Stock market is a "fully-fledged epic bubble" and will burst

Stock market is a "fully-fledged epic bubble" and will burst

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Discussion

DonkeyApple

54,934 posts

168 months

Sunday 3rd October 2021
quotequote all
Derek Chevalier said:
By global, I assume you mean Developed, and I take your point that it contains reasonable diversification, and you could also argue that with correlations increasing, especially during turbulent markets, that including EM is not necessary. However, historically, tilts towards EM (and also small companies) have generated a more sustainable income for a given pot, admittedly with the potential of more volatility, as not all sectors of the market tend to do badly for extended periods of time.

https://www.fa-mag.com/news/small-cap-withdrawal-m...

Going forwards, who knows, but if you look at the relative valuations of something like a developed market tracker (excluding small), it's around 2.5 times as expensive as an EM tracker on a P/E basis, with small-cap somewhere in between. Can the difference in relative valuations be justified......
Yup. I think, if anything, this shows the dilemma of the advisor industry due to the now absence of low risk yield available for older customers. It's an industry which throughout all our lifetimes has been built upon migrating away from equity risk and towards secure yields around the point that the customer ceases earning employment income but that model simply doesn't exist any more. Not only are customers living longer after employment so the risk profile has shifted out but secure yield barely exists anymore.

In many ways it's an industry that has traditionally pitched small caps and EM to you get clients who can afford to adopt risk during the early phase of the portfolio lifespan and strongly advocated not holding those assets in the later stages but suddenly finds itself pitching the reverse.

On top of that, for the higher terms from these markets, which are derived from the higher risk of then, one must be considerably overweight, over exposed to them. This means that you have an i here at mismatch in that the elevated risk dictates one weighting but in order for the returns to have any meaningful impact you need a higher weighting.

Fifteen years ago you wouldn't have found me contemplating leverage on blue chips as part of a blue chip portfolio but the market today bears almost no resemblance and I would argue now that the transparency of blue chips, the aspect that more than a few blue chips are in fact start-ups (when we were younger it was just VOD wink) and the cheapness of debt and total access to cheap OTC execution has changed that dynamic drastically.

NowWatchThisDrive

688 posts

103 months

Monday 4th October 2021
quotequote all
DonkeyApple said:
It's the amount of research and co tools required to even begin to dial out some of the risk on small caps. Most investors are taking positions in the hopes of a liquidity squeeze as opposed to an actual increase in the fundamentals, whether they realise they're doing this or not. You see this overwhelming addiction to RNS as opposed to audited accounts.

On top of that, the professionals involved tend to be the worst in the industry, or rather not remotely professional. The number of genuine small cap analysts in proper institutions is now tiny. It's simply not an area of the equity market that has any credible oversight today

My industry at the bottom end has massive crossover with the small cap industry because they are both built upon bullst and the end punter's addiction to gambling whether they realise it or not. Over my nearly 30 years of being in broking I've seen first hand the practices of this he small cap industry here and abroad. I remember when AIM first launched and the company I worked for back then launched some of the first listings all of which were frauds, just as most had been on OFRX one way or another and most are in some shape or form on crowed funding platforms. The people involved in pedalling small caps are horrendous. You get things like Beaufort Securities at one end and frankly, at the other Woodford. To me, Woodford is a great example of the toxicity of small caps when it starts to unravel because even if the underlying company is quality you find that there are no buyers so the stock has no value.

Woodford was and is a great stock picker who looked into every aspect and dirty corner of a small cap and invested in quality but what his downfall showed was something that has always existed but that many people, even professionals, never fully appreciated about small caps which was that none of that ever matters in a big event. To get returns you have to go smaller and smaller and take on more and more risk and ultimately, the fundamentals of the business play absolutely no role in the pricing during an event. I hey either get ramped up by a liquidity squeeze or the buyers simply evaporate and the equity is worth nothing despite absolutely nothing at all changing with the business itself.

so I simply don't see how a quality fund could be constructed out of listings which are illiquid so toxic with size risk, no credible third party oversight and where the market 'professionals' who do operate in this space have a remarkable tendency to be properly dodgy and mostly just door to door salesmen clothes in stripy nylon. And then to make that investment give any relevant returns as a share of your overall portfolio you need to go quite heavily overweight in then.

