Success Rate Of Retail Investors

[karlmarx]

All the so-called secrets have already been revealed and widely studied. The reason why there are, and will always be, investors who out-perform the market is because they practice the craft better than others. And the same principle applies across all professions and endavours.

If you haven't already known, you only need to read BG and WB to receive all the secrets. But their principles are broad, which easily leads to misinterpretation. Most investors like to think that they have a circle of competence, that they can identify a moat or a good business, that they will buy more stocks instead of sell when the skies/markets are crashing, that their portfolio companies were bought with a margin of safety, and that the managers of their portfolio companies are superior, and will produce superior results.

Obviously, very few people can do all these, which is why very few people -- including the professionals and very intelligent -- out-perform. In the avoidance of frauds and duds, the regular due diligence -- which are mostly the study of a company's past -- is the easy part. The hard part, which also happens to be the most value-adding, is the ability to look into the future.

Accounting knowledge is necessary but will not help you out-perform. Because that is a skill which the majority of the market players already possess. So if you can't read financial statements, your probability of under-performing the market is higher. Luckily, you don't have to take formal classes to learn. There are a lot of free resources, but more importantly, you have to work your imagination on how a business owner would have his/her transactions recorded and represented.

There are many factors which contribute to a stock outperforming the market. In my own experience as an opmi, the most significant key to out-performing lies in choosing the company with the correct management. But this is also the most difficult box to tick in a due diligence exercise. The management not only has to have an attitude which respects opmi, but also superior ability to produce results. I've yet to figure out how to identify such management, though it is certainly easier to identify the kind that you do not want.

For those interested to improve their investment abilities, my 2 cents worth of advice is to deeply reflect on your abilities. Specifically, the areas which you're lacking in. This is important because you're probably the only person to fully know the rationale/method behind every investment decision, which makes you the only person who can realise whether your rationale was perhaps erroneous or insufficient. Since there's no one to give you feedback on your rationale/method, you must teach yourself to be your own coach.

Where the study of BG and WB is concerned, perhaps more attention should be paid on understanding the rationale and context of the specific investments they made. And less on the sexy quotes.

[gzbkel]

In my own experience as an opmi, the most significant key to out-performing lies in choosing the company with the correct management. But this is also the most difficult box to tick in a due diligence exercise. The management not only has to have an attitude which respects opmi, but also superior ability to produce results. I've yet to figure out how to identify such management, though it is certainly easier to identify the kind that you do not want.

Thank you Karlmarx for the useful sharing as always. Could you elaborate more on how do you identify the kind of management you do not want?

Personally, I check the following:
- If I see big declines in the share price, I try to find out the reason for the plunge, and try to determine if fault can be attributed to management decision
- Check ratio of management remuneration against profit or cashflow, and compare to similar companies
- Look at voting results at AGM, and see if there are large numbers of dissenting votes
- Look for large amounts of ambiguous related parties transactions
- Whether meaningful amounts of dividend is paid, assuming company is not in growth stage

[Shiyi]

@kaykay,
The question posted by thread starter and your reply, personify the general observation that "we overestimate what we can achieve in the short run, and underestimate what we can achieve in the long run". As you have demonstrated, you probably have underestimated what you had achieved over the last 10 years. Knowledge compounds. By ignoring a question about the short term, we become a better investor because of understanding business, and a better business man because of understanding investing.

IMO, "Can I beat the market and how can I do it" is probably the wrong question to ask. Karlmarx puts it very aptly on why humans have a history of progress. Counter intuitively, we probably can beat the market, if we give up on trying to beat it. And focus ourselves on finding out our true temperament and developing the necessary skills (Corgitator). There are really no "secrets and techniques"..Long term rewards come at the expense of doing the daily grind, while forgetting about the long term rewards itself.


P.S. It would be really good if lurking silent VBs can continue to contribute back to VB.com through more insights. There is a Chinese saying roughly translated to "You give back to society what you have received from it". That is the main reason why i am a Moderator here.
As for "property related posts in this forum", it's been monitored closely. Unless it breaks rules (posts that look like blatant adverts), we have to assume that different strokes work for different people.

I have been investing in stock market for about 30 years.
Back then, information was lacking. Research reports were only circulated among big clients. Even that some reports were "leaked out", they were some weeks late. Investors then had to rely on "tips".  And hardly heard of fundamental or technical analysis. The strange thing is that, it was much easier to make money then from the stock market.

