How To Invest If You Can’t Beat The Market

Investing Demystified by Lars Kroijer

Morningstar interviews Lars Kroijer about how most investors can’t beat the market, and how they should invest once they come to accept and embrace that.

Q1 hedge fund letters, conference, scoops etc, Also read Lear Capital

Investing Demystified by Lars Kroijer

Investing Demystified: How to Invest Without Speculation and Sleepless Nights by Lars Kroijer

How To Invest If You Can’t Beat The Market (Which You Probably Can’t)



So today we’re talking about how the average man on the street can better invest. Joining me today is former hedge fund manager and author of How to Invest books now Esquire, Lars Kroijer. Thanks for joining me. Thanks for having me. So you’ve just written a book that is called Investing Demystified: How to Invest Without Speculation and Sleepless Nights. In a nutshell how do you. So in the book I start with a premise of Who are you. Who are you as an investor. And I argue that the vast majority of investors have no real prospect of having an edge to beat the markets. So what does that mean. It means that you will as an investor in all likelihood not be able to make a security selections of pick stocks or index funds or anything. Also active funds better than the market as a whole. You shouldn’t even try. So that’s the that’s the premise of the book. So you would say 100 percent passive fund investment no active fund and funds in your in your portfolio at all. Absolutely right. I’m saying you should. If you don’t have the prospect to beat the markets and you in all likelihood don’t buy the broadest cheapest index funds you can get your hands specifically if you stay with equities for a second I’m saying you should buy the world equity index. So that’s an index comprised comprise of as many equities from across the globe as you can possibly get your hands on. You should do that as cheaply as possible as a tax efficient as possible. And for your equity portfolio that’s all you should do.

Now why is that. Because anything else would somehow imply it would somehow imply that you have the ability to pick something other than what the market’s picked. And I’m arguing the vast majority of people don’t have that. Of course this is where Morningstar comes in you know analysts rate funds and analysts ratings are trying to say whether or not a fund will outperform its peers going forward. So a lot of people would argue you say in certain areas like emerging markets for example that the active fund manager you need the extra expertise to make the educated decision. Are you saying that you disagree with that. Well I’m not saying it doesn’t exist. That’s very important right. As a former hedge fund manager I would be a huge hypocrite if I said that I’m saying Who are you to have that edge and whether we’re in the emerging markets or in the UK. Are markets any less efficient in places like India and Brazil and so forth than they are here. Some people would argue yes some people would argue no. But let’s go to India for a second and say well do you have an edge in India. Does my mom have any realistic chance of picking Indian stocks different from what the quite active market of investors in India picked and are yogas she does. Does she have the ability to somehow magically pick the active fund manager who would beat the nifty 50 Artigas she doesn’t do some people sure. Most people don’t. So don’t try because it is expensive to try.

You’re going to be worse off in the long run picking active managers than then you pick a passive manager. If you don’t have the magical ability to pick the superior performance in the book actually you illustrate this very well. The difference between over a lifetime of investing actively invested passively yes so they Komla in the book is and now we’re back in the UK is an average saver who makes fifty thousand pounds a year puts 10 percent of that aside every year and puts an end to the equity markets. Let’s say that that person does that between the ages of 25 and 67 so it’s a normal working lifespan. And let’s further say that the stock markets perform much like they have historically so about four and a half five percent above inflation. The difference at retirement for that person between having picked a passive fund called the world equity index and an active fund that tracks the same thing. The difference in fees will amount to almost 300000 pounds in today’s money. So provocatively I say that’s the equivalent seven Porsches. So essentially I’m saying that the average saver someone makes 50000 pounds a year will over a lifetime pay the equivalent of seven Porsches to the financial sector for a product that does the same thing or very close the same out of the pass a product is better because it’s better diversified. So even if you didn’t have the advantage now that’s crazy. So I’m saying for you to not do that you have to have an amazing ability to pick just the right fund manager not trade not pick stocks yourself. Now most people don’t.

When you compare that to someone like myself who was a fund manager and not only did I have access to real time information I had the best minds in finance working for me I had the best software at the best information I was the first one to get a call back from the companies we invested in and I did it as a full time job. What chance does my mom compare to that. And I thought it was hard. I thought it was very hard and skeptical with a lot of people to do it for a living have the edge people don’t certainly don’t. So to sum up then for that average person wanting to save for retirement you say go 100 percent passive invested in the whole world stock market and assign bonds I assume according to your risk profile and stick with it for the long term. I’m certainly not advocating anyone should put all their savings in equities equities are extraordinarily risky. But I’m saying for the equity portion to just that it’s very very simple. It’s very cheap to tax efficiently. Of course don’t only do that in the book. The big part of it is actually what you do with less risk a risky part of your portfolio. But but for equities that is that. And then of course you get that little plug to Morningstar.

Hey we have just started rating trackers actually so that analysts were looking very closely at passive funds as well as active and I think I think that’s a huge service thing is very very useful because much like active phones there’s a huge industry of passive funds are not all equally good and the will need to service like that and I’m glad you guys are doing it ultimately would you say lowest cost is is the best kind of pointer to look out for. If you don’t know a bit I guess you mean there are many ways that these index trackers can charge your money. You know that there are issues of collateral issues. Do you own underlying Deonna underlying assets do you not synthetic versus physical stuff like that. But if you’re my mom if you go with the lowest cost product that’s a good start. Make sure it’s big because this is one of these things where that huge benefits of scale which is why the large index provider or index tracking providers will tend to do better. But absolutely right. You go gucci. Great well thank you very much. That is a good overview of how the average person illustration invests. Thanks for having me. When he saw halakhic thanks for watching.

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