Success Rate Of Retail Investors

Hi, I recently came across this article --- https://www.cnbc.com/2019/03/15/active-f...e%20index. about how around 90% of professional fund managers trail the market.


My question is : How accurate is this statistic? If true, doesnt that mean that success rates are even worse for retail investors ? In that case, why try picking stocks , might as well just buy the S and P 500 index and leave it be.

Thoughts ?

(12-06-2020, 07:39 PM)CaiGengYang Wrote: Hi, I recently came across this article --- https://www.cnbc.com/2019/03/15/active-f...e%20index. about how around 90% of professional fund managers trail the market.


My question is : How accurate is this statistic? If true, doesnt that mean that success rates are even worse for retail investors ? In that case, why try picking stocks , might as well just buy the S and P 500 index and leave it be.

Thoughts ?

i think warren buffett has been strongly advising the average investor to do dollar cost averaging in the S&P500 for a long long time. You can probably substitute the index for berkshire hathaway if you prefer

The problem is Warren will not be with Berk for a long long time. How Berk will turn out without Warren is a something to ponder upon.

Berkshire mainly consist of "old economy" companies dealing with more tangible business that offer good cash flow. It is not a bad choice for a person who prefers such companies, as compared to a index fund that includes any company that has the required market cap and liquidity regardless of fundamentals.

Succession is always a factor to consider, but Buffet has been in the company for decades, and I imagine he would have time to evaluate and choose someone competent that shares his investing philosophy. He/she may not be as good as Buffet, but hopefully will be good enough to keep the company on course.

Berkshire is pretty huge. Even if the successor makes a drastic change of strategy, it takes time for the changes to have an impact. There should be time for an investor to divest if he does not agree with the new strategy.

90% of the kids who participate in competitive sports never win a medal in their career. 90% of the members of a political party never get the chance to represent their party in an election. 90% of businesses fold within its first 3 years. 90% of the competitive chess players will never beat a supercomputer. 90% of the painters and sculptors never become critically acclaimed.

Of course, I made these up. But you get the point. It is interesting why people bother to do anything when their chances of performing (significantly) better than average is (very) low.

I guess it tells us why the history of humans is also a history of progress.

(13-06-2020, 11:04 AM)karlmarx Wrote: 90% of the kids who participate in competitive sports never win a medal in their career. 90% of the members of a political party never get the chance to represent their party in an election. 90% of businesses fold within its first 3 years. 90% of the competitive chess players will never beat a supercomputer. 90% of the painters and sculptors never become critically acclaimed.

Of course, I made these up. But you get the point. It is interesting why people bother to do anything when their chances of performing (significantly) better than average is (very) low.

I guess it tells us why the history of humans is also a history of progress.

I agree with you for the most part. Only point I would like to make is that you don't need to be significantly better than average for active investing to be worthwhile. Given the magic of compounding, even an extra 1% outperformance per year leads to drastic improvement in outcome. To use your sports example as analogy, we don't have to strive for a medal for active investing to be worthwhile, rather we need to outperform the average sportsman.

Having said that, I must stress than even 1% outperformance is very difficult to achieve over the long run, just that it's less daunting than gunning for a medal. From my experience in the industry, 80-90% of professionals underperform in developed markets, and the figure drops slightly (but still 60-70%) for professionals investing in emerging/frontier markets.

Back at the question: I would separate retail investors into two groups: 1) those that invest in funds, 2) those that do direct investing themselves.

For Group 1, the success rate is terrible. Unsurprising, because the majority of the underlying funds will underperform, and investors do not have the ability to tell ahead of time which fund managers (the small select group) will outperform. To add salt to the wound, retail investors have the tendency to market time to their detriment, and research has generally shown that the average mutual fund investor has returns that are lower than a buy-and-hold mutual fund investor. For this group of investors, I always recommend that they just passively index, and their investment outcomes will almost surely be better.

For Group 2, there are some great retail investors, but I think majority of retail investors are quite terrible. Retail investors do have some structural advantages (able to invest in less liquid names, able to be contrarian without getting sacked, able to really focus on the long-term without needing to show short term results), but most retail investors end up succumbing to their behavioral bias instead (impatience, greed, confirmation bias etc). I always encourage retail investors to give active investing a shot for a few years, before evaluating whether they are proficient at investing. If they happen to be in the lucky select group that's blessed with the temperament and skills to beat the market, that's great. If it's otherwise, then they should just index.

So are there any retail investors on this forum who has consistently beaten the market and earned good returns over long periods of time ? Can share your techniques and secrets ? Haha

(1) Buy and hold good companies with good growth potential (best with quasi-monopoly characteristic). Sell when potential is no longer certain.
(2) Dumb luck.

