Portfolios for Ageing Brains and Value Hell

There were a couple of good articles in last week’s Investors Chronicle – one of which I totally agreed with and one which I did not.

The first was by Chris Dillow who reported on academic studies of aged Americans. It was suggested that investment skill declines with age and those who were unaware of their cognitive decline were substantially poorer than others who were aware of it who hadn’t suffered such a decline. Now as someone who is about to reach the age of 75, this is not solely an academic issue.

The article suggested that older people might have acquired some wisdom over the years, and tend to acquire better rules of thumb, but their stock picking ability does decline. Mr Dillow suggests that one answer to this problem is to delegate our wealth management to others. But he does point out that this leaves you still with the problem of picking a good fund manager when your ability to do that might also decline. His other solution is to simplify your portfolio so you just hold equity and bond trackers plus cash.

I am not convinced by this at all. Clearly some people suffer sharp mental degradation with age and should delegate portfolio management to others, or buy managed funds of various kinds. But others do not.

Has the performance of Warren Buffett (Aged 90), or his partner Charlie Munger (Aged 96) or George Soros (Aged 90) declined in recent years? It’s not obvious at all.  My own portfolio performance last calendar year was double that of the FTSE All-Share and almost double that of the MSCI WMA Balanced Private Investor Index. So I don’t think I’ll give up managing my own portfolio just yet.

The other interesting IC article was entitled “Welcome to Value Hell” by Algy Hall. It reported on the performance of a “Value” based screen over the last year and said “the performance over the last 12 months has been extraordinarily bad”. The top 50 picks did worse than the FTSE All-share and the top 5 were a disastrous -69%. Even over the last three years, it returned minus 19.3% total return compared with plus 10.7% from the FTSE.

Looking down the list of shares recommended last year, they are a very mixed bunch but gaming companies did well (Plus500, Flutter, William Hill, IG Group and GVC). The “Zeus” screen used is based on how much the earnings have diverged from historic means, i.e. it is based on the principle that they might “bounce back”.

I think the lesson is that looking at past profits tells you little about the future and that stocks that look cheap at a glance are to be avoided. They often need a re-rating which can be crystalised by specific events. But in the depression of a pandemic, that is unlikely to occur and even in the good times other companies will do better.

One can only conclude that these “cheap” stocks needed to be even cheaper than they were to make reasonable investments. In effect the market was not reflecting the bad news about the stocks and investors were holding them longer than they should in the hope of recovery.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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