Random or repeatable?

The beauty of a SMSF is rock solid audited historical data to use for analysis.

After completing this year’s return, I decided I would subject myself to an acid test. A comparison between the SMSF and the XAO total return index. As the index is theoretical and doesn’t pick up all the taxation intricacies, I also subjected it to a comparison against Australian Super High Growth strategy, it’s been the top long-term performer and ignoring any hindsight bias I like to think that it would have been how I invested my Super if I had stayed in an industry fund. Plus they publish historical unit prices for the comparison.

I use tax effect accounting for the SMSF so both Aus Super and SMSF are after-tax returns, I made my best judgement to get an after after tax comparison for the index.

As Aus Super only have annual unit prices going far enough back, I assumed any contributions/rollovers were made at the beginning of the period to maximize Aus Supers comparison. Reality is most contributions were end of period.

I have removed the $ from the axis to protect the innocent

The biggest question I have in thinking about my investment approach going forward.
Is this random or repeatable?
I’m a strong convert of passive and theory suggests random…. But, but,but………

 

I’m surprised the XAO and Australian Super High Growth (which is diversified across countries and other assets) are so close.

Was your SMSF ASX companies only?

 

As they say...time will tell

When you started your journey down this path in 2004...what gave you the conviction to take the path you did?

 

Seems you were neck and neck until about the GFC or shortly after.

Does the SMSF invest in international shares, particularly the USA? US diversification could conceivably account for quite a bit of the extra return considering what a bull run the USA has been on compared to Australia.

 

I'm guessing a sizable holding of small caps? Hence does the comparison make sense?

A relatively small number of investors do beat the index consistently, it's appears highly likely you're one of them. But only time will tell.

Fortunately given your substantial diversification into passive funds and your substantial wealth you can persue your active investing passion in earnest without any concerns whatsoever. Given only time will tell enjoy the journey and report back in 20 - 30 years time with the answer.

 

I am interested in the likelihood curve of your returns. It would prove whether active investing has the potential to beat passive. Unfortunately it doesn't take into account your intelligence, education and commitment, which may exclude active investing as a useful choice the bottom 5% of investing methodologies.

 

May I ask @dunno, how the GFC impacted your strategy/tactics and if so, how you reacted before and afterwards?

 

As a check I just did a compassion on Vanguards Index chart between their High growth allocation and Australian Shares. Also gives similar closeness but this time with ASX shares slightly leading. Aus Super high growth closing the gap on my chart would be from them out-performing their multi asset indexes.

Yes until I started building international ETF exposure in the last few years.

 

True that - But I want to know now!!!!.

Youthful Enthusiasm.

I also had some earlier success before deciding to self manage our super. All early success was put down to my "brilliance" rather than correct recognition that randomness plays a huge role. EGO and stupidity is a great combination for taking on risk.

I now want to contemplate the question of randomness or repeatable with a more level head in deciding how much active management to retain.

Although I have been at the stock picking game outside super for longer, my records to accurately measure performance over the long term outside of super are not robust enough for accurate comparison.

 

Here is the period just up until 2010 so the scale gives a bit more clarity.

US only add in last few years as I started to build international ETF allocation.

 

In Australia XSO has under performed XAO since 2004. Not going to cheat and give myself the easy beat index as a comparison. for me the most meaningful comparison is the Aus Super High Growth option because it is actually invest-able and what I imagine I would have done if not for managing the SMSF.

In the past yes but it could be luck!!!

I have to make decisions about the future NOW.

Its the diversification into passive that I'm questioning - It's clearly the general rule! but maybe not applicable to all specific cases. Is it hubris to think I can ignore the general rule?

We are divesting the non-super assets to the kids over time. Its our intention to live off only the super fund and 1M each in private names after reaching preservation age. It makes the game more interesting because there will be less margin in case of investment **** up. Though wealthy kids should be the ultimate fall back if we brought them up proper.

Actually the real contemplation of repeatable or random comes about because the kids want me to keep actively managing and teach them to actively manage the assets being transferred. Seems they have the useful enthusiasm for risk.

 

GFC was mentally tough. But as they say what doesn't kill you........ so it was a valuable experience.

From an analysis point of view it made stock picking easier. Prices for anticipated future cash flows were cheaper so you had more of a margin of safety if the future didn't quite pan out like you were expecting.

