Winning the Losers’ Game

by Doug Brodie

 

/1. Winning the Losers’ Game

The book:

 

The player:

Roger Federer playing a tennis game
 

Roger Federer reckons his winning percentage of points in his professional career is 54%. He will have the stats. The website ‘tennisnerds’ gives us this outline of his points percentages at Wimbledon alone (thank you random.tennis.stats) which strongly suggests that Mr Federer is correct.

The strategy that Federer has copied is basing the work on ‘not losing’ each point rather than going all out to win each point. Being that competent allowed him to sit back and wait for his opponent to lose the point, rather than him winning it.

Charlie Ellis’s strategy focuses on not losing money, in so far as not letting value fall as much as Mr Market. He teaches every retail investor that returns are not symmetrical, and if the market falls 10% and your money falls 5%, you don’t have to climb back as much as the market to get back into profit. This means you can generate investment profits in more years than the market. The point he makes is that it’s still not easy – the market wouldn’t exist if it was – however, for consistent gains, the focus should be not losing rather than trying to outsmart Mr Market every day.

chart showing Roger Federer's % total points won in Wimbledon finals

/2. It might not say so on the tin but…

Investing is not Ronseal; there is a well-publicised list from The AIC that trumpets investment trusts which have increased their annual dividend payments for over 50 years. You know we focus on income – that’s what we all need when we’re not being paid – however, we are guilty of not talking about capital much. This is because we have a tough job getting the message across that income and capital value from an investment are not correlated, even though this seems at first to be counterintuitive.

We took all the trusts that qualify for the 50-year Dividend Hero status and ran their total return for the last thirty years, measuring returns against the FTSE All Share:

graph showing the total return for the last 30 years for trusts that qualify for the 50-year Dividend Hero status, measured against the FTSE All Share

Next, we took a sum of £100k invested into each to see what the income alone was, and here we used Vanguard’s passive fund since it started.

graph showing investment returns of trusts that qualify for the 50-year Dividend Hero status, measured against Vanguard's passive fund

Our strategy is really quite simple – we follow Charlie Ellis’s strategy of focusing on income (read the book) and then simply compile, collate and analyse data. We don’t make assumptions on asset allocation, whether we should be in bonds or emerging market ETFs, we simply analyse data and where it leads, we go there. One of many reasons we don’t try and guess an asset allocation for the coming years (aside from not trusting crystal balls) is that is the job of the managers we use: William Meadon at JP Morgan who runs Claverhouse has an embarrassment of skills, resources and brilliant minds to support him, so it would be somewhat arrogant of us to suggest we could improve on that.

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/3. Big, bigger, biggest

Microsoft still wins.

chart showing the list of the largest companies by market cap

Interestingly, all funds, ETFs etc start to run into a problem if one stock becomes toooooo big. For UCITS status in Europe, no single holding can be more than 20% of the fund’s net asset value. In the US…

Section 12(d)(1)(A) of the 1940 Act places the following limits on investments by investment funds in any registered investment company. Specifically, a fund is prohibited from:

  • acquiring more than 3% of a registered investment company’s shares (the “3% Limit”);

  • investing more than 5% of its assets in a single registered investment company (the “5% Limit”); or

And the UCITS rule:

  • No single asset can represent more than 10% of the fund's assets; holdings of more than 5% cannot in aggregate exceed 40% of the fund's assets. This is known as the "5/10/40" rule. There are certain exceptions for government issued securities and for index tracking funds.

Various market commentators have been suggesting this week that Nvidia could one day be worth as much as 15% of the S&P. Year to date, that one stock has been responsible for 34% of the total gain in the S&P.

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/4. China and gold – who knew?

You’ll have seen those adverts trying to offer you gold as an investment, or currencies, or trade-yourself markets (you know, the ones with a front page warning that 70% of all customers lose their money). One of the big issues for retail investors trying to be traders is the simple lack of relevant, inside information, and this snippet from Syz is just a great example.

snippet of a Syz's article about gold prices

(FYI, HODL is a crypto term for ‘holding on for dear life’).

So hands up who was following China’s gold purchases?

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