Editor's Note: This article was written by the editors of the blog " stews by Benjamin Graham , "a blog that discusses the value investment, based on the asset value of companies. They said you were in a previous article the gains generated by the investment Deep Value. In this new article, they compare the advantages and disadvantages of investment Live, buying yourself your actions in the face of investment through mutual funds.
Our investment club that invests in equities directly. Does this mean that we automatically reject the management company through investment funds?
For those who direct the investment is not a pleasure, let us say from the outset: we believe it is best to use investment funds to manage its assets. Indeed, time necessary for the success of direct investment is very important and that this does not give you pleasure, there's better to spend a little time and let professionals do that for you. Indeed, fund managers have on individuals, on the advantages:
1 - It is their job: they are trained and have to invest much more time than the punters on Sunday for this activity,
2 - They have at their disposal means that the revelers as we do not have access: professional databases, economic studies, information or software decision aids,
3 - They have the opportunity to meet business leaders in which they invest, they have a network of contacts and informants,
4 - They have teams of analysts and often, economists specializing ,
5 - And, though the big boys say stock forums, they usually have an IQ quite satisfactory.
Nevertheless, we believe that investors 'amateurs' provided that they are passionate and rational, have nevertheless gained certain advantages compared to these professionals.
First, due to the fact that fund managers and other unit trusts are professionals, they must be paid. Management fees or performance are regularly collected. These fees can vary greatly from one substance to another, but we can estimate that on average they are around 3-4%.
This may seem modest at first glance and yet ... imagine an investor and a direct fund manager earning a return before fees of 8% per annum. After 10 years, capital investment will directly generated a capital gain of 116% while the same capital management has reported 70% indirect. As Clearly, the fund manager must already justify a pretty outperformance to justify the management fees it collects. So the first advantage of the individual investor: he can pocket "the wages of the manager" .
The second benefit of the individual lies in the sheer size of funds to manage. Imagine a fund with capital under management of around 200 million euros (a work in progress rather commonplace for this "industry"). This fund must manage a hundred lines. Whenever he wants to build a position, it must buy on the market for 2 million euros securities. Please understand that with such flexibility, it will be difficult to invest in micro-caps in the portfolio of our club.
Indeed, if a company like Avatar Holding with its 180 million dollars of market capitalization and daily volume of 600,000 dollars it is accessible to the rigor, we understand that it will invest significantly in a society like Vet 'Affairs (market capitalization of 22 million euros and daily volume + / - 6000 euros) in causing prices to rise so high that the price can hardly be called a bargain. As for investing in Value Vision Media which at the time of our purchase, had a market capitalization of + / - 15 million dollars is almost impossible.
The individual therefore has the advantage of to invest in micro caps with very high potential, inaccessible to investment funds , without unduly influence the course of its target.
The third competitive advantage lies in the individual's legal or contractual fund or the fund. These constraints leave with good intentions: to protect the investor. However, they have the disadvantage of significantly reducing the flexibility of the manager. Thus, a value investor who can not find good investment ideas can remain fully liquid. It is possible to invest in all markets it wishes without restriction or geographical sector. It may hold only one row or more than one hundred. He can buy either on regulated markets or free markets.
The fund manager must, in turn, strictly abide by the prospectus related to the fund. If the prospectus informs him that the weight of his most important line can not exceed 10% of the current, it shall comply with even if he has a very strong conviction on a value. If the prospectus states that it can hold only 15% in cash or money market funds, he must comply even if it is on the market any real opportunity. Sometimes he is forced to invest only in regulated markets, or on a defined geographical area or type of action. All these constraints allow the purchaser to understand mutual funds in which it invests ... but also restrict the scope of the manager where the individual has complete freedom .
Another problem for investment funds: they must manage the "input" and "outputs" of capital. Unitholders may, at any time request a refund from them. To do this, the manager is forced to sell some positions it holds. The disadvantage is that in times of crash for example, the manager is frequently faced with massive demands for repayment ... at a time when it should just be able to have cash to invest in opportunities that arise.
And the reverse in times of market euphoria is also true: the manager is forced to invest heavily even as market equities are expensive and scarce opportunities. The sunk may, in turn, elect himself in progress to manage and stabilize it over a long period .
Finally, last but not least for individual investors: it is not subject to the "institutional imperative", the requirement for the manager to "always please his audience, or rather its customers' including being forced to manage its volatility.
To understand the handicap may be the "imperative Institutional, just read some feedback on the forums dedicated to equity mutual funds: a majority of speakers judge a manager, not on his management philosophy, not on its long-term performance, or even how NAV of the fund rebounded since March. Not anything like that: investors 'average' fund first examines "how the fund has recouped the fall of 2008." Nothing to do, dear reader, the fall of a product generally being a "pain" larger than a rise in product not being "fun." A mutual fund which today presents a good "retro-performance" over the past 10 years will be "pilloried" if its net asset value has had the misfortune to lose more than the market in 2008.
This obligation to "avoid falling" to avoid losing subscribers affects the long-term performance of the fund: the obligation to use blankets expensive than it is on the development of action or course of currencies, bonds press the "sell" if the share purchased would "not go in the right direction," ...
We recently read the latest reporting a investment fund which has an excellent "performance feedback" since its inception in 2002: an annual return of 10.4% positive end-September 2009 as its benchmark lost annually over the same period more than 2%. Unfortunately, in 2008, the NAV of the fund has been "massacred" - 67%! Although VL is much the same "rebound" in 2009 to finally make the return you know, it seems that these jerks do not like to unitholders of this fund.
Indeed, we now read that the portfolio would be diversified to hold "companies which react differently when economic conditions change. " We also learned that the assets will be invested in companies less sensitive to economic cycles and some of these companies have an expected return less than 15% per year while providing more stability to the portfolio. We read this as the fund's objective is precisely to buy only companies that have a potential long-term performance of at least 15%.
We explain this not to criticize the quality of management team in place (we also appreciate its overall value approach) but as an example, in our explosive, a "sacrifice of performance at the institutional imperative": the manager agrees to lose a little efficiency to reduce volatility.
Here, summarized below, the respective competitive advantages of professional managers and "passionate and rational investors. To you make your choice.
Manager Professional vs. individual investor:
1 - Training and experience vs. specific self
2 - major Time available vs. reduced time available
3 - Many information tools vs. less media
4 - Meeting with business leaders in principle vs. nil
5 - Information Network vs. none in principle
6 - Surrounded by a professional team vs. none in principle
7 - Cost management fee vs. time spent in principle "free"
8 - Freedom of action reduced the importance of work in progress to manage vs. handle being reduced to
9 - Freedom of action limited by the constraints Legal vs. total freedom of action
10 - Freedom of action reduced by changes in stocks at manage vs. current managing stable over time
11 - Freedom of action reduced the institutional imperative vs. opportunity to remain deaf to the institutional imperative
Editor's Note: the faithful readers know PlusRiches.fr that I practice on my own investing through mutual funds. I do not devote the time required to invest online. On your side, you invest directly or through funds? Why? What questions do you have after reading this article?
If you want to know more about the authors of this article and method of investment "Deep value", why not check out the blog " stews by Benjamin Graham."
Credit: Let Ideas Compete
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