I'm a lot more uncomfortable a a stock picker in this current market than I was for many years following the GFC.

 

Interesting article from Larry Swedroe https://www.advisorperspectives.com/articles/2021/09/11/the-suckers-at-the-investment-table

Discusses how institutional investors like mutual funds outperform the market before fees at the expense of retail investors, but ultimately underperform after fees are factored in

In general it is the active retail investor left holding the bag.

"As they say in poker, 'If you've been in the game 30 minutes and you don't know who the patsy is, you're the patsy'"

 

How likely do you think you/they could suceed in this? It seems unlikely, or at the very least quite ambitious. From what you've shared previously, it seems you've dedicated the best part of 30 years to learning your craft. Do you expect they would have the same dedication. (I'll assume aptitude and intellect as a given)

 

@dunno concentration plays a role here, what is roughly the average number of positions SMSF has held, and approx weights of 3 largest out of interest ? Fewer positions higher return divergence likelihood obviously.

 

I don’t know about 30 years of dedicated learning. But there was a steep learning curve and then continuous observation. But it has always been my passion.

Majority of useful learning for me probably boiled down to Munger and Buffett for Mental Models, bias recognition and general investment framework; Bruce Greenwald for competitive advantage; and Aswath Damodaran for valuation. 6 solid Months’ worth maybe. From there it would come down to passion because the process for implementation is simply a satisfactory hypothesis and continual observation (much like a science experiment), the passions is needed to stay engaged and observe the unfolding events. Abandon any business hypothesis disproved otherwise hold on tight.

The real question for me is whether the market is truly efficient in weighing current information. If it is, I cannot possibly add value or teach anything of value to my kids. Any outcome must be random, solely dependent on how the unknown future unfolds. If it is not fully efficient then there is a possibility for people to guess better than average.

No question Index funds offer the greatest good for the greatest number of people. But my passion and a lack of belief in a fully efficient market is leading me back to my roots. The fact the kids are showing genuine interest is irresistible. But if there ends up being a lack of passion, I will steer them firmly towards passive indexing as part of the handover of ownership.

Incidentally passion of one child and partner is already leading us into buying farmland and machinery that will be used both on farm and contracted out to others. Riskier than direct shares but their passion is the key. The passive ETF’s we already have in the investment company will be retained as ballast for the riskier endeavors but probably not added to for a while.

For the super fund the transition to more passive will continue as planned. Its not overly capitalised to fund the cash flows we hope to take from it (if we live long enough) so reduction of volatility is equally important to absolute return.

The journey continues and I’m still excited. How cool.

 

Concentration plays the biggest role of all and its a doubled edged sword. On a equalized number of holdings basis I probably spent most of my time with around 5ish (or less) holdings. Generally top heavy in a few winners. The process of pulling the weeds naturally lead to large holdings in successful guesses and churn in smaller incubated ideas that either got traction or got terminated.

 

How are you managing this from a risk perspective of breakdowns in relationships between kids and their partners? Whilst I obviously don't know your split between super and non-super, you are potentially talking about divesting eight figures to your kids.

Also do you have the CAGR of the Australian super option and your SMSF - graph looks impressive but would be interested in understanding the quantification of outperformance.

 

@dunno and what part of the market were those 5 ish holdings? Large, mid, small, micro? ....I'm going to guess weighted towards the lower end?

 

I’m not. Other than the transfer of ownership occurring progressively over time and we could halt/slow if concerns arise. The plan is combined they will have majority ownership in about 9-10 years at which time we will fully step aside and make a decision on how fast to transfer remaining ownership at that point.

They need to seek their own advice on how to hold and protect themselves. A nasty split and a good lawyer on behalf of the partner and they could be vulnerable no matter how they structure. Hopefully they realize and we have set the example that finding your right lifelong partner is the most important and precious thing in life.

We could keep them more protected by not transferring ownership. But we want the kids to have an ownership mentality not trust fund mentality.

They have been made directors and have been given first small tranche of shares – it just went into their individual names at this stage whilst they seek individual advice.

The IRR over the 17 years for Aus Super High growth was 8.74%, 8.44% for the ‘theoretical’ after tax index return and 18.67% for the SMSF.