apple, Meta Platforms (Facebook), Microsoft, NVIDIA and Tesla.

    Some commentators have warned that the success of these stocks has made indices like the S&P 500 too heavily concentrated. But, historically, it’s not unusual for a small number of stocks to dominate an index. And, as new research by Vanguard demonstrates, investors who held the Magnificent Seven stocks in their portfolios have been amply rewarded. The researchers found that a simulation of the Russell 3000 Index without these seven companies would have lagged the back-tested Russell 3000 Index by approximately 2.1% per annum over the ten-year period to the end of 2023.

    Interestingly, though, that same Vanguard study also found that it isn’t always so beneficial to own all of the biggest stocks. The researchers looked at returns over a 24-year period from the start of 2000. Although it appears to have been more important to hold the stocks that made the biggest positive contribution to index returns in recent years, it was actually more impactful not to hold the stocks that made the biggest negative contribution in the early years of the study.

    Why was this the case? The reason, says Vanguard, is that up until 2014, small-cap stocks outperformed large-cap stocks. After 2014 that trend reversed.

    “If large caps underperform small caps,” the study’s authors explain, “the gain from not holding the bottom performers tends to exceed the loss from not holding the top contributors. Conversely, if large caps outperform small caps, the loss from not holding the top contributors tends to exceed the gain from not holding the bottom contributors.

    “Hence, the ‘direction of travel’ is, to a significant extent, determined by large-cap stocks.”

    So what lessons, if any, can investors learn from this research? And how can they avoid being over-exposed to a small number of large stocks?

    READ THE FULL ARTICLE HERE

     

    PREVIOUSLY ON TEBI

    Here are some other recent posts you may have missed:

    Channel your inner Mr Spock

    How to think like a scientist

    Investment perfection doesn’t exist

     

    TEBI ON YOUTUBE

    Have you visited the TEBI YouTube channel lately? There’s already a wide selection of high-quality videos on there. Why not subscribe and be one of the first to see our latest content? You’ll also find our videos on Instagram and TikTok.

     

    © The Evidence-Based Investor MMXXIV

     

     

     

  4. How hard is it to pick a megastock in advance?

    Comments Off on How hard is it to pick a megastock in advance?

     

     

    There can’t be many equity investors who haven’t dreamed of picking the next so-called megastock — a stock like Google, Amazon, Microsoft or NVIDIA, for example. If you buy into a stock like that before it takes off, and hold on to it for a long time, the profits you can make are astronomical. But, in practice, how hard is it to pick a megastock in advance?

    If you read investment magazines or follow certain influencers on social media, the impression you’re given is that it’s perfectly realistic. There’s always someone telling us how much money they made on, say, BAE Systems, the FTSE 100 stock whose price, at the time of writing, has risen by more than 200% over the last five years.

    The fact, however, that others have made a fortune on a particular stock in the past can blind you to the harsh reality that the odds of repeating their success yourself are heavily stacked against you.

    So why is that?

    READ THE FULL ARTICLE HERE

     

    PREVIOUSLY ON TEBI

    Decumulation is where the greatest danger lies

    What will your legacy be?

    Five mathematical principles for investors to grasp

    HAVE YOU READ THIS BOOK?

    Robin Powell and Jonathan Hollow have been friends since childhood and share a passion for helping people understand the world of money, savings, pensions and investments.

    Now they’ve authored a book called How to Fund the Life You Want, which explains in plain English what you need to know to pay for the life you want to lead.

    The book is published by Bloomsbury and is primarily written for a UK audience.

    It’s available to buy on Amazon, on Bookshop.org, and in all good bookshops. There’s an eBook and an audio book version as well.

    © The Evidence-Based Investor MMXXIV

     

     

     

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