Nowadays, research reports are readily available, and on-time. Lots of interesting and insightful exchanges in the socal media like Valuebuddies.
And many gurus popped up, giving free advice and expert knowledge. However, money is harder to make. And it is often said that 9 out of 10 retail investors lost money.

Oh, one more point. Back then, I hardly heard of hedge funds. Now, they are the big players and the prime movers.

[Porkbelly]

There are actions that separate between 'investing' & 'trading'
Actions of investing would include:
- collecting information about the business
- trying to make sense of that information
- trying to interpret the management ( of the business) ideas/policies
- trying to understand the particular industry that the business i in

Actions of trading would include:
- buying shares of a business in the hope that the shares will rise
- selling shares of a business because the price of the shares have risen
- Watching the trend of a particular share in terms of volume, prices
- watching if the shares are omitted / included in indexes

And some actions are sometimes difficult to distinguish.
I am incline to believe that the actions of trading is focused on short term financial gains
while actions on investing is for gains over the longer term.

Both may well result in similar financial gains/loss based on annualized returns.

[karlmarx]

Thank you Karlmarx for the useful sharing as always. Could you elaborate more on how do you identify the kind of management you do not want?

As WB has often mentioned, management should be evaluated based on their ability and integrity. If you're a conservative investor, you will want to avoid management with low integrity more than those with low ability. Of course, you absolutely want to avoid those with both low ability and integrity.

In trying to identify people the kind of low integrity management which we certainly do not want to be in business with, we are generally trying to figure out their intentions, and look for behaviours which may be dishonest. It is very hard to judge people we do not know. And dangerous when we attempt to do so with incomplete/insufficient information, like basing your judgement mostly on your interactions with them during AGMs or IR events. 

I don't have a list I can recite off the top of my mind. I just read everything I can find about the company/management, and by the end, you try to figure out how everything fits to form a narrative/impression of them. Certain things like how related party or major transactions, and corporate actions, are structured can tell us a lot. Others such as aggressive self-marketing and promotion are also behaviours which raise my eyebrows.

But its not exactly that you're trying to find a specific needle in a haystack. You just dig deep and see where that takes you. If you feel you haven't had enough time/data to arrive at a conclusion, you should, if you're a conservative investor, hold off from making one. Just allow more time to pass, so that the management can reveal more of themselves. But that could also mean a missed opportunity.

But whether you interpret certain actions/events correctly also depend on your existing knowledge base, perspective, or intellectual framework.

I think there are more than a few cases of suspect companies/management spotted on VB. A lot of them s-chips, but there are others as well. Not all of them are crooks of course. But you can still lose a lot of money from being misled. There's a lot to learn from these bombed out stocks.

[mobo]

Does anyone know of any studies that were previously done on investment performance of Singapore retail investors as a group?

I know there are some reports by CPFIS, but they seem to be a mish mash of individual stock picking and mutual fund investment making it hard to actually discern how retail investors perform as a group. I am genuinely curious how retail investors perform as a group.

Anecdotally based on my rather limited social circle, the results don't look good. Most of the people I know whether it is traders using Technical Analysis or value based approach seem to be either drifting or simply give up after a while. The even more surprising thing is most of them don't even seem to be able / willing to track performance, i.e. they can't answer whether they have even outperformed general indexes in their investment span. 

I have a nagging feeling retail investors as a group have very low success rate and the people who outperform general indexes is even lower.

[gzbkel]

Thank you Karlmarx for the useful sharing as always. Could you elaborate more on how do you identify the kind of management you do not want?

As WB has often mentioned, management should be evaluated based on their ability and integrity. If you're a conservative investor, you will want to avoid management with low integrity more than those with low ability. Of course, you absolutely want to avoid those with both low ability and integrity.

In trying to identify people the kind of low integrity management which we certainly do not want to be in business with, we are generally trying to figure out their intentions, and look for behaviours which may be dishonest. It is very hard to judge people we do not know. And dangerous when we attempt to do so with incomplete/insufficient information, like basing your judgement mostly on your interactions with them during AGMs or IR events. 

I don't have a list I can recite off the top of my mind. I just read everything I can find about the company/management, and by the end, you try to figure out how everything fits to form a narrative/impression of them. Certain things like how related party or major transactions, and corporate actions, are structured can tell us a lot. Others such as aggressive self-marketing and promotion are also behaviours which raise my eyebrows.

But its not exactly that you're trying to find a specific needle in a haystack. You just dig deep and see where that takes you. If you feel you haven't had enough time/data to arrive at a conclusion, you should, if you're a conservative investor, hold off from making one. Just allow more time to pass, so that the management can reveal more of themselves. But that could also mean a missed opportunity.

