HAMISH MCRAE: When it comes to investing, the pros don’t always know best

Sometimes it’s the big professionals who get it wrong and the little people who get it right.

There is a rule of thumb in the stock markets that retail investors get sucked in to buy at the top of the market.

Remember how, years ago, whenever stocks boomed, there were pages of advertisements in the newspapers for mutual fund launches? And when the markets went down, no one wanted to buy and the ads dried up?

We hear a lot about FOMO these days – fear of missing out – but in investing it is a long-established human trait.

This year, the triumph of small investors over the big boys has been the dominant theme of investment across the Atlantic.

At the start of the year, as highlighted here last week, most top analysts predicted that stocks would fall further. But the S&P 500 is up nearly 20 percent this year, thanks in part to continued purchases by private investors, the most important index.

In a noteworthy mea culpa, Morgan Stanley chief analyst Mike Wilson acknowledged in a client note last week that “we were wrong.” Hats off to him for the confession, but also hats off to the millions of small investors who have remained loyal to corporate America.

Here the market has moved sideways, so the last six months haven’t been much of an example of retail investors beating pros like there. But over a longer period, which of course matters more, a similar story emerges.

Over a period of ten years or more, UK retail investors will generally have done at least as well as their professional counterparts, and probably – though it’s hard to find the data – slightly better.

That’s not because they are better stock pickers. There doesn’t seem to be much evidence for that. It’s because of asset allocation. Individuals have maintained a decent stake in UK stocks, while professionals have sold out.

As we recently highlighted, the share of UK equities held by UK insurers and pension funds fell to around 4 per cent in 2020 from a peak of more than half in the late 1990s.

The share of UK stocks held by private individuals also fell – from 15 per cent in 1999 to 12 per cent. But add in the 7 percent of unit trusts and 1 percent of investment trusts, and personal property will make up more than 20 percent of the market.

And individuals do not have many gilts. Until two years ago, there was a long bull market in gilts. Since then it has been one of the most catastrophic periods in history for holding fixed income.

The largest holder of gilts is the Bank of England, thanks to its quantitative easing program. The latest estimate for the loss was published on Tuesday – just under £150bn. That is a hefty sum, even by public accounting standards, and it will have to be paid by us as taxpayers over the next ten years.

Also the losses of pension funds and insurance companies will be huge, another example that the professionals can give terrible advice. The fundamental point is that as a society we should encourage our savers to buy and hold stocks. It is a lesson to be learned and relearned.

Over a long period of time, they outperform fixed income securities, and far outperform leaving money in a bank. So what to do?

Well, there’s an organization, ProShare, founded in 1992 to promote broader share ownership. Now it focuses solely on employee share ownership, but I think it would be fair to say that the zing has gone out of that move.

In any case, it is not a good idea for employees to have too much of their assets invested in their employer. If the company goes through hard times, they could lose their jobs as well as their savings. It is much better to spread the risk over several investments.

Earlier this year, Archie Norman, chairman of Marks & Spencer, launched a plan called Share Your Voice.

The idea was to update corporate law so that companies could communicate directly with shareholders with interests in nominee accounts, and make companies’ annual reports shorter and simpler, and so on.

Most of this is sensible, and it is in line with this paper’s views that we should try to encourage more investment in stocks.

But ultimately, the main argument is that, aside from buying a home, money put into a spread of the shares of solid companies will almost certainly outperform anything in the long run.