Small caps as far as I am concerned are fine if someone is spending enough time monitoring them and looking at the right things. For me, that would be looking for the listings being pumped by the most successful crooks wink But I wouldn't rush to think that the typical small cap fund manager is any kind of rocket scientist and nor would I want to be holding much in the way of funds where the price can deviate so significantly from the fundamentals.

Re the FTSE100, I quite like it. I think it's absence of tech has made it quite relevant and along with its yield at 3%+ and an underlying desire of the State to pump money into its constituents its possibly the closest thing to resembling a bond that exists anymore. wink. Bit I think the index is a good foil to things like the US indices.

Edited by DonkeyApple on Sunday 3rd October 09:13
In aggregate I actually agree on both the stocks and the punters. A lot of the companies are rubbish - there are whole sectors (e.g. O&G, miners, pharma) in the small & midcap space that I'd never entertain - and a lot of retail flow is little more than glorified gambling in poor quality names by mugs with little knowledge of, or interest in, fundamentals.

That said, it's absolutely possible to do it "properly" and there's a small but significant minority who do take the time to understand businesses inside out, engage with management over many years and ultimately reap the rewards in terms of outperformance. In the same sense, there is real value in some of the institutional coverage if you look in the right places and it's not all as fly-by-night as you're suggesting.

While I'm fortunate enough to have done it as a hobby and, latterly, vocation for a while now, I've also managed money professionally, neurotically pursuing short-term alpha among the same kind of stuff the rest of the world looks at, and I'd choose private investing in smaller companies in an instant for your ability to have an edge, learn and enjoy it, and benefit financially without answering to anyone else (except my family!). Liquidity is definitely something to think about given holding multiple days' volume in some stuff, but I'm not going to be selling in a hurry on any single event and I've got some trackers and large caps to sell if I need to raise cash that urgently.

Ultimately everyone's skills, interests and risk appetite is different and of course I'm biased by experience but I think smallcaps (and PIs generally) cop too much flack from people within the industry who should know better and haven't necessarily done it properly themselves.

Derek Chevalier

3,942 posts

172 months

Tuesday 5th October 2021
quotequote all
DonkeyApple said:
Derek Chevalier said:
By global, I assume you mean Developed, and I take your point that it contains reasonable diversification, and you could also argue that with correlations increasing, especially during turbulent markets, that including EM is not necessary. However, historically, tilts towards EM (and also small companies) have generated a more sustainable income for a given pot, admittedly with the potential of more volatility, as not all sectors of the market tend to do badly for extended periods of time.

https://www.fa-mag.com/news/small-cap-withdrawal-m...

Going forwards, who knows, but if you look at the relative valuations of something like a developed market tracker (excluding small), it's around 2.5 times as expensive as an EM tracker on a P/E basis, with small-cap somewhere in between. Can the difference in relative valuations be justified......
Yup. I think, if anything, this shows the dilemma of the advisor industry due to the now absence of low risk yield available for older customers. It's an industry which throughout all our lifetimes has been built upon migrating away from equity risk and towards secure yields around the point that the customer ceases earning employment income but that model simply doesn't exist any more. Not only are customers living longer after employment so the risk profile has shifted out but secure yield barely exists anymore.

In many ways it's an industry that has traditionally pitched small caps and EM to you get clients who can afford to adopt risk during the early phase of the portfolio lifespan and strongly advocated not holding those assets in the later stages but suddenly finds itself pitching the reverse.

On top of that, for the higher terms from these markets, which are derived from the higher risk of then, one must be considerably overweight, over exposed to them. This means that you have an i here at mismatch in that the elevated risk dictates one weighting but in order for the returns to have any meaningful impact you need a higher weighting.