(13-06-2020, 08:31 PM)CaiGengYang Wrote: So are there any retail investors on this forum who has consistently beaten the market and earned good returns over long periods of time ? Can share your techniques and secrets ? Haha

I'm a retail investor and actually I have been lurking in this forum for many many years now and I have benefited tremendously from the many knowledgeable posts shared by many wise investors here such as d.o.g. and Musicwhiz and many more ..

I purchased my 1st stock on SGX in 2009 and i have been investing ever since and have been keeping records of every single transactions that I have made. Recently, I was thinking that since I have been investing for more than a decade now and if I cannot beat the index, I am better off with putting my funds in a index or in the hands of a fund manager since it takes a some effort and sweat to pick stocks and not to mention, the emotional roller coasters of seeing your portfolio fluctuates every now and then, especially during times of great volatility.

Using the unit value method as shared in this forum a couple of years ago, I computed the CAGR of my portfolio vs STI since I only invest locally for the most part of my investment journey 

Since portfolio inception in 2009: 14.85% vs 4.49% for STI
Past 5 years YTD: 4.69% vs -3.78%
Past 3 years YTD: 5.56% vs -2.17%

So it was with a relief to find out that I have been beating the index consistently although in recent years, my returns has been slowing.

I believe there are no secrets to beating the index and I truly believe that all the secrets can be found in this forum in the posts which has been shared by many. 

However, over the years, i have honed my investing edge through many painful lessons and it can broadly split into the 2 categories of knowledge and emotions.

For the aspect of knowledge, the very minimum requirements is that you need to be able to know how to read financial statements and understand the concept of valuation for stocks and this will set you apart from the majority of retail investors. If I was fortunate that I took up financial accounting as an elective since it was compulsory for the program which I was in though I was not a financial major and it turned out to be very useful when I look backwards in my life. For the concept of valuation, the first book I read was on The Intelligent Investor by Benjamin Graham and subsequently, I went on to read books on Buffet, Fisher etc. 

Once you achieve the above, you will be able to avoid most of the lemons since reading financial statements will help you avoid companies which are dangerously over leveraged, poor cash flow etc. save for financial frauds which I don't think is avoidable thus it is important to diversify your portfolio and not be overweighted in any particular company, sector etc. and you will be able to derive a valuation for a stock such as P/E ratio, P/B, P/E, EV/ EBITDA or using DCF to gauge whether a good quality company is cheap and what is a good entry price to buy the stock of a company. 

For the aspect of emotions, you must be able to withstand the emotions that comes with investing your money. When I first started, I did some trading and it was truly nerve wracking to hold your positions overnight, only to see it gap down the next day when the market opened and I did not have a peaceful night sleep when the market was volatile. I lost a few thousands when I first started trading and it was quite a sum of money since I was a student back then and I just started working but it was a good lesson in which I decided that trading is not my cup of tea through the technical analysis is still pretty useful to gauge potential entry and exit point for the companies in your watchlist which you have deemed to be good companies based on fundamental analysis.

Chucking aside trading, I turn my attention to investing. In the initial stage, it was emotionally difficult to buy when the market is down since we are kind of 'wired' in our brains to see red as danger and should sell instead. However, I kind of force myself to buy only when the market is down and slowly, I have kind of 'wired' myself to only buy when market is down and upon seeing numerous times and realizing that the market will always recover back to higher levels after some time and the only regrets was I did not take courage and buy enough when the market is diving. Most of the times, I'm able to do this and in fact I bought heavily over the past few months but it still takes courage as I remembered on the day Dow dropped 2000 points in March this year, I was very fearful to buy on that day and emotion is really powerful in affecting your logical decisions. Once you can manage your emotions, you will do better than the average retail investors since many would sell when the market is down.

I consider myself very fortunate in able to beat the index. In my portfolio, I have winners and losers but as long as the winners outpace the losers, I guess it will be fine. My worst loser is at -65% currently while my best winner is up by 400%

That being said, i am investing in other markets now such as HK and US markets where I see more higher quality companies with good growth at reasonable valuations. The companies on SGX really pale in comparison. In the past, SGX has good quality companies such as like Asia Pacific Breweries, Cerebos Pacific, ARA asset management etc. which has been delisted. These days, SGX is mainly dominated by financials, properties and REITS.

From a holistic point of view, I think it is equally important to focus on your career or business since the returns from these is much higher as compared to investing since the latter needs a certain amount of meaningful capital to have meaningful returns. Assuming that I have 100k at 30 years old, even if I compound it at 15%, it will only be 404k at the end of 10 years. If you can grow your salary for your career or business by 15%, it makes a lot of difference in building up your capital that is needed for investing.

PS. Aside to moderators, can you please consider to remove the property related posts in this forum? I think it is unrelated to this forum.

@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.