SOMETHING FOR THE WEEKEND
Opportunities
For most investors, buying individual stocks is a bad idea for a number of reasons. But there’s growing evidence that newly listed companies in particular are worth avoiding.
New listings inevitably receive a disproportionate amount of media attention; they are, by definition, “news”. But they’re also increasingly volatile. For example, a company listed in the US before 1970 has a 92% chance of surviving the next five years, compared to just 53% for a company listed between 1990 and 2000.
Of course, no new company can expect a smooth and steady ride. Disrupting established markets, or just breaking into them, is inherently risky. Some academics have also suggested that new companies often go public before they’re ready, while others say that today’s investors have a higher tolerance of risk.
But new research in the US suggests there may be a more fundamental reason why newly listed stocks have become more volatile. In a paper entitled Why Are Successive Cohorts of Publicly Listed Funds Successively Riskier?, Anup Srivastava from Tuck School of Business in New Hampshire and Senyo Y. Tse of the Mays Business School in Texas point to the shift from an “infrastructure-intensive” production economy to one driven by innovation.
New from TEBI — articles for evidence-based advisers
I’ve been asked by several advisory firms over the last few months whether I’d be willing to write articles or blog posts for them. I’ve always said no, but I’ve now had a sufficient number of enquiries to make me change my mind.
To clarify, these articles will be written by me but will not be featured on The Evidence-Based Investor. They will not be exclusive — in other words, they will be made available to a number of different firms — but the circulation for each article will be carefully restricted to avoid over-duplication.
Find out more information here
On average we’re average. Get over it
People often struggle with the concept of average. Particularly us Anglo-Saxons. It’s instilled in us from an early age that we must do our best — and be the best we can at whatever it is we do. If you’re anything less than well above average you’re a loser.
We naturally like to think we’re better than most — better drivers, bloggers, lovers or whatever it may be. We’re like the inhabitants of Lake Wobegon, the fictional town in Minnesota “where all the women are strong, all the men are good looking, and all the children are above average”. Of course the blunt truth is that we can’t all be above average. In aggregate, average is precisely what we are.
When Jack Bogle, the founder of Vanguard, launched the first retail index fund on New Year’s Eve 1975, he was derided by the mutual fund industry. The fund was lampooned as “Bogle’s Folly” and was even described as “un-American”. Why? Because no one could see why investors would be happy to “settle for average”.
Want to know fund managers’ not-so-secret sauce?
Jack Bogle once described fund management as an industry built on witchcraft. OK, even I would admit he was being a little harsh there, but you can see the point he was making.
Those who manage, sell or advocate using active funds have a vested interest in giving them an air of mystique. What you’re paying for is some unique skill or insight which, they like to imply, will deliver long-term value over and above the market return, even when all the costs entailed are taken into consideration.
To simplify things a little, the industry calls this outperformance alpha — as opposed to beta, which essentially encompasses passive investing or index-tracking. Alpha, if you like, is the active managers’ secret sauce. Or at least in theory. As most people reading this already know, the reality is rather different.
You’ll never guess who’s bankrolling Brexit
I don’t want to get involved in the Brexit debate. I’m firmly in the Remain camp but I respect the views of those who aren’t. That said, the funding of the Leave campaign does raise serious questions about the political influence wielded by industry lobby groups.
According to the Financial Times, figures released by the Electoral Commission show that almost half of the funding received by the pro-Brexit campaign between February 21st and April 22nd came from the investment management industry. Two other financial sectors — banking and insurance — have also made large donations.
To be fair, asset managers have also contributed large sums to the Remain campaign, though nowhere near as much.. And of course, the likes of Peter Hargreaves, Jeremy Hosking and Alexander Darwall are doing nothing wrong in lending financial support to the Brexiteers. But, as a country, we need to ask why it is that one industry consistently makes more political donations than any other, and whether that’s healthy for our democracy. Asset managers, as a group, are also, by some distance, the biggest donors to the Conservative Party.
Other TEBI post you may have missed
China — evidence-based investing’s next frontier
Mark Hebner — a man on a mission to change the way we invest
Active management — the industry that grew too fat
Why active funds make less sense now than ever
Also worth reading
The secret to longer life: keep working (Squared Away)
Perhaps all is not so well in low volatility land (Wesley Gray)
The three most important words in investing (Charlie Bilello)
How should alternative investments be benchmarked? (Ben Carlson)
The world’s smartest investors have failed miserably (The Motley Fool)
What sports nutrition can teach us about factor investing (Matthew Abouzeid)
How to conjure up big savings without sacrificing your quality of life (Monevator)
Does your mindset affect how you make retirement income decisions? (Wade Pfau)
Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
