I have been an active stock picker since 2008-9 and this is the first year I have got my hands-on ETFs
So what are ETFs?
An exchange-traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index
Lars Krojier has written an excellent book (Investing Demystified) on ETFs and you can get a good summary from this video series, I encourage you to spend 30 mins to go through them.
Like always I like a theory but I wanted to see numbers and once numbers stacked in favor of ETFs I got sold and started adding them to my portfolio.
How did I do the numbers?
I compared returns from Jan-2018 to Jul-2020 on a momentum portfolio, large indexes and active stock decisions I took between those dates
Why Jan-2018 as a starting date?
In Jan-2018 I had subscribed to a very well respected momentum service for their sake it will remain unnamed
What were results
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2 out of 3 boring indexes beat systematic price momentum portfolio, Large-cap index-matched comfortably to my active transactions in the scorecard
How have you calculated your own average active returns?
Personally I am very fortunate to get an investable surplus every month so portfolio end values from 2018 to today would have not given any meaningful comparison, so I took this approach
- Every single active transaction between Jan-18 to Jul-20 in scorecard – Add or Remove was considered
- For add transaction which is still in portfolio calculated return by taking market price as of 16th July 2020
- For add transaction, if it’s not in portfolio use the remove price to calculate the return
- For remove transaction, if it was bought before Jan -18 take cost as mid-Jan stock price and not the actual cost price
- Dividends were ignored
No 4 meant that some of by massive winners like Symphony and Piramal turned into big losers as prices sold were higher than my actual cost base but lower to Jan-18 prices
You can see all details in my working sheet here
Is your intention to blow your own trumpet?
No, while on the surface it seems that scorecard has beat indexes and momentum portfolio comfortably what’s missing is the allocation to those transactions
A massive allocation to either Aarti Drugs or LEEL electricals could have made or break my active portfolio.
Scorecard beat indexes and you still you like ETFs?
Scorecard has done ~30 transactions (approx 1 per month) and I have spent probably 100s of hours on research (if you ask my wife 1000s) while if I bought the large-cap index countless hours, the agony of tracking, updating thesis would have been saved and I could have used those hours elsewhere.
You have taken the worst time in the last 10 years for small-cap and your analysis is wrong?
Lars Krojier’s book has data over many decades as well just google you don’t have to believe me, small caps may do well or may not do well for the next 5 years who knows. The intention of this exercise was to help myself and hopefully if you are starting out on a journey on individual stock picking you have gained some perspective.
ETFs > Invest in Large companies > their weight increase > ETFs buy more, Isn’t this a self-propelling virtuous cycle?
This could be possible however and given it’s a self-propelling virtuous cycle and not a vicious one why not participate? Broad-based & large index funds would overcome most limitations highlighted on the web.
Why are you then still actively picking stocks?
For the love of it, even though I spent 100s of hours sitting in my rabbit hole (home office) reading one page after another this activity doesn’t feel tiring, in fact, this is an escape for me from work and other commitments, Also I have done reasonably well at least till now.
Kiran’s tweet is a good summary 🙂
But slowly I have learned that passive investing works and it’s going to get a prominent place in my portfolio as life takes over (raising children, social, learning commitments, etc)
Love to get your comments here on twitter