Fifteen years ago you wouldn't have found me contemplating leverage on blue chips as part of a blue chip portfolio but the market today bears almost no resemblance and I would argue now that the transparency of blue chips, the aspect that more than a few blue chips are in fact start-ups (when we were younger it was just VOD wink) and the cheapness of debt and total access to cheap OTC execution has changed that dynamic drastically.
Your comment re how much the market has changed over the last fifteen years reminded me of a chat I had with a gent last week who was a member of the exchange many decades ago - a completely different world smile

Regarding low yields on (quality) bonds, while not ideal, the scenario that tends to put (retirement) portfolio sustainability under threat are things like

1. Deep and prolonged equity market falls (e.g. 1970)
2. Sustained elevated inflation (ditto)

especially if it happens in the early years of retirement. We aren't (yet) in that situation.

One thing to be aware of regarding equity market falls is for those that are invested in fund managers with large-cap growth holdings - what happens if this approach falls out of favour? See Vanguard's forecasts based on current valuations (of course forecasts rarely come true, but worth a read)

https://advisors.vanguard.com/insights/article/mar...

U.S. growth –0.5%–1.5%
U.S. value 3.4%–5.4%






Derek Chevalier

3,942 posts

172 months

Tuesday 5th October 2021
quotequote all
DonkeyApple said:
NowWatchThisDrive said:
Speaking as someone predominantly focused on small/midcaps I have to disagree with the blanket characterisation of them all as horrible! While there's an awful lot of dross especially on AIM that I wouldn't touch with a bargepole, there's a good number of quality, well-run businesses that generate solid cash and are worthy of serious consideration. Yes you have to put up with a bit more irrational volatility (I'm down 10% over the last 3wks while benchmark indices are more or less flat...) but if you're willing to really do the work, seek out great businesses to own in perpetuity and not fixate too much on macro + cycle noise then the outperformance is there to be had. The great thing about investing in smaller companies is you're fishing in a pond where you have a structural advantage over most institutional money, and it only takes a few big winners to truly change your life. Anyway, enough philosophical drum-banging from me...

On EMs esp Asia I broadly agree; I tend to steer clear as completely different business and regulatory frameworks, with abundant cultural/political factors that are well outside my circle of competence to understand. Also agreed on the FTSE100 being a rubbish index but that probably merits a thread on its own.
It's the amount of research and co tools required to even begin to dial out some of the risk on small caps. Most investors are taking positions in the hopes of a liquidity squeeze as opposed to an actual increase in the fundamentals, whether they realise they're doing this or not. You see this overwhelming addiction to RNS as opposed to audited accounts.

On top of that, the professionals involved tend to be the worst in the industry, or rather not remotely professional. The number of genuine small cap analysts in proper institutions is now tiny. It's simply not an area of the equity market that has any credible oversight today

My industry at the bottom end has massive crossover with the small cap industry because they are both built upon bullst and the end punter's addiction to gambling whether they realise it or not. Over my nearly 30 years of being in broking I've seen first hand the practices of this he small cap industry here and abroad. I remember when AIM first launched and the company I worked for back then launched some of the first listings all of which were frauds, just as most had been on OFRX one way or another and most are in some shape or form on crowed funding platforms. The people involved in pedalling small caps are horrendous. You get things like Beaufort Securities at one end and frankly, at the other Woodford. To me, Woodford is a great example of the toxicity of small caps when it starts to unravel because even if the underlying company is quality you find that there are no buyers so the stock has no value.

Woodford was and is a great stock picker who looked into every aspect and dirty corner of a small cap and invested in quality but what his downfall showed was something that has always existed but that many people, even professionals, never fully appreciated about small caps which was that none of that ever matters in a big event. To get returns you have to go smaller and smaller and take on more and more risk and ultimately, the fundamentals of the business play absolutely no role in the pricing during an event. I hey either get ramped up by a liquidity squeeze or the buyers simply evaporate and the equity is worth nothing despite absolutely nothing at all changing with the business itself.

so I simply don't see how a quality fund could be constructed out of listings which are illiquid so toxic with size risk, no credible third party oversight and where the market 'professionals' who do operate in this space have a remarkable tendency to be properly dodgy and mostly just door to door salesmen clothes in stripy nylon. And then to make that investment give any relevant returns as a share of your overall portfolio you need to go quite heavily overweight in then.

