The cost benefit of self-directed value investment

[tanjm]

Let me pose a thought experiment for you guys.

I think it is an axiom (at least among what I think are reasonable investors) that beating the market is hard work.

And obviously, value investing is also a kind of hobby or interest. But let's leave that out. Let's consider what is the break even "cost" of indulging in value investing versus just putting your money in a series of index funds.

Assume that you spend an average of 100 man hours (I think that's low actually) a year over a 30 year investing "career". During this time, you started with 5K a year in savings (savings increasing by 5% a year). The long term market return is 7%, and your return is 8%. At the end of 30 years, you will have capital of 956K versus 822K if you had put your money in the index. Then your incremental gain of 134K over 3000 manhours of work is $44 an hour. :-). Is is "worth" your time and effort ?

Let's optimistically change your long term return to 10% per annum, but you spent 200 hours per annum on average. Your manhour cost is now $82. Still worth it?

It gets worse if you can't even beat the market over the long term. heh.

Anyone who claims he can get very high above market returns is probably either very lucky, or very skilled/knowledgeable, or has spent an inordinate time and effort at it. I'm excluding these cases.

[cif5000]

Let me pose a thought experiment for you guys.

I think it is an axiom (at least among what I think are reasonable investors) that beating the market is hard work.

And obviously, value investing is also a kind of hobby or interest. But let's leave that out. Let's consider what is the break even "cost" of indulging in value investing versus just putting your money in a series of index funds.

Assume that you spend an average of 100 man hours (I think that's low actually) a year over a 30 year investing "career". During this time, you started with 5K a year in savings (savings increasing by 5% a year). The long term market return is 7%, and your return is 8%. At the end of 30 years, you will have capital of 956K versus 822K if you had put your money in the index. Then your incremental gain of 134K over 3000 manhours of work is $44 an hour. :-). Is is "worth" your time and effort ?

Let's optimistically change your long term return to 10% per annum, but you spent 200 hours per annum on average. Your manhour cost is now $82. Still worth it?

It gets worse if you can't even beat the market over the long term. heh.

Anyone who claims he can get very high above market returns is probably either very lucky, or very skilled/knowledgeable, or has spent an inordinate time and effort at it. I'm excluding these cases.

The way you frame this question, I'm very tempted to go with you that it is just not worth it for the average people.

...but compare that to the more average people who spend 100 man hours on drinking beer each year it may still worth the while. At least when you invest at market rate return, you still have your money. The alternative will see the money go down the drain...

[Temperament]

Let me pose a thought experiment for you guys.

I think it is an axiom (at least among what I think are reasonable investors) that beating the market is hard work.

And obviously, value investing is also a kind of hobby or interest. But let's leave that out. Let's consider what is the break even "cost" of indulging in value investing versus just putting your money in a series of index funds.

Assume that you spend an average of 100 man hours (I think that's low actually) a year over a 30 year investing "career". During this time, you started with 5K a year in savings (savings increasing by 5% a year). The long term market return is 7%, and your return is 8%. At the end of 30 years, you will have capital of 956K versus 822K if you had put your money in the index. Then your incremental gain of 134K over 3000 manhours of work is $44 an hour. :-). Is is "worth" your time and effort ?

Let's optimistically change your long term return to 10% per annum, but you spent 200 hours per annum on average. Your manhour cost is now $82. Still worth it?

It gets worse if you can't even beat the market over the long term. heh.

Anyone who claims he can get very high above market returns is probably either very lucky, or very skilled/knowledgeable, or has spent an inordinate time and effort at it. I'm excluding these cases.

The way you frame this question, I'm very tempted to go with you that it is just not worth it for the average people.

...but compare that to the more average people who spend 100 man hours on drinking beer each year it may still worth the while. At least when you invest at market rate return, you still have your money. The alternative will see the money go down the drain...

i think we can't leave the interest or hobby out in the first place. It's not sustainable in reality or practice because investing is for a lifetime.
In fact, if you breath and think about investments all the time and you still enjoy it until now, you should be doing quite O. K.

[corydorus]

The process of investment is just like running a business. You can pick, choose and diversified.
Is a "Fast and Cleaner Way" than running a business itself. I enjoy DIY actually.

[greypiggi]

You missed out utility we get from DIY. Also another factor is quantum. For some 1% can be 100k more per year. So that means 1k per man hour. Probably that is fair compensation for someone who has built that kind of portfolio size.

[tanjm]

The way you frame this question, I'm very tempted to go with you that it is just not worth it for the average people.

...but compare that to the more average people who spend 100 man hours on drinking beer each year it may still worth the while. At least when you invest at market rate return, you still have your money. The alternative will see the money go down the drain...

You have a point :-).

[tanjm]

You missed out utility we get from DIY. Also another factor is quantum. For some 1% can be 100k more per year. So that means 1k per man hour. Probably that is fair compensation for someone who has built that kind of portfolio size.

Well, a person with that kind of money probably has a much higher breakeven cost per hour :-). But I get your point, it becomes more "efficient" as your asset size increases. With relatively low investible amounts, it appears relatively not as "worth it" unless you are treating it as training for when you do have assets worth protecting.

[GPD]

The way you frame this question, I'm very tempted to go with you that it is just not worth it for the average people.

...but compare that to the more average people who spend 100 man hours on drinking beer each year it may still worth the while. At least when you invest at market rate return, you still have your money. The alternative will see the money go down the drain...

You have a point :-).

From a pure monetary measure, yes. Anything other than that will be difficult to quantify.

[hongonn]

Knowing it hard to beat the market and not even bother trying, the person is designated to be average. Should aim high like 10% more the market return and keep learning and try harder.

In the end, effort is not wasted because you put up a good fight.

[specuvestor]

^^tried and failed is better than not trying at all someone said that if your passion does not become your work, it will become your hobby

Anecdotally speaking if u can do 20% CAGR over a decade u are up there with the gurus. So that roughly give u an idea of how high one can reach, realistically

So 10% CAGR seemed to me a fair number to aim for. May look minute "outperformance" but diff between 7% and 10% is that the former about 8X in 20 years while the latter 4X. Academics call it power of compounding, gurus realize the profound implications. With ref to the thread question, it has huge implication on Assets managed, and hence the "pay per hour"

And then of course we wonder if gurus all get around 20% CAGR, why is Buffett way up there? Food for thought.