Strategies for asking others to invest

We have learned about the forms of investment that each individual can implement those investment strategies for themselves.

However, the investment strategies that I have mentioned are all very complicated, even the simplest one, Dividend investing. It sounds like you just need to analyze dividend indicators and then choose companies with high dividend rates to invest in.

But in reality, it is much more complicated. We still have to analyze the company’s future, profit margins and many other factors, from which we can ensure that the dividend level will be stable in the long term. If we calculate wrongly, choosing companies that have high dividends but are on the decline, we may end up with negative profits.

Therefore, almost all of the strategies listed are very complex, requiring us to have a lot of analytical knowledge in many different factors. Even professionals, they graduated from the top business schools in the world, they work every day in the financial field, they can still make wrong decisions as usual, let alone novices like us.

So the question here is for beginners like us, when we do not yet understand the analysis techniques, do not have much information and experience in the fields currently on the market, how can we make investment decisions on our own?

This question has led us to a completely different investment direction, tentatively called the strategy of asking others to invest for us . It sounds funny, because of your own money, you ask others to invest. But both in theory and in practice, it has been proven that this is one of the most effective strategies among the investment strategies currently available on the market.

In the article below, I will show you how effective it is, why it is the most suitable strategy for the majority of non-professionals, and why all the most experienced investors in the world advise us to invest according to this strategy.

1. Active Investing

1.1. Investing in Mutual Funds

Investing in mutual funds is one of the most popular forms of active investing .

Suppose you have some capital, but you do not have the knowledge or time to invest. As for me, I am a professional investor, winning wherever I go. Because I see the successful results of my investments and in addition, I also spend a lot of time researching information from here and there, analyzing companies and markets, so I see that my investments are quite certain.

And you think that you just need to send me money, invest with me, then you don’t have to do anything, and it’s safer than investing yourself. Whenever you see me buying stocks of a company, you also send me money to buy some, at the end of the year, you will earn the same percentage of profit that I make.

In fact, you don’t have to do anything, just give me money to invest. From my perspective, I see that many of you have this need, so I decided to set up a fund for you to deposit money for me to invest, then I will take this money to invest (of course, I will commit to only using it for investment and not for food or drink). And that fund is called a mutual fund.

I will use this mutual fund, combined with my knowledge and experience to allocate this fund into investments appropriately, decide which stocks to buy, which stocks to sell. I have to calculate how much % I will divide for Growth investing, how much % for Value investing and how much % for Dividend investing.

The ultimate goal is that I will do everything I can to bring you a higher return than the market. That is also the ultimate goal of Mutual Funds, which is to try to beat the market and achieve the expected return of the fund .

Of course, when I spend my time, passion, and knowledge to invest your money for you, I will not be able to do other things, so I will not have any income, so you have to pay me a fee, let’s call it a salary.

And when I invest successfully, you also have to take a portion of the profit to reward me so that I have the motivation to work for you, I temporarily call this a bonus.

For Mutual Funds, that salary is called the Management fee , and the bonus you pay to the fund is called the Performance fee . These two fees will depend on each country and the stock market in that country.

In Vietnam, Management free usually falls between 1% and 2% of the value of the money you put into the fund, and Performance usually falls between 20% and 20% of the profits you achieve.

Figure 2 : Information about a Mutual Fund is publicly available on the website of the company managing that Mutual Fund, in this case VinaCapital.

For example, if you send 1 billion to the fund for investment, the Management fee you have to pay will be about 1% to 2% of 1 billion, which is about 10 million to 20 million, and after investing, your profit will be 500 million, in total you have 1.5 billion, which means the Performance fee you have to pay to the fund will be 20% of 500 million, which is 100 million.

The total cost you have to pay for the fund will be around 110 million to 120 million. And even if the fund fails, no matter how much you lose, you still have to pay a Management fee of around 1% to 2% of 1 billion, which means even if the fund loses 10% of its investment, you only have 900 million left, but you still have to pay a Management fee of 10 million to 20 million.