Small caps as far as I am concerned are fine if someone is spending enough time monitoring them and looking at the right things. For me, that would be looking for the listings being pumped by the most successful crooks wink But I wouldn't rush to think that the typical small cap fund manager is any kind of rocket scientist and nor would I want to be holding much in the way of funds where the price can deviate so significantly from the fundamentals.

Re the FTSE100, I quite like it. I think it's absence of tech has made it quite relevant and along with its yield at 3%+ and an underlying desire of the State to pump money into its constituents its possibly the closest thing to resembling a bond that exists anymore. wink. Bit I think the index is a good foil to things like the US indices.

Edited by DonkeyApple on Sunday 3rd October 09:13
Small-cap: I guess it depends how far down the small-cap spectrum you are going. Agree that the further you go down concerns about illiquidity/coverage increase, but I'm thinking more about this level, with a market cap around the 2-3BN level (which you might class as mid-cap) vs 100BN of the "normal" index.

https://www.msci.com/documents/10199/a67b0d43-0289...

I assume much smaller than this and the tracker/systematic funds are going to have issues with trading costs.

For these systematic funds, they tend to have "quality" screens in an attempt to filter out the "junk".

https://acrinv.com/size-matters-control-junk/

Woodford: If you look at the returns in the Invesco days, some question whether it was stock-picking skills/alpha or merely tilting to styles that can be replicated (to a certain extent) with an index.

https://finalytiq.co.uk/woodford-vs-ftse-uk-equity...




mikeiow

5,288 posts

129 months

Tuesday 5th October 2021
quotequote all
Derek Chevalier said:
Your comment re how much the market has changed over the last fifteen years reminded me of a chat I had with a gent last week who was a member of the exchange many decades ago - a completely different world smile

Regarding low yields on (quality) bonds, while not ideal, the scenario that tends to put (retirement) portfolio sustainability under threat are things like

1. Deep and prolonged equity market falls (e.g. 1970)
2. Sustained elevated inflation (ditto)

especially if it happens in the early years of retirement. We aren't (yet) in that situation.

One thing to be aware of regarding equity market falls is for those that are invested in fund managers with large-cap growth holdings - what happens if this approach falls out of favour? See Vanguard's forecasts based on current valuations (of course forecasts rarely come true, but worth a read)

https://advisors.vanguard.com/insights/article/mar...

U.S. growth –0.5%–1.5%
U.S. value 3.4%–5.4%
Or rather than June, check their latest October report https://advisors.vanguard.com/insights/article/mar...
U.S. growth –0.6%–1.4%
U.S. value 2.9%–4.9%



DonkeyApple

54,934 posts

168 months

Tuesday 5th October 2021
quotequote all
Derek Chevalier said:
Small-cap: I guess it depends how far down the small-cap spectrum you are going. Agree that the further you go down concerns about illiquidity/coverage increase, but I'm thinking more about this level, with a market cap around the 2-3BN level (which you might class as mid-cap) vs 100BN of the "normal" index.

https://www.msci.com/documents/10199/a67b0d43-0289...

I assume much smaller than this and the tracker/systematic funds are going to have issues with trading costs.

For these systematic funds, they tend to have "quality" screens in an attempt to filter out the "junk".

https://acrinv.com/size-matters-control-junk/

Woodford: If you look at the returns in the Invesco days, some question whether it was stock-picking skills/alpha or merely tilting to styles that can be replicated (to a certain extent) with an index.

https://finalytiq.co.uk/woodford-vs-ftse-uk-equity...
I would tend to consider that sort of size to be midcaps and would be more comfortable being overweight in that sort of area. But that's the key, if you take the 350, the 250 combined is so small that to achieve meaningful gains within a portfolio you need to consciously go considerably overweight. At which point you're arguably taking on domestic exposure so need to consider whether you want more or less of that.

