For the first time, they are now talking about survivorship bias in their data. Hooray! However before you get too excited, all they have done is to include a couple of countries that have seen their stockmarkets liquidated e.g. Russia in 1917 and China in 1949. The impact on their average equity returns is minimal (down 0.14% to 5%).

What they have yet to do is to address the more serious issue I raise about survivorship bias in the constituents of the index itself. That is where the real error in their returns are due to survivorship bias and these are significant – I estimate they are reducing returns by 1% a year if you are an investor in individual stocks (as opposed to buying index trackers). I agree it is more difficult to calculate this (as you just can’t lift a dataset of FTSE index scores and pop them into a spreadsheet) but it behoves the likes of Dimson, Staunton & Marsh to try to do this or at least acknowledge the problem.

Not only do they steal survivorship bias from Monkey with a Pin, but they are also mentioning that returns need to factor into costs too – albeit only as an aside on Page 14, but that is progress.

The final good thing about the report is, like Money with a Pin, it makes a big point of reminding investors that returns are just not going to be as high as they expect. To quote them:

Many investors seem to be in denial, hoping markets will soon revert to “normal.” Target returns are too high, and many asset managers still state that their long-run performance objective is to beat inflation by 6%, 7%, or even 8%. Such claims are unrealistic in today’s low-return world.

Although I have seen consistent out-performance of monkeys vs the index and professionals, the size of this out-performance seems slightly incredulous. I fear that they may not not have used survivorship bias free back data for this simulation. I await the full report from Research Affiliates to see.

The book is going to examine in layman’s terms what is inflation is, what causes it, why we have difficulty understanding it, the tricks governments get up to with it, and how it is going to change your life in the future.

If you have any views on the subject, please let me know and I’ll do my best to include them.

Looking forward to hearing from you.

Pete Comley

A copy of his PowerPoint slides can be found here: BPP talk 3 Dec 2012.

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Harvey – I thought I’d pick up on your interpretation of what I said about the FTSE hitting 4000 at some point in the next few years. I still hold by that but I never said it would happen now.

What I didn’t write in my post about that (http://www.iii.co.uk/articles/36243/why-i%E2%80%99ll-buy-40-random-stocks-when-ftse-100-hits-4000) was that I had a personal belief that the FTSE would go higher in the short term.

If you look at the S&P over the last 10-15 years, you’ll see it has topped out at around 1500 twice before (in 2000 and 2007). There is a certain mathematical symmetry that suggests to me it wants to repeat this at some point (in the next year) and this is the “unpredicted rally” you refer to. What will cause the final push? I suspect it will be QE3 in the US.

The FTSE will get dragged up by that event too. Personally, I think the FTSE won’t make back its previous highs but will probably end up around 6200-6300.

However after that event, all world indices will decline – possibly when it becomes apparent how useless bouts of QE really are, possibly after China implodes, or more likely when the euro starts to break up. I know not why, nor care, but I just have a hunch it is going to happen. It is after that that the FTSE will put in a low sub 4000 (not in the immediate future).

Then will be the point at which investors can make the biggest killing. So keep some of that powder dry. Also don’t lose those darts, as you’ll need them then to pick your random shares amongst the tatters that will follow such a decline.

Read the review in the July members newsletter: http://www.sharesoc.org/ShareSoc_News18.pdf

Why not join Share Soc (UK Individual Shareholders Society) now? It is free – join here: http://www.sharesoc.org/free_membership.html and support their work for private investors.

Watch the interview on iiTV: http://www.iii.co.uk/tv/episode/why-monkeys-beat-private-investors

It is in the July 2012 edition. You can subscribe to the Saga Magazine here.