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The elephant in the room

Market losses are usually temporary, but money lost to excessive fees is permanent.

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Ian Millward
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Imagine buying shares in a business only to find that just 5 months later they had almost halved in value.

What would you do?

It is hard question to answer until you face that situation for real. But let’s imagine you cut your losses and sold. You walk away nursing serious losses but also with the certain knowledge that investing in the stock market is a roulette wheel and not a place you will be committing your money in the future.

Now let’s imagine you didn’t cut your losses. Perhaps loss aversion, pride and ego lead you to stick your head in the sand and hope for a recovery.

And to your immense surprise, and utter relief, the share price rises almost as quickly as it fell, putting you back where you started a few months later. Not prepared to ‘look a gift horse in the mouth’ you quickly get your money off the table.

It has been a chastening experience, but you have learnt not to be deterred from investing although you will be more cautious in the future.

But let’s also say there’s another version of you. And this one didn’t sell. And now let’s imagine we are in 2019 and the company in question is electric car maker Tesla. The share price fell some 45%, before recovering its value and then rocketing some 15 times higher by last November.

Investing in the stock market can be like bumping into an elephant in the dark. One person feels the ears, another the trunk and another the rear. All come away with a completely different experience of what an elephant looks like.

As I write, history is repeating itself. Tesla shares are now down over 40% since last November, and other covid favourites like Amazon, Meta (Facebook), Netflix and PayPal are all down (at the time of writing) between 35% and 70% since the end of last year.

And it is not just high octane, U.S stocks. Closer to home, Hargreaves Lansdown (HL) and Ocado shares have both more than halved in value over the last year.

This is exactly why we don’t advocate buying individual shares. Few investors have the required skill or knowledge, and far fewer still the right temperament. But that doesn’t mean that we should kid ourselves that fund managers have these powers of second sight either.

Investing via a fund offers diversification, and, hopefully, a steady hand on the tiller with the ability to buy good businesses. But this doesn’t mean fund managers have the power to second guess short-term share price or market movements. And to be fair, few good fund managers even claim it.

During Covid, Baillie Gifford were lauded as visionaries, despite their approach remaining largely unchanged from the preceding years. Lindsell Train’s experience of holding HL shares would be similar. Both are nursing painful losses with some of their holdings falling sharply back down to earth. Even the much-revered Fundsmith Equity fund owns companies whose share value has fallen by more than 30% year to date.

If they could see these big falls coming, they would probably do something about it. But the point is that these things are only easy in hindsight. And a particular bugbear of mine is financial advisers who like to claim they can successfully make these kinds of calls and decisions. My sense is they usually just pick recent strong performers then seek out ‘research’ to justify their decision.

It is not an ability we lay claim to, but it is our job to carve a way through this apparent maze and keep our clients safe. It is a big responsibility, which we take seriously, but doing it successfully is easier than you think.

First, let’s be clear what we mean about being successful. Success means shifting the odds in your favour re: making you money over the long term - achieving your objectives and securing a comfortable retirement. It is not about an ability to call markets or second-guess future top performing funds.

It involves not getting too excited when things are flying up. And avoiding panic or overreaction when they go down. It involves the knowledge, and perhaps humility, to admit to what you don’t know and can’t possibly hope to control. It is to understand that past performance simply tells you what has happened, and not what will happen. And then to act accordingly.

It relies on balance and diversification. Why take the risk of backing the horse when you can own the whole stable? That is exactly why we build around a solid core of tracker funds. And from this foundation, we add carefully selected active managers all aimed at doing something different. But we are careful never to get overexcited or overcommit to anyone.

As with the Woodford scandal, we are not afraid to act when it is clear something fundamental about a fund has changed. But more often doing nothing is the braver, and correct option. In a sense, it is winning by not losing and understanding that aiming for average, is the best way to be above average in the long run.

And it is then about addressing the real elephant in the room. Charges. If you own the market, losses are temporary and a natural part of the journey. Money lost to excessive fees is money that is lost for good.

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