How You, The Amateur, Can Beat The Pros

My family and I spent the Easter weekend over in Ballarat. Our kids had never been to Sovereign Hill. We ate boiled lollies, freshly baked tarts, and panned for gold. What a time consuming exercise gold panning is, but oh, how much fun it was. The amount of time, energy, and patience that is required is enormous. And even if you endure the process, the reward, a speckle. After spending almost 2 hours entertaining myself, here’s what I walked away with. I was assured the gold I had discovered was worth more than the $1 bottle I bought to put it in.

It’s been one month since the AFR reported It’s the end of an era in Australian funds management. Funds management is a tough gig, especially in this day and age as technology and fee pressure adds fuel to the fire. Professional investors are not all they’re made out to be – unlike professional sports. Consider this. You’re an avid boxing fan. You’ve got all the top gear, gloves and all. Would you jump in the ring with Mike Tyson?

Charles Ellis (founder Greenwich Associates) said, “Well, 90% of stock market volume is done by institutions, and half of that is done by the world’s 50 largest investment firms, deeply committed, vastly well prepared — the smartest sons of bitches in the world working their tails off all day long. You know what? I don’t want to play against those guys either.”

Playing their game on their terms will leave you and your portfolio for dead. There are however, a number of advantages amateur investors have over the pros. Here are my top 5:

Benchmarks: As a pro, you are measured against a benchmark day by day, second by second. Arbitrary or not, that’s that game. Rather than applying a considered long-term philosophy, short term comparison of benchmarks will eventually take hold. As an amateur, you have no benchmarks to compare yourself to each week, quarter, or year. You can feast on all the free market have to offer over the long-term.

Short-termism: As an amateur investor, you don’t have to trade as frequently as the pros. With all the twists and turns in the stock market these days, you can avoid making sticking plaster decisions by not reacting to all the noise and remain focused on the long game.

Doing nothing: With every zig and zag of the market, the pros needs to act. It’s difficult to justify fees and demonstrate expertise by doing nothing. So, they do more. As an amateur investor, you probably sat idle for that last 20% correction. Am I wrong? The pros, pulling their hair out for either missing the decline or not positioning themselves to participate in the recovery. Jack Bogle once said, “Don’t do something, just stand there.”

Fees: You can keep yours low. The pros cannot. Staff, conferences, flights around the world, expensive offices, legal and compliance departments are only just the beginning for these guys and gals. As an amateur, you have access to the US stock market for just 0.04%. The average pro charges 1.09% – that’s a 2,725% increase on what the amateur has access to.

Forecasts: You don’t need to make them. The pro’s do. And then they trade on it – despite there being ample evidence that they have any capability in this area. And I get it. Acknowledging that markets are very unpredictable in the short-term and responding with, “I don’t know” to questions that are asked of you, is not the way you climb the industry ladder. I guess it’s better to have a sophisticated point of view and be wrong.

Like panning for gold, stock picking is a damn hard game to play. Sure, it’s entertaining for those panning, but when the spectators (investors) have been waiting this entire time, and all you can produce is a speckle of gold (if that), and the speckle (return) is not worth more than the bottle of water (fees) you bought, which is more often the case, they’ll spit in your face and leave you for the dogs.

We Anonymously Surveyed Our Clients. Here’s What They Said.

To say the wealth management industry is crowded is an understatement. In Australia there are more than 25,000 registered financial advisers, and we all claim to be the best. In an industry that is also dominated by males, in fact almost 80%, it wouldn’t be out of school to say we’re a little egotistic, and probably driven by a need to feel significant. Most of us think we know what our clients want, without thinking to ask them. We engage specialist consultants and marketers to tell us what our clients think and want, when our clients are one email and phone call away – and they’re willing to help because it benefits them directly.

In can be daunting to face the truth, but in the pursuit of improving our offering to our clients, we decided to survey them, anonymously. Here are the top 3 things we found. The aqua colour bars are the results for BWM, and the green bars are the results of all firms participating in the study (nation wide).

The question, the results…

What we learned…

Most investors believe an adviser’s value proposition is in their investment returns. Nothing could be further from the truth. The reality is that there is more to what we do than just make money. Our clients measure our value by their ability to achieve their goals. Whether it’s to travel, to educate their children, to contribute back to their community, there is always a deeper purpose and ‘why’ to money. Uncovering this, putting in place a game plan to help achieve their objectives, whilst giving them a sense of security and peace of mind that they are on track is paramount to our clients.

The question, the results…

What we learned…

Investments and goals are joined at the hip. The money is simply a means to an end. It’s an enabler. It provides our clients with choice, flexibility, and freedom to do the things that are most important to them. As such, investment decisions need to be made through the lens of their goals. Each investment is made with a specific purpose of helping our clients achieve their objectives. Making money, in isolation, is not the objective, there is always something deeper. Once we understand this, once we have clarity of this, investment decisions become much easier to make. Make money, don’t let money make you.

The question, the results…

What we learned…

Everyone, and every family is unique. Our clients seek a bespoke experience – one that is customized to them. It validates our decision to serve a select group of people, and serve them well.

We we’re overwhelmed by the response rate of our clients and their kind words, however in the pursuit of doing more and better for our clients we sought real feedback. In the end, we ended up with a Net Promoter Score (NSP) of 54 (a score of greater than 0 is generally deemed good, and a score of +50 is deemed excellent), something we’re truly proud of, and validates the honest, hard work we do for our clients – more to come in this space, and we’re excited!

In summary, it’s our relationshiprange of servicesour experience with clients like them, and having a sense of security and peace of mind that our clients find most important in our relationship. Thank you to a bunch of great people – our clients, our friends, who have supported us through the last 3 years – we are truly honored that we can serve you in this way.

If you want to know more about BWM, you can check us out here.