As an aside, I've often wondered how a portfolio would look if you simply took 350 exposure and went overweight in a constituent when it moved up into the 250 or 100 and held for a fixed period of two years, the theory being that the stocks that get elected up are the ones currently experiencing the best growth etc?

DonkeyApple

54,934 posts

168 months

Tuesday 5th October 2021
quotequote all
Derek Chevalier said:
DonkeyApple said:
Derek Chevalier said:
By global, I assume you mean Developed, and I take your point that it contains reasonable diversification, and you could also argue that with correlations increasing, especially during turbulent markets, that including EM is not necessary. However, historically, tilts towards EM (and also small companies) have generated a more sustainable income for a given pot, admittedly with the potential of more volatility, as not all sectors of the market tend to do badly for extended periods of time.

https://www.fa-mag.com/news/small-cap-withdrawal-m...

Going forwards, who knows, but if you look at the relative valuations of something like a developed market tracker (excluding small), it's around 2.5 times as expensive as an EM tracker on a P/E basis, with small-cap somewhere in between. Can the difference in relative valuations be justified......
Yup. I think, if anything, this shows the dilemma of the advisor industry due to the now absence of low risk yield available for older customers. It's an industry which throughout all our lifetimes has been built upon migrating away from equity risk and towards secure yields around the point that the customer ceases earning employment income but that model simply doesn't exist any more. Not only are customers living longer after employment so the risk profile has shifted out but secure yield barely exists anymore.

In many ways it's an industry that has traditionally pitched small caps and EM to you get clients who can afford to adopt risk during the early phase of the portfolio lifespan and strongly advocated not holding those assets in the later stages but suddenly finds itself pitching the reverse.

On top of that, for the higher terms from these markets, which are derived from the higher risk of then, one must be considerably overweight, over exposed to them. This means that you have an i here at mismatch in that the elevated risk dictates one weighting but in order for the returns to have any meaningful impact you need a higher weighting.

Fifteen years ago you wouldn't have found me contemplating leverage on blue chips as part of a blue chip portfolio but the market today bears almost no resemblance and I would argue now that the transparency of blue chips, the aspect that more than a few blue chips are in fact start-ups (when we were younger it was just VOD wink) and the cheapness of debt and total access to cheap OTC execution has changed that dynamic drastically.
Your comment re how much the market has changed over the last fifteen years reminded me of a chat I had with a gent last week who was a member of the exchange many decades ago - a completely different world smile

Regarding low yields on (quality) bonds, while not ideal, the scenario that tends to put (retirement) portfolio sustainability under threat are things like

1. Deep and prolonged equity market falls (e.g. 1970)
2. Sustained elevated inflation (ditto)

especially if it happens in the early years of retirement. We aren't (yet) in that situation.

One thing to be aware of regarding equity market falls is for those that are invested in fund managers with large-cap growth holdings - what happens if this approach falls out of favour? See Vanguard's forecasts based on current valuations (of course forecasts rarely come true, but worth a read)

https://advisors.vanguard.com/insights/article/mar...

U.S. growth –0.5%–1.5%
U.S. value 3.4%–5.4%
In some ways, the very essence of this thread. By most logical metrics there ought to be a rebasing but we've been looking at that for maybe as long as two decades now. The uncomfortable aspect being that anyone who'd done the historically correct thing since the turn of the century and derisked upon retirement will have taken an absolute battering in lost performance.

bmwmike

6,918 posts

107 months

Tuesday 5th October 2021
quotequote all
Feels a bit like pass the parcel, but the parcel keeps getting more valuable grenade-y

Edited by bmwmike on Tuesday 5th October 10:13

ATM

18,099 posts

218 months

Tuesday 5th October 2021
quotequote all
DonkeyApple said:
Derek Chevalier said:
DonkeyApple said:
Derek Chevalier said:
By global, I assume you mean Developed, and I take your point that it contains reasonable diversification, and you could also argue that with correlations increasing, especially during turbulent markets, that including EM is not necessary. However, historically, tilts towards EM (and also small companies) have generated a more sustainable income for a given pot, admittedly with the potential of more volatility, as not all sectors of the market tend to do badly for extended periods of time.

https://www.fa-mag.com/news/small-cap-withdrawal-m...

