Warning for retirees about playing this game

Even the ‘experts’ have trouble after years of training.

It’s not a game, retirees warned

Graham Hand
Graham Hand
is managing editor of leading financial newsletter Cuffelinks. He explains that while anyone can do their own investing, it is quite another matter whether they are sufficiently qualified for the task.

Canadian author Margaret Atwood features on most lists of the best living writers. The worldwide success of the recent adaptation of The Handmaid’s Tale further enhanced her status. Atwood tells a story about a brain surgeon who she met at a party. On learning her identity, the surgeon said: “I've always wanted to be a writer, and when I retire, I'm going to become one.” Atwood replied: “Well, that’s a coincidence. When I retire, I'm going to become a brain surgeon.”

It was Atwood’s way of saying that writing is a craft that takes years to master. Almost anyone can write, but few people can write well without a lot of practice.

What about investing and, in particular, selecting your own shares to outperform the market?

Anyone can do their own investing
More than one million Australians are trustees of their own superannuation fund. Think about that for a moment. They have all signed a 70-page trust deed which makes them legally responsible for their own retirement savings and investment strategy. According to the Australian Securities Exchange (ASX), almost 40 per cent of adults hold ‘on-exchange investments’ outside of institutional super funds, making listed shares more popular than investment property and cash as a retail investment.

The vast majority of these people would not dream of fixing the engine on their car, playing a piano concerto or doing the dental work for their children. Those skills take years of dedicated study and practise to acquire.

What makes teachers or electricians or doctors believe they can start trading shares successfully when they retire, most with little or no training?

Even the experts struggle
I recently received two emails from different market experts within a couple of hours of each other. Both had analysed the shopping centre company, Scentre, owner of 40 Westfield malls. A broker, Ascot Securities, warned revenue may be ‘deteriorating’ as specialty store rents were ‘going backwards’. The latest results were weak in the food and dining out areas. SELL! Then fund manager APN Group said Scentre has great real estate with huge barriers to entry with ‘an extraordinary diversity of sources of income’. It was as attractive as any property company. BUY!

Who’s right? I have no idea, but I know one thing – despite all the time these experts have spent analysing Scentre, flying around the country inspecting the properties, meeting management and dissecting the numbers, at least one of them will be wrong.

To become a share market analyst requires years of training. After university, most attend specialist courses that are tough and take years of study to pass. Then they work for years more before being given portfolio responsibilities. Yet most of these analysts managing active share portfolios cannot beat the market index consistently.

An ‘index’, such as the S&P/ASX300 Index, is simply the returns from the top 300 companies in Australia weighted by the size of the company, with no active share selection.

Rating agency Standard & Poor’s (SP) produces a scorecard of Index Versus Active (IVA) performance, to which they give the great name of SPIVA. In its latest report, measured over 10 years, it says 85 per cent of active global equity fund managers and 74 per cent of active Australian equity fund managers fail to beat the index.

In fact, about half of all institutional share funds established do not survive longer than 15 years.

It’s a counter-intuitive result. Active managers need only pick a few winners and avoid a few losers, and they would do better than the index. Indeed, there are some special people with such a talent, but most of these highly qualified people who spend 12 hours a day sitting in their offices studying markets and stocks can’t beat a simple index.

A recent report estimated there are almost 10,000 professional fund managers in the US. Rather than being poor investors, it’s more likely that most of them are good, making it difficult for anyone to outperform the market as a whole. After all, the market is simply the sum of all participants.

It’s doubtful that most people who have fixed plumbing or flown an aircraft for 30 years will perform any better after they reach the age of 60 and suddenly have more free time.

How do individuals pick stocks?
I attend many conferences given to the public by these expert fund managers. They are always impressive presenters and the audience listens intensely for the wisdom shared from on high. The experts usually offer their best ideas, and people in the audience madly scribble down the selections as if given some special inside knowledge. Then they go home and buy the shares.

Or people watch business television or subscribe to share tipping newsletters or hear company gossip from mates. It’s easy to collect four or five great ideas every day. That’s 20 a week or 1000 tips a year. How on earth is anyone supposed to filter all these bits of information?

In self-managed funds, the most popular stocks are the four major Australian banks and Telstra, companies that do not have the brightest prospects, and recently, deemed underperformers. Australian Tax Office data shows that, on average, self-managed funds deliver worse results than the large public funds.

Asset allocation matters most, not share selection
The second-largest fund manager in the world, Vanguard, estimates that 90 per cent of the return from a portfolio comes from the mix of assets, not the share selection. Even if someone has a special talent for picking shares, it matters little ultimately if the overall asset allocation between cash, property, bonds, domestic and global shares and other alternatives is inappropriate.

So what should you do?
Of course, if you enjoy investing in shares, or you have special talent and knowledge, or even if it’s just something to do in retirement, then go for it.

What about everyone else? My next article will offer suggestions on investments for the majority.

What will you do with all the extra time if you’re no longer pretending to be an expert share investor? You could follow Margaret Atwood’s advice and try brain surgery.

Graham Hand is managing editor of leading financial newsletter Cuffelinks. He writes regularly on investing for YourLifeChoices. Cuffelinks will always be free for YourLifeChoices’ subscribers and includes insights from hundreds of market experts. You can register to receive the newsletter here.

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    Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.





    COMMENTS

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    Old Geezer
    14th Sep 2018
    11:29am
    I have been reading cufflinks for years now and liked what they had to say. This article however has made me appraise them again.
    GeorgeM
    14th Sep 2018
    12:46pm
    Good article with some straight talking, with "Even the experts struggle" examples showing the futility of people trying to beat the experts - noting "Australian Tax Office data shows that, on average, self-managed funds deliver worse results than the large public funds."

    Ultimately, the question is whether these advisers are any better than the weather forecasters who get the weather wrong 90% of the time! Where do you go then?
    Await to see his next article...
    Old Geezer
    14th Sep 2018
    3:10pm
    Many people just park their super money in SMSFs because they don't trust the experts. They feel it is better just to pick up a little bit of interest then lose the lot.
    Keith64
    14th Sep 2018
    3:07pm
    It could be argued that analysis is where the experts get it wrong. The marketplace is emotional: the sum total of the responses of all the participants in the market and those who have chosen not to enter the market. It is, at least, arguable that persons able to read the emotional state of the market will do as well as analysts most of the time but, ultimately, its all a gamble with slight better odds than AustLotto.
    Old Geezer
    14th Sep 2018
    3:10pm
    If it wasn't that way there simply would not be markets.