The Difference Between Betting And Investing


Tuesday, 8.17pm

Sheffield, U.K.

Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas. – Paul Samuelson

I gave away much of my library last month and, of the two hundred odd books let loose into the world, a significant number were about investing.

We aren’t taught how to invest when growing up, but we certainly learn how to spend.

The reason I didn’t need to keep those books is because investing is a solved problem – it’s simple to understand but not easy to do.

And I learned that the hard way, trying out every strategy that’s been touted over the last century.

Well, the main ones anyway, which are as follows.

A value based strategy looks for a company that looks underpriced, where it’s total market cap seems low when you look at the financial numbers.

An example might be an oil company that seems to be worth less than the oil it has on the ground.

A buy what you know strategy looks to invest in a field where you have an information advantage – perhaps you work in retail or energy and know what’s coming around the corner and if it’s going to be good or bad news for your industry.

An example might be understanding the way in which commodity prices are going and the impact that’s going to have on your sector.

And then there’s the buy a good story strategy which is where you look around and see what people you know are buying – what’s hot right now?

Apple and the iPhone come to mind, perhaps Tesla these days?

But do these strategies work?

The first doesn’t – computers can analyse the numbers much better than you can and if a company is cheap it’s probably because something is seriously wrong with it.

I lost everything I invested with this strategy.

The second is a good one, you can make a decent return although perhaps not a spectacular one.

The last strategy worked best for me, clawing back some of the losses from the first approach.

But I still lost money overall.

Which is why we come to the fourth strategy – which is to buy everything.

An index tracker doesn’t pick and choose stocks, it just buys the market in proportion to the market cap of individual companies.

This means you end up with more of some and less of others and overall what you get is based on how the global economy works out.

Now people who sell you financial products hate this last strategy – a low cost index tracker doesn’t rake in the high fees that a more active approach can ask for.

Which is why I was concerned recently.

There’s a lot of talk around Environmental, Social and Governance (ESG) approaches in companies – many people want investors to only invest in companies that have high ESG ratings.

Of course, that way people who push ESG ratings can make some money, but they don’t mention that.

I’m all for ESG but if you use any kind of strategy to invest you need to realise that you’re looking at the world through a lens – one that makes some things look brighter and other things look worse.

Just because a company scores highly on ESG doesn’t mean it will do well in the market- you’re essentially betting that it will if you build a portfolio around that argument.

Of course a company that works on improving ESG is doing a good thing – as long as it’s really doing something better rather than gaming the system to get a better score.

The big index trackers too some flak recently because they said they wouldn’t change their strategy to target companies that scored highly on ESG.

They said, quite rightly, that this wasn’t the mandate they had to set the funds up in the first place – which was simply to buy the market.

And I think that’s the right strategy – and here’s why.

If companies with good ESG do well then their market valuation will go up – and as a result the index trackers will buy them and they’ll make up a larger portion of their portfolios.

If they do badly, they won’t.

Which goes back to the key point – the lens doesn’t matter.

If you pick a particular point of view you’re taking a bet that that point of view is right.

Buying the market is the only neutral point of view – one that says the market is what the market is.

Your bet might pay off – you may get market beating returns.

But the chances are you won’t – in the long-term it’s really very hard to beat a market tracker.

The best thing to do these days, is to stick your money in an S&P 500 tracker or similar and get on with using your time to do something interesting, like reading a book or making something useful.

Often people aren’t satisfied with that strategy – it seems wrong to do nothing, to sit on your hands, and just put your money in a simple instrument.

But that’s why it’s not easy – we feel like we have to be active – to do something.

Obviously – I’m not giving you investment advice – this is just what I’ve learned and what I do.

And this is why most of those books are now in a second-hand store somewhere.

I did keep John Bogle’s book, The clash of cultures: Investment vs speculation, which talks about these ideas.

Bogle, in case you don’t know, was the creator of the first index fund.

It’s an interesting world at the moment, and things that were certain a year ago look much less certain now.

What strategies and tools are we going to need?

I might explore that over the next few posts.


Karthik Suresh

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