Godspeed.

Your Brain Doesn’t Want You To Invest In The Stock Market – Here’s Why

Last week my wife and I spent a beautiful evening at the Peninsula Hot Springs. Although my favourite pool was the 38°-40° She Oak Barrel Bath, the Cold Plunge Pool intrigued me the most. Was it the uncertainty? Was it the challenge facing me? Whatever it was, I wanted to jump in.

Jumping into the unknown can make anyone nervous. It reminded me of the stock market. Sure, the She Oak Barrel Bath was warm, comfortable, and I knew what to expect. The Cold Plunge Pool on the other hand, uncertainty awaited me.

The human brain is millions of years old. It’s not designed to make you happy, it’s designed to make you survive, so it’s always looking for what’s wrong in a situation so you either fight it or flight from it.

We all know the stock market can crash at any time, and your brain will over-estimate this probability every day of the week – making even the most seasoned investors make questionable decisions.

Whilst it’s true, jumping into the stock market is never easy, yet the track record of the stock market is undeniable – a consistent performer over the long long. Although the stock market has trended upwards over time, investors experience negative returns around 31% of the time.

When looked at over short periods of time, the stock market can be extremely volatile. In fact, the stock market has lost between 30% and 40% in five different years (1917, 1931, 1937, 1974, and 2008), whilst it has gained more than 50%  twice (1933 and 1954), as see in the distribution chart below:

These wild swings begin to reduce the longer our time horizon. Consider the below animation, which looks at 1, 5, 10, and 20 year rolling periods. Take a look at the 1 year horizon, we see the best return of 53.20%, worst return of -37%, and volatility (ups and downs) of 18.20% – lots of red lines (losses).

Consider 5 year rolling periods. The best return was 28.50%, worst return was -11.70%, and volatility of 7.10% – much less red lines (losses) when looking at your investment over a 5 year period.

Consider 10 year rolling periods/returns. The best return was 17.60%, worst return was -4.10%, and volatility of 5.10% – only a handful of losses (red lines). Finally, consider 20 year rolling returns. The best return was 13.20%, the worst return was 0.50% (yes, a positive number), and volatility of 3%.

The longer the time frame, the less red you see. In other words, the stock market has not lost any money over a 20 year period.

No different to the Cold Plunge Pool, if you’re looking to jump into the stock market for a quick dip, you’re likely to have a poor experience. If however, you’re patient, resilient, and have the courage to brave the initial shock to the system, you will have a far more enjoyable and rewarding experience.

The stock market is a device for transferring money from the impatient to the patient

Warren Buffett

Source: The Measure of a Plan

You Just Got Ripped Off. Again

Your kids are in your year, blaming you for destroying the planet. You want to do your part for the planet. You’ve watched Craig Reucassel’s War on Waste Documentary, and you want to reward companies doing the right thing. You’re now far more conscious of environmental, social, and governance factors when thinking about your investments.

You’re in luck. A new Australian Sustainable Share Fund has been launched. And it’s raised over half a billion dollars within months. Not only is your money working for you, but you can now tell your 21 year old that you’re doing your bit for the planet. Here’s where your fairy tale comes to an end. The fund you just invested in has two filters, 1) the exclusion of tobacco, and 2) the exclusion of controversial weapons. Can you tell me how many companies on the Australian stock market are involved in tobacco or in controversial weapons? You just got ripped off, again. Sustainable investing is far more than that.

There’s more to than just dumping your money into a so called ‘sustainable fund’ and feeling like you’ve done your bit. We have a choice not only as investors, but as consumers and citizens.

UBS surveyed 5,300 people in 10 markets around the world, and they found that 65% of people say they want to create a better planet, yet only 39% say they have sustainable investments.

Sure, it’s confusing. The jargon, the marketing, how do even judge the impact you’re making, and do they even perform well? Let’s take a look.

What is ESG?

The “E” – Here are some things to consider

The “S” – Here are some things to consider

The “G” – Here are some things to consider

How do they perform?

Applying the right ESG filters to your investing and portfolio does not mean you must give up good returns. Here’s market returns versus the market excluding specific sectors (US) since 1975. We’ve used the US because of it’s long data history. The numbers are very similar to other markets around the world. As you can see from the table below, the returns are very similar to each other.

Some common questions:

Should I exclude all miners?

When it comes to any type of investing, you need to maintain a level of diversification so that you don’t take anymore risk than you need to. In any case, not all miners have bad environmental records. Especially as we transition from fossil fuels, you want to encourage and reward the good ones.

Why shouldn’t I just throw out the bad ones and buy all the good ones?

Choice is an investors friend. You need to maximise your investment universe so you have more choice. Some so called “good” companies aren’t that good, and so called “bad” companies, aren’t so bad. Reward the companies that are moving in the right direction, even if they’re in a “bad” industry.

What are the costs of pursuing a sustainable investment strategy?

The more of something you do (trade, filter), the more it will cost you and the less diversification you will gain. Having said this, it is not significant, and in fact, the returns ad diversification are very similar to what you would otherwise receive.

Here’s how you may want to approach sustainable investing

As investors, you can feel satisfied that your investments match your personal values. You can make an impact on social and environment issues. You can target higher expected returns. And you can reach your financial goals without taking on more risk than is necessary. Just don’t get caught up in the marketing of all of this. You deserve better.

And please don’t feel as though your impact is limited by your investment choices. The decisions you make every day as a human being has an impact. From what you buy, where you buy it from, how you commute, to what you eat, make’s a difference.

This is my first time at Davos and I find it quite a bewildering experience to be honest, I mean, 1,500 private jets flown in to hear David Attenborough speak about how we’re wrecking the planet.

– Rutger Bregman (Dutch historian)

Source: ABC, Dimensional Fund Advisers