Going forwards, who knows, but if you look at the relative valuations of something like a developed market tracker (excluding small), it's around 2.5 times as expensive as an EM tracker on a P/E basis, with small-cap somewhere in between. Can the difference in relative valuations be justified......
Yup. I think, if anything, this shows the dilemma of the advisor industry due to the now absence of low risk yield available for older customers. It's an industry which throughout all our lifetimes has been built upon migrating away from equity risk and towards secure yields around the point that the customer ceases earning employment income but that model simply doesn't exist any more. Not only are customers living longer after employment so the risk profile has shifted out but secure yield barely exists anymore.

In many ways it's an industry that has traditionally pitched small caps and EM to you get clients who can afford to adopt risk during the early phase of the portfolio lifespan and strongly advocated not holding those assets in the later stages but suddenly finds itself pitching the reverse.

On top of that, for the higher terms from these markets, which are derived from the higher risk of then, one must be considerably overweight, over exposed to them. This means that you have an i here at mismatch in that the elevated risk dictates one weighting but in order for the returns to have any meaningful impact you need a higher weighting.

Fifteen years ago you wouldn't have found me contemplating leverage on blue chips as part of a blue chip portfolio but the market today bears almost no resemblance and I would argue now that the transparency of blue chips, the aspect that more than a few blue chips are in fact start-ups (when we were younger it was just VOD wink) and the cheapness of debt and total access to cheap OTC execution has changed that dynamic drastically.
Your comment re how much the market has changed over the last fifteen years reminded me of a chat I had with a gent last week who was a member of the exchange many decades ago - a completely different world smile

Regarding low yields on (quality) bonds, while not ideal, the scenario that tends to put (retirement) portfolio sustainability under threat are things like

1. Deep and prolonged equity market falls (e.g. 1970)
2. Sustained elevated inflation (ditto)

especially if it happens in the early years of retirement. We aren't (yet) in that situation.

One thing to be aware of regarding equity market falls is for those that are invested in fund managers with large-cap growth holdings - what happens if this approach falls out of favour? See Vanguard's forecasts based on current valuations (of course forecasts rarely come true, but worth a read)

https://advisors.vanguard.com/insights/article/mar...

U.S. growth –0.5%–1.5%
U.S. value 3.4%–5.4%
In some ways, the very essence of this thread. By most logical metrics there ought to be a rebasing but we've been looking at that for maybe as long as two decades now. The uncomfortable aspect being that anyone who'd done the historically correct thing since the turn of the century and derisked upon retirement will have taken an absolute battering in lost performance.
Right

Anyone who is long their currency - ie holding lots of it - will lose during this inflation and currency devaluation.
Anyone who is short their currency - ie with lots of debt - will win during this inflation and currency devaluation.

So the younger [and therefore we assume poorer] and elderly are losing.

Those more middle aged [and more nearer to middle class] with mortgages and better jobs will get bigger pay rises and are probably leveraged to F on their mortgage so winning from house price appreciation with cheap debt.

Obviously all that changes if interest rates dont remain as low.

Mr Whippy

28,945 posts

240 months

Tuesday 5th October 2021
quotequote all
So much banging on about bubbles and black swans.

I see a new paradigm starting... sovereign debt jubilee shenanigans, then interest rates can rise somehow.

Nirp/zirp is a zero sum game that’s run its course, along with globalisation... now the devaluation elephant is coalescing and people are expecting boom or bust.

Derek Chevalier

3,942 posts

172 months

Tuesday 5th October 2021
quotequote all
DonkeyApple said:
Derek Chevalier said:
Small-cap: I guess it depends how far down the small-cap spectrum you are going. Agree that the further you go down concerns about illiquidity/coverage increase, but I'm thinking more about this level, with a market cap around the 2-3BN level (which you might class as mid-cap) vs 100BN of the "normal" index.

https://www.msci.com/documents/10199/a67b0d43-0289...

I assume much smaller than this and the tracker/systematic funds are going to have issues with trading costs.

