Contents

Preface

  • What inspired the book
  • An overview of its structure
  • Who the book is targetted at
  • About the author
  • Sources of information
  • Why it is called Monkey with a Pin
  • The small print

Chapter 1 – New Investor Expectations
This chapter looks at the expectations of new investors and particularly how those are framed by the investment industry and the Internet. For most people, the key goal is to achieve significantly better returns than from a savings account.

Chapter 2 – The Industry Evidence for Equity Returns
This chapter looks at the evidence of historical returns from the UK stock market. In particular, it focuses on the one study that is frequently used by the industry: The Barclays Equity Gilt Study.

Chapter 3 – Skill – The Evidence from Competitions
In the previous chapter we saw that there were three factors that affect real investors’ returns. We now look at trying to determine how much above (or below) the market the average private investor performs. There are two chapters on this subject. This first one focuses on the results of investing competitions.

Chapter 4 – Skill – The Real Numbers
This chapter focuses on the published literature with the aim of determining how much above (or below) the market the average investor performs. It then attempts to quantify this number exactly by drawing the data from this and the previous chapter together.

Chapter 5 – Returns – Is the Index Correct?
This chapter looks at how benchmark indices like the FTSE are calculated. It highlights a specific attribute that, over time, they will always rise, even though individual shares may not. This so-called survivorship bias has implications not only for equity return comparisons but also the likely long-term effectiveness of strategies such as buy and hold. Survivorship bias also affects fund performance statistics.

Chapter 6 – Costs – Share Trading
This chapter examines all the costs and charges that can affect the average investor trading in shares (trading commissions, stamp duty, taxation, etc).

Chapter 7 – Costs – Funds
This chapter systematically examines all the costs and charges that specifically affect a person investing in funds. Not all the costs are disclosed or apparent to the private investor.

Chapter 8 – The Correct Return on Cash
This chapter looks at the negativity of the industry towards “cash”. It then examines more closely what the industry uses when it makes comparisons with cash. It shows that in many cases it is using an inappropriate benchmark as its definition, which is not even available to a private investor. Furthermore, when building society accounts are used in comparisons, the rates quoted usually underestimate those obtained by a private investor.

Chapter 9 – Equity Returns Revisited
In this chapter we’ll summarise all the previous chapters and look again at the theoretical industry returns but this time factoring in the likely actual returns to a real investor. We’ll then look at few scenarios of certain types of key investor and calculate their probable returns.

Chapter 10 – Implications for Investors #1 – Cash
In this chapter we look at the potential benefits and issues with holding more cash than traditionally would be recommended in your portfolio.

Chapter 11 – Implications for Investors #2 – Cut Your Costs
The results of Chapters 6 and 7 showed that the biggest area of losses was related to charges. In this chapter we therefore focus on exactly what the private investor can do directly to reduce their costs. We also look at whether spread betting might be a solution.

Chapter 12 – Implications for Investors #3 – Change Your Trading Behaviour
In this chapter we look at what it is exactly that the average investors does that causes him or her to fail to beat the market, even when you ignore costs. We focus in particular on evolutionary and behavioural economics explanations for this. We propose that a pre-requisite for success is having a clear set of rules that you follow – particularly with regard to your exit strategy.

Chapter 13 – Implications for Investors #4 – Review Your Strategy
In this chapter we look at what implications our findings have for investing strategies. In particular, we look at the merits of buy and hold, dividend and value investing and “technical” strategies in the current environment.

Chapter 14 – Implications for Investors #5 – Reconsider Your Group Investment Type
In this chapter we look at the implications of our findings for the type of group investments you choose. We particularly focus on the benefits of, and issues with, holding different types of unit trust fund. We also compare the merits of unit trusts with exchange-traded funds and investment trusts. The chapter not only looks at the relative costs of these alternative group investments, but also goes into detail of how they work. Finally, we also touch on pension funds and structured products.

Chapter 15 – Implications for Investors #6 – Alternative Asset Types
In this chapter we look at the issues and costs of the other key asset classes apart from equities and cash, ie, bonds and commodities.

Chapter 16 – Implications for the Finance Industry
In this chapter we examine the implications of this investigation for the finance industry. We consider what changes are likely to happen in the coming years and propose 10 ways in which the industry needs to act now as a result of them.

Chapter 17 – Implications for Regulators
In this chapter we examine what the implications are for regulators, and seek to understand how the state of affairs found in the finance industry could have been allowed to continue for so long.

Chapter 18 – Concluding Thoughts
In this last chapter, I’ll attempt to bring the whole book together. I’ll give you my take on it all, what I’ve learnt and how it is probably going to change the way I personally invest in the future.

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