Some of the advantages of this strategy are as follows:

• There will be “experts” investing for us : Mutual Funds are all managed and operated by experts in the stock market, or at least professional, specialized investors. We do not need to do anything, those “experts” will invest for us.
• Ensure the “don’t put all your eggs in one basket” factor (Diversify) : with the financial potential of the fund, a Mutual Fund will buy many stocks in many categories in many different fields. For example, if you invest yourself, you will need a relatively large amount of money to be able to buy many stocks of many different companies. However, if you invest in a fund, you only need to deposit a certain amount of money, the fund will pool money from many people like you and start buying stocks of many different companies, and when you own a part of this fund, it is equivalent to owning (a part) of stocks of many different companies. Therefore, if a company has bad business results, there are many other companies in the portfolio that will make up for that company’s loss.

Some of the disadvantages of this strategy are as follows:

• Flexibility is not as high as stocks : when you own stocks, you can buy and sell anytime you want, and the buying and selling process will be very simple, just through some order placement, you can buy and sell stocks. But when investing in funds, they will have requirements on the time to leave money in the fund, or if you want to buy or sell, you have to go through quite cumbersome documents and procedures.
• There is a minimum limit : that is, the funds will have requirements for the minimum investment level that you must have to participate in the fund. For example, my fund specializes in big bets, so if you want to join, you must invest at least 10 million, less than 10 million, we will not accept.
• The fees are quite high : I mentioned the fees of Mutual Funds above, they are calculated in % which is quite high.
• Statistics show that in the long run, this strategy yields a growth rate lower than the market growth rate .

1.2. Investing in Hedge Funds

In nature and operation, a hedge fund is similar to a mutual fund , but there are some minor differences as follows:

2. Passive Investing

2.1. Investing in index funds

Similar to Mutual Fund, it also collects money from many people and then invests it, but Index Fund follows a passive investment strategy .

We have learned about how to group companies and the concept of indexes . In Vietnam, we have popular indexes such as VN30, VN50, VN100. In the US, we have S&P500 and in Australia, we have ASX200.

For Mutual Funds, people will try to select, buy and sell at different times with different types of stocks to seek profits, the purpose is to achieve a growth rate higher than the market growth rate (Active Investing strategy).

As for Index Funds, they will try to follow the growth rate of a certain index as closely as possible. They will use the opposite strategy to Mutual Funds, which is the Passive Investing strategy, with the ultimate goal of having a growth rate as close as possible to the growth rate of the market (ie instead of trying to beat the market like Mutual Funds, they will try to follow the market as closely as possible).

So how can they track the Index? They buy all the companies in the index, and if any company falls out of the index, they sell all of that company’s shares and buy the shares of the new company that enters the index.

For example, with the VN30 index, the Index Fund will buy shares of all 30 companies, and if the 30th company falls out of the VN30 list for some reason, they will sell all the shares of this company and at the same time buy shares of the new company that has just entered the VN30 to replace the company that has just fallen out.

And as mentioned in section 2.2, although only accounting for a very small number compared to the total number of companies on the stock market, VN30, S&P500 or ASX200, or in other words, these Indices, although only representing the top largest companies on the market, in reality it almost always reflects the increase or decrease of the entire market.

Therefore, when Index Funds invest in indices like this, it is similar to investing in almost the entire market. And theoretical data as well as practical evidence have also proven that in the long term, the market will always grow (will be cited in the following section), or as the analysis above says, in the long term, indices always grow.

With Index Fund investing in these indices, we can be sure that in the long term, the growth rate of Index Fund will always increase, leading to the profit rate will also always increase .

Figure 3 : Information about an Index Fund is publicly available on the website of the company managing that Index Fund, in this case Vanguard, and this Index Fund is tracking the S&P500 indices.

Some of the features of this strategy are as follows:

• Investing with Passive Investing strategy : this strategy has been proven to bring the most stable profits for long-term investors.
• The management fee is very low: because the core of this strategy is to buy according to the index, for example, with the VN 30 index, they will buy the whole basket of VN 30. That means the Index Funds will not spend too much effort or need too many experts to analyze the market, any company that falls out of VN 30 will be sold, any company that enters VN 30 will be bought. Because the work that needs to be done is quite small and quite simple, they will not spend too much money to manage and operate these funds, so the management fee of the Index Fund will be quite low (as shown above, the management fee of the Index Fund tracking the S&P 500 index of Vanguard is only 0.04%).
• Not as flexible as stocks : this is both an advantage and a disadvantage. For short-term investors, this is a disadvantage, but most of the people who invest in Index Funds are long-term investors. Therefore, this feature is considered an advantage, because the difficulty in buying and selling will help long-term investors limit the sale of investments in the short term.
• There are minimum limits : that is, funds will have minimum investment requirements that you must have in order to participate in the fund.
• The summary data shows that in the long term, investment funds following the Passive Investing method will have a higher growth rate than investment funds following the Active Investing strategy.