For these systematic funds, they tend to have "quality" screens in an attempt to filter out the "junk".

https://acrinv.com/size-matters-control-junk/

Woodford: If you look at the returns in the Invesco days, some question whether it was stock-picking skills/alpha or merely tilting to styles that can be replicated (to a certain extent) with an index.

https://finalytiq.co.uk/woodford-vs-ftse-uk-equity...
I would tend to consider that sort of size to be midcaps and would be more comfortable being overweight in that sort of area. But that's the key, if you take the 350, the 250 combined is so small that to achieve meaningful gains within a portfolio you need to consciously go considerably overweight. At which point you're arguably taking on domestic exposure so need to consider whether you want more or less of that.

As an aside, I've often wondered how a portfolio would look if you simply took 350 exposure and went overweight in a constituent when it moved up into the 250 or 100 and held for a fixed period of two years, the theory being that the stocks that get elected up are the ones currently experiencing the best growth etc?
I don't necessarily disagree with your FTSE 250/350 observations, but just to point out that (unfortunately?) the UK is such a small amount of a global market cap-weighted index that it will make little impact ~6.5% for this benchmark

https://www.msci.com/documents/10199/a67b0d43-0289...

Regarding the buying of constituents that have just been promoted, I think the potential outperformance is dying out, certainly in the S&P, as the market gets more efficient over time.

https://alphaarchitect.com/2021/01/22/is-the-marke...
https://www.spglobal.com/spdji/en/research/article...

Must've been great to run such a simple strategy back in the day and make a decent return biggrin

https://www.barrons.com/articles/SB124243913088626...




NowWatchThisDrive

688 posts

103 months

Tuesday 5th October 2021
quotequote all
Derek Chevalier said:
I don't necessarily disagree with your FTSE 250/350 observations, but just to point out that (unfortunately?) the UK is such a small amount of a global market cap-weighted index that it will make little impact ~6.5% for this benchmark

https://www.msci.com/documents/10199/a67b0d43-0289...

Regarding the buying of constituents that have just been promoted, I think the potential outperformance is dying out, certainly in the S&P, as the market gets more efficient over time.

https://alphaarchitect.com/2021/01/22/is-the-marke...
https://www.spglobal.com/spdji/en/research/article...

Must've been great to run such a simple strategy back in the day and make a decent return biggrin

https://www.barrons.com/articles/SB124243913088626...
Index rebalance trading has certainly changed within the last decade. In the good old days it was only banks that were really involved and was pretty reliably profitable (though not always - everyone has some horror stories...). But nowadays everyone on the buyside is at it too, and even the passive money on the other side of the trade to some extent. So it's definitely lost some of its edge as it's become a more crowded space, particularly in the major developed market indices. There is still some juice around big individual events and in the more obscure stuff, but like most quant strategies the more fashionable it becomes the harder it gets to discern signal from noise.

bitchstewie

50,810 posts

209 months

ATM

18,099 posts

218 months

Saturday 9th October 2021
quotequote all
bhstewie said:
Exactly what we're all - well me definitely - have been harping on about. This time it is different because inflation is getting out of control and that is never good. It's tolerable when the economy is thriving but ours is pumped up by easy money. The only way to control inflation is to tighten monetary policy but we don't seem to be doing that and are doing the opposite so we'll have a bad situation which is getting worse. Then when you look at the valuations of companies who make no or little money it's not hard to see where this is all going. The news from China shows how quickly these asset bubbles appear when we have a small drop. If valuations start dropping then people start to get margin calls and liquidating even quicker. The house of cards can come down quickly. And if interest rates nudge up even slightly all the people highly leveraged with property and mortgages will suffer and possibly even start defaulting as values start to ease. It could be the gfc all over again quite easily. The doom and gloom scenario seems far more likely to me but maybe I'm just a massive bear.