But whether you interpret certain actions/events correctly also depend on your existing knowledge base, perspective, or intellectual framework.

I think there are more than a few cases of suspect companies/management spotted on VB. A lot of them s-chips, but there are others as well. Not all of them are crooks of course. But you can still lose a lot of money from being misled. There's a lot to learn from these bombed out stocks.

Thank you for sharing your approach!

[Wildreamz]

Seems like a good time to revisit this quote from Prof Aswath Damodaran (source: http://people.stern.nyu.edu/adamodar/pdf...ai2017.pdf):

Assume that you have been an active investor all your life and that you are told on your death bed that your actively managed portfolio delivered 0.5% less than you would have earned if you left your money in index funds for your entire lifetime. Which of the following would be your reaction?

a) Rage at an Investment God that would allow this to happen
b) Anger at yourself for having wasted so much of your life picking stocks
c) Disbelief in the numbers and a demand that they be recomputed
d) Serenity

A good test before considering active investing at all.

---

Personally, investing shaped who I am today, financially, career, education, view in life etc. It's no longer (just) about the money.

[corydorus]

For many average retail investors, ones can only able to do basic analysis. Is not like you do in-depth that we can beat the market as many would know by now. We probably derive the details wrongly. Even if you can do correct, situation matters.

The point i am making is that there are "simple businesses" for retailer to invest in their area of locality with moats and they will do much better off for themselves long term. The moats are typically income producing in nature with moats by virtual of their strong presence in local economy for eyes to see. ie. Mapletrees, Ascendas, CMT, FCT, VICOM or more familiar brands with lesser yields for growth like ShengSiong, Koufu, ... and forget about most other SMEs, Nasdaq and smaller reits ... unless one is more adventurous.

From my experience, retails do have to stay abreast with some macro movements. Eg. Telco major change affecting Singtel, Digital affecting SPH, Shale affecting Oil Rigs on Keppel and SBM. So diversification is important. Another area I look for is management credibility. No matter how good the business, if there is lack of trust, is a serious red flag.

[karlmarx]

There are about a dozen or so local boutique managers with a value-orientation and an Asian investment universe. They have been in the game for some time and they publish their results. If you have been following them, you will know that even the professionals are having a tough time. So the fact is that if you're trying to make (above average) money off the market, it is very hard.

Why is it that the same strategy can work for the first 10 years, but fail in the next 10? Could the investor have simply been lucky for the first 10 years?

If you're in this game, I think it is important to acknowledge that, as skillful as you may be, a significant part of your outcome is still based on luck. Even as you may believe that 'value investing' is a safe and sure way to make money, you are still, in some measure, a gambler. Better odds if you're skilled, worse if you're not. But the odds of doing worse (under-performing) even if you're skilled is still present.

So if you're just starting out, best to open your eyes wide and look at all the dead bodies that litter the path of "early retirement through value/reit investing." I'm not saying that it can't be done. I'm just saying that expectations have to be realistic. You have to open your eyes wide because the dead bodies are always far removed from the present. And nobody wants to talk about unpleasant things like that when they're selling you a dream.

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I do not think there is a simple/straightforward/easy ways of identifying good investments, and make money from them consistently, over the long term. For one, investments which people believe to be good and safe bets will always be priced more expensively. For another, the world is constantly changing, and often in ways which we do not expect. So what is true today may not be so in the future.

For example, if for some reason the government decides to introduce/allow more competition into the vehicle inspection/testing business, VICOM not only stands to lose a part of its income, but also the high earnings multiple awarded by the market. The probability of something like that happening is low, because the only people who are going to benefit are the vehicle owners, and reducing their cost of vehicle use will not have additional benefits to the larger economy. But still, things can change. And the owner of VICOM shares is betting that it won't.

Asset and management quality aside, reits like CMT/FCT/Mapletrees have largely benefited from very low interest rates for most of the previous decade. And it looks like this may continue for another good part of this decade. But interest rates can rise, and reit investors are betting/predicting that it won't.

I'm not saying that VICOM or reits are bad investments. I'm saying that there are no simple/straightforward/sure win investments. And it is dangerous to assume so, because that's usually how investors get 'killed.' Even in cases when investors are expecting bad things to happen, they may underestimate the impact that may have on their shares.

There are lots of evidence/examples on VB of simple/straightforward/sure win investments' gone wrong. And I urge those just starting out to take a good look at them.