2.2. Investing in exchange-traded funds (ETFs)

From the characteristics of index funds, people have created another type of fund, which is the exchange-traded fund (ETF) .

In essence, ETF is almost identical to Index Fund, the only basic difference is that ETF is like a stock code. That is, with Index Fund, you have to register an account with the company that manages those Index Funds and transfer money to the company so that the company can transfer it to the Index Fund for you.

As for ETFs, they are listed directly on the stock market, you just need to open a securities account and participate in trading these ETF codes on the stock market. We can easily imagine that when we bring Index Fund to IPO, Index Fund will be listed on the stock market with the stock code ETF.

The difference between Index Fund and ETF is briefly described as follows:

Figure 4 : Comparison of Vanguard’s Index Fund and ETF tracking S&P 500 indices

Like Index Fund, when you buy an ETF that tracks the VN30 index on the stock market, it also means that you own shares of all 30 companies with the largest market capitalization on the stock market. And the nature of ETFs as well as Index Funds has been proven that in the long term, the growth rate of ETFs will always increase, leading to an increase in the rate of return .

2.3. Practical example of the statement “in the long term, the return rate of Index Fund / ETF will be higher than Mutual Fund / Hedge Fund”

In 2008, Warren Buffett (a billionaire currently worth an estimated $80.1 billion – according to Forbes) issued a challenge to hedge funds, arguing that investing in an index fund over the long term would help investors earn greater profits than investing according to hedge funds’ plans.

Protégé Partners LLC is the only company that accepted Warren Buffett’s challenge, through a $1 million contract, to prove the investing legend’s thesis wrong.

And in this bet, Mr. Buffett chose the S&P500 index (an index based on the common stocks of the 500 companies with the largest market capitalization listed on the NYSE or NASDAQ stock exchange in the US). Meanwhile, Protégé Partners bet the opposite of him, choosing 5 unnamed hedge funds.

While Protégé Partners LLC uses the main investment method of active investing (continuously buying and selling stocks to gain short-term profits), Warren Buffett will use his classic method: applying the passive investment method (buy and hold for a long time).

Although the deadline for this contest was December 31, 2017, around October of that year, Ted Seides, co-founder of Protégé Partners LLC, publicly admitted defeat on Bloomberg: “Buffett won. Whether it was in terms of numbers or the objective of the challenge, we lost,” Ted Seides shared.

As a result, over 10 years, Warren Buffett’s S&P 500 investment grew 125.8% while his investment in five hedge funds of Protégé Partners LLC grew only about 36.3% on average.

Figure 5 : Details of the bet between Warren Buffett and Protégé Partners LLC

The confrontation between Warren Buffett and Protégé Partners LLC was not peaceful, and Warren Buffett’s victory was only a final victory, not an overwhelming one.

Specifically, not long after the challenge began (January 1, 2008), the financial market fell sharply (this was also the year that the world’s largest financial crisis occurred), hedge funds demonstrated their superiority: effective risk hedging. While Buffett’s index fund lost 37% of its value, at that time Protégé Partners LLC only lost 23.9% of its value.

But Warren Buffett then beat Protégé Partners LLC consecutively from 2009 to 2014, when the market recovered and showed signs of warming. Entering 2015, Buffett once again fell behind his rival, for the second time since 2008, when he achieved a growth rate of just 1.4% compared to Protégé Partners LLC’s 1.7%.

However, in 2016, Buffett achieved a growth rate of 11.9%, 0.9% higher than Protégé Partners LLC (according to Investopedia.com).

“By the end of 2016, Warren Buffett’s index fund investments had grown an average of 7.1% per year, dwarfing Protégé Partners LLC’s 2.2% per year. And at this point in 2017, it would be very unlikely that another recession would occur for Protégé Partners LLC to hope to reverse the trend,” David Floyd, a financial expert, commented on Investopedia.com.

In general, the Passive Investing strategy is a safe and effective strategy, bringing us the best investment rate. The key point of this strategy is the keyword long-term , and long-term here must be from 15 years, 20 years, 30 years or more. This is not only the writer’s personal belief but also the advice of most masters and investment legends in the world.

