This is the story of the missing £808,446.
Someone lost this money. It might have been you.
But there is a happy ending. Because you (and I) can learn how to get it back in the years ahead via the hero of our story.
The story begins over 30 years ago in 1994. At the time the FTSE 100 index was at 3,418. In 1987 there had a been an unpleasant interruption to an uptrend which began in 1974, but even this Crash was very short lived, and, remarkably, the UK stock market still ended the year higher than it began.
So 1994 did not represent an obviously cheap-as-chips time to buy equity investments. But the hero of our story had £100,000 to invest – he actually had inherited £200,000 but decided to leave £100,000 on deposit, interest rates not being too terrible at the time.
Our hero, let’s call him Harry, was not a patient man and simply wanted to invest the money. He knew a little about investing, through investing much smaller sums, and enjoyed reading around the subject, particularly biographies of legendary investors. George Soros and Warren Buffett were living legends. And he read a number of intriguing books on investment history. “Extraordinary Popular Delusions and the Madness of Crowds”, “Manias Panics and Crashes”, and “Where Are The Customers’ Yachts?”. He was endlessly curious.
One book was particularly interesting and totally uncompromising – “A Random Walk Down Wall Street”, by Burton Malkiel.
The message of the book, written in a pithy style, was clear. There is no point buying anything other than index tracking funds (so-called passive funds) because actively managed funds are so poor, and the few good ones are inconsistent.
Harry could not bring himself to agree. Though not a VERY experienced investor, this didn’t feel right. He couldn’t PROVE it, but instinctively he felt there must be investors who can achieve consistently better returns than merely being invested in mind-numbing index trackers. And surely the success of the likes of Soros and Buffett proved this point, unless you believed they were merely extraordinarily lucky.
Harry had 2 advantages.
His tinkering with investing smaller sums in individual shares, usually following other peoples tips, had been fascinating but ultimately not terribly profitable. An occasional success would convince him he had turned the corner, and that he had some skill, but it was invariably followed by a failure. It was fascinating but frustrating. Being brutally honest with himself he realised he had no special investment skill.
Added to this conclusion was another edge – he did not like to feel he was wasting his time, and was very disciplined by nature.
So, spurred on by the £100,000 burning a hole in his pocket, he put the investment approaches of Soros and Buffett side by side for comparison. They were very different.
Buffett is what is called a Value Investor. Through in-depth analysis of individual companies he would identify the share prices of companies which were not just cheap, but unjustifiably cheap. The problem is that after you buy you have no idea when the market will eventually recognise that same value – considerable patience is required.
In contrast, Soros applied a type of momentum investing. At its simplest momentum investing means buying what is going up most today, on the assumption that it will keep going up tomorrow – a volume of research indicated this tendency over certain timescales. Harry was particularly impressed by a gentleman called David Ryan. He won the U.S. Investing Championship in 1985 with a 161% return, came second in 1986 with 160% return and followed that up with another first place finish and yet another triple digit return. Ryan used a momentum strategy and said “The more disciplined you can get, the better you are going to do.”
Value investing seemed like very hard work, and Harry, still brutally honest, didn’t feel he had the time or skills to research individual shares.
But momentum investing appealed. He didn’t need to have a view on the markets – which was good because he was honest enough to recognise that his view had no more validity than that of anyone else.
Rather than buying individual stocks he figured that fund managers were already doing all of the hard work. Although not instinctively comfortable with the conclusions of Malkiel, he had to accept that few fund managers were consistently successful, this was a statistical fact. But a good number were successful over shorter periods – again accepted, even by Malkiel.
So why not apply a momentum strategy to buy funds? This would mean buying individual funds when they were flying high, and automatically dumping them when they weren’t.
Eureka.
This was his plan. He wanted to stick to funds invested into the UK stock market; he felt a bit more comfortable with this domestic bias. So in July 1994 he did this:
Bought the best UK growth funds of the last 6 months
He planned to sell these 6 months later...
...and then buy the top performing funds of the most recent 6 months
And he would repeat this process every 6 months.
These were the funds he bought and held in the first 18 months:
July 1994 bought: | January 1995 bought: | July 1995 bought: |
|---|
GAM UK Diversified | Halifax UK Growth | Halifax UK Growth |
Fidelity Special Situations | Investec UK Special Situations | Jupiter UK Growth |
Fidelity UK Select | Newton UK Equity | Aberdeen UK Mid Cap Equity |
Nothing too horrible happened until the Autumn of 1997. Then an economic crisis in Asia caused the UK stock market to fall by 11% in six weeks.
There was a more serious repeat of this in Autumn 1998, with the Russian financial crisis of August followed by the collapse of the US hedge fund LTCM.
Harry was unmoved. He kept it simple and just continued to apply his momentum strategy switching into the three top performing funds every 6 months.
And when the markets fell in this period he appeared to perform no worse than anyone else, even at worst remaining in substantial profit since his 1994 starting point, to the tune of +£97,510.
The next three years were a little crazy as the tech bubble really gathered pace, dragging up the whole UK stock market. The FTSE 100 index hit a peak in December 1999 which has not been breached since.
Then it all came tumbling down.
The technology investment bubble burst and stock markets fell 49% over the next three years.
That Harry remained too busy in his day to day life to panic was a fortunate coincidence. Yet he also consoled himself knowing that his momentum strategy never got him into technology funds (which were in a different sector to his UK growth funds).
The world was not going to end, and his historical knowledge of previous similar episodes illustrated that such periods come and go – you just need to hold your nerve.
Even when markets fell at their worst, the value of Harry’s three fund portfolio was still way above the 1994 value, by +£137,770.
By 2003 a new market upswing had begun, and a very profitable 5 years lay ahead. The momentum strategy was superb at keeping him in the very best funds. From 11 March 2003 the FTSE 100 went up 96% over the next 5 years, but Harry’s portfolio went up by 136%.
Markets had another surprise in store.
There were various warning signs that all was not well in 2007 (remember Northern Rock in the UK?). In September 2008 the debt edifice came tumbling down when Lehman Brothers went bust, and the UK stock market fell by 31% from 15 September 2008 to 3 March 2009.
At its worst Harry’s portfolio value fell to £332,920 – still a long way above the £100,000 invested in 1994, and the £195,550 which it would have grown to if invested in an index tracker.
As of February 2014 the value was £1,179,114. The FTSE 100 index increased 354% over the same period, and the average UK growth fund was worth a mere £370,668.
A difference of £808,446
But unless you had the discipline and honesty of Harry, this £808,446 was lost to you.
In fact the vast majority of investors lost out on that £808,446.
Fast-forward to 2025: that same gap isn't £808,446 anymore.
It's over £2.1m
The reason I have set out those major downward lurches over the last 20 years is to illustrate that this was no easy time for investing – there were a very unusual number of ugly market falls.
So why was Harry so rare?
Dennehy Wealth has been established to provide answers, and help you with the best way for you to approach investing over the next 20 years.
The solution is not merely the kind of momentum investing set out above – if only it was that easy! In fact that kind of momentum investing will not suit everyone. So we have come up with a number of approaches, and are here to help identify what suits you – and stand alongside you as you take advantage of the very best investment strategy for you.
The result over the years ahead is not just the prospect of more growth, more money – though that is very welcome!
You will also have a clear plan, giving you greater confidence in your financial future, and the likelihood that you will spend LESS time (not more) in transforming your investing success.