bmwmike

6,918 posts

107 months

Saturday 9th October 2021
quotequote all
ATM said:
bhstewie said:
Exactly what we're all - well me definitely - have been harping on about. This time it is different because inflation is getting out of control and that is never good. It's tolerable when the economy is thriving but ours is pumped up by easy money. The only way to control inflation is to tighten monetary policy but we don't seem to be doing that and are doing the opposite so we'll have a bad situation which is getting worse. Then when you look at the valuations of companies who make no or little money it's not hard to see where this is all going. The news from China shows how quickly these asset bubbles appear when we have a small drop. If valuations start dropping then people start to get margin calls and liquidating even quicker. The house of cards can come down quickly. And if interest rates nudge up even slightly all the people highly leveraged with property and mortgages will suffer and possibly even start defaulting as values start to ease. It could be the gfc all over again quite easily. The doom and gloom scenario seems far more likely to me but maybe I'm just a massive bear.
So you are all out of equities and sitting on cash? Or are you referring just to property?

Isnt cash a risk long term, esp with inflation. Not just a risk but a certainty to lose purchasing power. Equities will suffer but business will ultimately survive, on the whole. Ill probably keep my current mix mostly equitiies.




Edited by bmwmike on Saturday 9th October 12:22

Welshbeef

49,633 posts

197 months

Saturday 9th October 2021
quotequote all
Isn’t gold a good bet traditionally to put £ into when there is inflation and fully fledged epic bubble stock market?


Speaking of Gold how do you actually invest in gold - not buying the physical metal ?

vulture1

12,127 posts

178 months

Saturday 9th October 2021
quotequote all
Welshbeef said:
Isn’t gold a good bet traditionally to put £ into when there is inflation and fully fledged epic bubble stock market?


Speaking of Gold how do you actually invest in gold - not buying the physical metal ?
Gdx a gold etf or gold mining companies. However gold has been the worst performer this year.

Re equities or cash if in doubt mega stable consumer staple companies Jonson and jonson pepsi procter and gamble tesco etc. No matter what you people are still going to buy food Edited to add in. Buying those if you are worried about inflation is exactly where the inflation comes from. They just raise their prices.

Derek Chevalier

3,942 posts

172 months

Saturday 9th October 2021
quotequote all
bhstewie said:
Negative news sells. We may well have large inflation and falling markets ahead, but we've had these before and have emerged from the other side. You could try and explicitly hedge against inflation...

https://www.evidenceinvestor.com/how-can-you-hedge...

but this can have trade-offs re longer-term outcomes.

Far better, IMO, to have a portfolio that you are happy to stick with during inflationary times (maybe using the 70s as an example stress test?) that will deliver the long term growth necessary to achieve your goals.

bitchstewie

50,810 posts

209 months

Saturday 9th October 2021
quotequote all
Ironically inflation is the thing that's putting me off opening a Vanguard account the most right now.

How much of that is rational and how much is like you say, bad news sells, I don't know.

ATM

18,099 posts

218 months

Saturday 9th October 2021
quotequote all
bmwmike said:
ATM said:
bhstewie said:
Exactly what we're all - well me definitely - have been harping on about. This time it is different because inflation is getting out of control and that is never good. It's tolerable when the economy is thriving but ours is pumped up by easy money. The only way to control inflation is to tighten monetary policy but we don't seem to be doing that and are doing the opposite so we'll have a bad situation which is getting worse. Then when you look at the valuations of companies who make no or little money it's not hard to see where this is all going. The news from China shows how quickly these asset bubbles appear when we have a small drop. If valuations start dropping then people start to get margin calls and liquidating even quicker. The house of cards can come down quickly. And if interest rates nudge up even slightly all the people highly leveraged with property and mortgages will suffer and possibly even start defaulting as values start to ease. It could be the gfc all over again quite easily. The doom and gloom scenario seems far more likely to me but maybe I'm just a massive bear.
So you are all out of equities and sitting on cash? Or are you referring just to property?

Isnt cash a risk long term, esp with inflation. Not just a risk but a certainty to lose purchasing power. Equities will suffer but business will ultimately survive, on the whole. Ill probably keep my current mix mostly equitiies.
In my SIPP I'm almost all in with some form of derivative which is short the sp500 with x2 leverage. Only other thing I'm holding is a bit of miner for Lithium.