A typical example is Mr. Warren Buffett, he is a master in the school of stock picking , which means choosing potential stocks to invest in, a form of Active Investing, and the number of people with this ability in the world is extremely rare.

Although he is known as a legend in the Active Investing school, he always repeats that for the majority of non-professional investors, the Passive Investing strategy is still the most effective strategy.

Another person is Mr. Ray Dalio, he is the founder of the largest Hedge Fund in the world, he also advises investors, whether professional or amateur, to allocate their investment portfolios into ETFs to ensure their profits.

A person who created and runs the largest and most successful Active Investing fund in the world also recommends us to invest in ETFs, so there is no reason why we should not put our trust in this Passive Investing strategy.

3. Summary

In both parts, we have briefly learned about investment methods in the stock market. There are mainly two main methods: self-investment and having others invest.

In the self-investment method, we have the following specific strategies: dividend investing strategy, growth investing strategy and value investing strategy.

In the method of asking others to invest, we have two main strategies, which are active investing strategy and passive investing strategy:

• Active investment strategies mainly focus on mutual funds and hedge funds.
• Passive investment strategies mainly focus on index funds and exchange-traded funds (ETFs).

In addition, if not divided by self-investment and investment by others, we can also divide into two main types, which are active investment and passive investment. Active investment will include self-investment strategies and investment strategies in mutual funds or hedge funds. Passive investment will include investment strategies in index funds and exchange-traded funds.

Figure 6: Summary diagram of investment types and classification .

In addition, we have two more concepts, which are short term investing and long term investing .

Personally, I don’t call short-term activities investing, but more accurately, it should be called stock trading . For those who participate in stock trading (called Traders), they will not look at the long term, nor will they look at the true value of the company (and if they do, it is only a secondary factor).

Traders mainly focus on analyzing market supply and demand, predicting the rise and fall of stock prices and choosing the right time to buy and sell, from which they make a profit based on the difference in stock prices when buying and selling.

These trading activities are really dangerous because they are not based on the real value of a company, or at least the potential value of a company, they are only based on technical analysis and making predictions about the supply and demand of the market.

In simple terms, they will try to buy at the lowest possible price (traders call this bottom fishing) and wait to sell to a buyer at a higher price, the buyer at that higher price will then wait to sell to a buyer at a higher price than the price they bought.

And so on, until the last person in this buying and selling chain cannot find anyone to buy at a higher price, and so they have to accept selling at a lower price and take a loss (traders call this action of chasing the top).

In essence, these trading activities are not really investments, traders just want to beat other traders to make a profit based on the difference. In the stock market, there are many professional traders with very good experience and skills, in addition, there are machines and artificial intelligence also participating in this analysis war. So is a person like you capable enough to beat them?

“The game of speculation is the most exciting game in the world. But it is not for the stupid, the lazy, the emotionally unstable, and those who want to get rich quick. They will die poor” – Jessive Livermore .

In short, there are 4 types of people in the current stock market:

• Type 1 : investing according to the Passive Investing strategy and long-term investment. These people will invest in ETFs and Index Funds and hold them for the long term. These are people who may not have time for the stock market, or even do not have much knowledge about the stock market, so they choose this investment method, and this has been proven to be one of the most effective methods for non-professional investors.
• Type 2 : Active Investing and long-term investment. These people will invest in companies according to Dividend Investing, Growth Investing, Value Investing strategies and hold for the long term. These people have knowledge and excellent analytical ability to make accurate investment decisions.
• Type 3 : Active Investing and short-term investment. These people will participate in Stock Trading activities, or participate in Mutual Funds and Hedge Funds, then buy and sell continuously. These people will take on quite a large risk because they almost have to fight each other to profit from the difference in stock prices on the stock market.
• Type 4 : investing according to the Passive Investing strategy and short-term investment. These people will continuously buy and sell ETFs and Index Funds. These people are really difficult to understand, either they do not have specific knowledge about these funds, or they just want a small profit, because ETFs or Index Funds must be held for the long term to really make a profit, while in the short term the profit is very low, maybe even negative.

Figure 7: Diagram describing 4 types of people in the stock market

Thank you for reading my sharing, hopefully it has brought more or less useful value to you.

- Sky -