YouTube video by James Helliwell arguing that common beliefs about passive investing and reported historical market returns are misleading. The speaker critiques reconstructed/index returns (survivorship bias and US outperformance), demonstrates how lower real returns drastically reduce retirement outcomes, and recommends a global, concentrated, quality-focused stock-picking approach as a way to stack small edges and outperform passive strategies.
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What if I told you that everything you thought you knew about the stock market was really a $9 trillion lie? A lie that suits the likes of BlackRock, Vanguard and industry behemoths in pushing passive investing over stock picking. And in this video, I'm going to share the truth with you, based on my experience as someone who spent over a decade in the industry as a professional trader, applying that same strategy to get my own financial freedom at just 34. So it's probably a chart like this that first got you interested in investing. But here's the part that most people miss. The average market return that you see on charts is actually built on reconstructed data. It literally says in the small print of these ETF and index methodologies that it is hypothetical and simulated. In other words, it's made up. So I decided to do some digging and I came across this study by UBS I. And what they found is that US stocks have indeed returned just shy of 10%. But more important was that they also looked into the biases that passive investors are most likely oblivious to. So, first of all, we have something known as survivorship bias. Companies that otherwise went bankrupt in real life simply fell out of the sample. And that means that the returns are most likely exaggerated. Now, the second reason why it can't be relied on, you already knew who won. The US has outperformed the rest of the world by 2 to 3% annually, according to that study by UBS. Germany, the UK, Japan, they all underperformed. And that's the very reason why I invest globally. We'll get on to that a little bit later. So let's test these numbers and we'll assume that you're 30 years old, contributing a typical amount, 500 pounds a month or six grand a year over 37 years, 30 through to retirement. The real return of 6.8% would see your investment grow to just shy of a million pounds in real terms. That would almost be enough for a moderate retirement. But what if the returns are lower? Say you only get 3.5% real return. That's actually the level post 2000 investing globally as a passive investor in the index. So we've gone from 985k in real terms to. To £466,000. Now, that would be nowhere near affording you even a modest standard of living in retirement. According to the PLSA, that's going to cost you somewhere between 30 to 43,000 pounds, depending on your standard of living and whether you're single or a couple. If the returns are lower, you could get a drastically different outcome. And that's why it's so important to understand exactly what you're up against. These indices that we're looking at here, they rebalance for something known as float and as a result overvalued stocks can dominate for long periods. We saw the likes of Apple and Microsoft, just two companies making up more than 13% of the S&P 500. And it's something that really frustrates me when I see my feed and it's just saturated with here's how to invest 10k for beginners and it will always bang on about global ETFs and diversification. The more expensive something gets, the more of it the ETF will buy. So rather than buying simply what's biggest, why not focus on buying the best? Let's go through some of the sources of edge. Quality as a style has outperformed in America from 1995, so this is a very recent and relevant sample. It's been repeated in the uk and particularly quality stocks at a reasonable price have clearly outperformed the index. So this is consistent across geographies and slightly different time frames. So this way you're able to gain diversification in the same way that people talk about investing in global ETFs rather than only the US. But what we're very clear about also doing here is, is concentrating on the factor that has proven to deliver edge. Now another source of edge that I stack inside of my process is concentration. So this is anti diversification by numbers in terms of the volume of companies that you own in your portfolio. We can be globally diversified, but I don't want to be diluting my best picks by adding a certain number of companies for the sake of it, or indeed adding sectors that I have no interest in investing in. And this article from the Journal of Economics describes how you need to hold a company for at least two years in order to realize the edge that exists in stock selection and the average outperformance or edge over the years for that 2%, which is similar to to what we've just seen in the edge that quality provides as a style over the general market. So we're beginning to stack these 2% edges here. And there are of course other sources of edge that I've mentioned in other videos, including primarily your time horizon, which in the case of passive investing is actually aligned as a linear trend in the excess return going out further and further longer and longer in time. And that's why I invest with at least a five year horizon. So when you put that together and you stack these edges. That is how you're able to get such consistent outperformance. Don't blindly follow the popular narrative that passive investing is the only way to go. Take control by building a portfolio of the world's best companies like I do, and stop worrying about historical returns. Comment below and I will send you a link to show you exactly how I do it. And in the meantime, check out this video, which I think you're also going to enjoy.
