January 12, 2021

Investing Success: Just Plain Luck?


In this post, we will access if our DIY approach is doing better than indexing in the long run. We will also try to determine to what it can be mainly attributed.


Many assume it can only be plain luck. They think DIY investors aka stock pickers can only beat indexing if they are lucky. Lucky to identify and cash in on big winners or to avoid big losses or even both.


In the end, the big question boils down to knowing if DIY Investing is worth the trouble?


We’ll have a look at our own investing situation to have a better idea.


To be clear, indexing is probably a better approach for most people. But we are trying to verify what’s better for us and it definitely may not be better for you.


Why Did We Get into DIY Investing?


Let’s get back to why we got into DIY investing in the first place.


Our initial DIY assumptions were to try to obtain similar capital returns (8%) as our expensive-on-fees mutual funds (indexing was not that accessible yet in those days) but to do a little better on dividends (4% instead of 3%) and fees (almost zero versus 2%). Here, we’ll note that indexing solutions, with fees around 0.5% or even under, are now quite easy to find. In that context, indexing is already much better than archaic mutual funds.


From the start, our overall objective was to make 12% long-term (8% capital + 4% dividends + 0% fees) instead of 9% with our old-fashioned funds (8% capital + 3% dividends - 2% fees).


In fact, doing 2-3% better seemed to be worth the hassle for us.

On a side note, the way mutual funds invest money may not be that bad. One of our initial strategy was to mimic them. We looked at their top holdings to start our research and pick our favourite stocks.


The new comparable is now index funds. Since the difference in fees is greatly reduced, is marking just 1% more on dividends sufficient to justify all that effort?


The real question may be: are we just making 1% more?

Are We Doing Better?

Let’s address this question and get it out of the way. Is our DIY investing approach doing better than indexing?


After many verifications, it would seem that we are.

We were very conservative in our assumptions and within reasonable limits, we favored indexing whenever we had a choice to make. For instance, we kept XIU as our Canadian indexing representative instead of XDV that would have done worse. And this even though XDV holdings are more similar to our own.


The end purpose was to make sure that if our DIY approach was ahead, it would clearly be doing better.


Our US representative ended up being Vanguard Dividend Appreciation ETF (VIG). We used a 60% Canadian (XIU) / 40% US (VIG) mix to compare it to our own humble DIY Portfolio. We used a few 10-year periods to obtain overall averages.


As expected, we did about 1% better on dividend. To be precise, 0.98% better on Canadian content and 1.38% on the US side for a 60/40 mix of 1.18%.


Before we get to the fascinating part, we’ll note that we are also doing better on fees. Once again, we omitted fees in our present calculations to favor indexing as much as possible. Because we maintain our number of transactions to a minimum, we managed to keep our DIY fees under 0.1%. And even if many indexing ETFs can now be traded for free, you can still expect management expense ratios (MERs) of at least 0.15% but often as much as 0.5%. Some indexing solutions even charge fees a little higher.


But what surprised us the most in our research is that we also did better on capital gains. Quite a lot better in fact. After all verifications, we consistently did 2-3% better on capital return.


We had enhanced capital returns both for US and Canadian content. The consistent factor of our edge is not to be neglected. It would imply our method can explain at least part of our success.


Being lucky on occasion could be possible but being consistently lucky is a whole different animal.


Luck Irrelevant with Proper Diversification and Well-Thought-out Process

We will admit we were lucky early in our DIY investing career as our investing process was not that refined.

For instance, we were extremely fortunate with Teck Ressources (TCK.B) with a 197% gain within 3 years. With retrospect, that was plain luck even though it happened with our “play” money. Over the next few years, we ended up losing quite often with those riskier plays.

Today, being more experienced, we don’t even consider those somewhat stupid reckless tries. With time, we realized we could make better consistent returns owning boring stocks. It may be strange, but we now manage better returns taking on less risk. To be clear, our approach exposes us to some risks, probably more than the average person may be willing to take, but at this point, our approach involves much more calculated risks.

In theory, taking more risk should result in superior returns. But in practice, you will need luck for these tempting returns to materialize. We prefer safer stocks submitted to thorough analysis to provide us with more predictable returns.

To get back to indexing, one of the main pro-indexing arguments is that just a few stocks (most of them tech stocks) drove the market in 2020. Having those good apples in your DIY portfolio would be lucky. indexing automatically gave you access to those prominent stocks.

One of our argument would be that indexing also exposed you to all stocks that did quite badly during the same period. And those bad apples drag your returns down.


Indexers buy everything in the basket trying to reduce their risk thru diversification. They just overlook the potential risk of over-diversification.

Investing success is probably less about hitting homeruns than about avoiding strikeouts. With indexing, you can get a lot of hits but still quite a few strikeouts and foul balls. All in all, it would seem our DIY batting average is a little higher.

We can still concede that indexing can give you an interesting average return. We just think attaining a better average is possible without taking on that much additional risk. And till now, our approach proved we can achieve 2-3% better on a regular basis. You could settle for average returns. We just like to look for superior returns.


All in all, we don’t consider it too risky to try to do better. As we allude to before, practice and experience are necessary. But a well-balanced approach that involves proper diversification and choosing solid companies can greatly reduce the amount of luck and risk necessary to succeed. 


On a parallel front, you may also suggest that we were lucky to have so much US content over the years. We will argue that maybe that choice partially came down to good instinct and common sense.


In the end, choosing US stocks was only logical as they can provide both sector and geographical diversification. Several sectors are not even represented on the Canadian stock market, so we had to look elsewhere. In that sense, many adequate alternatives exist south on the border. On top of that, many US stocks will give you international exposure because their business has already globally expanded.


To take it further, we don’t even look at international stocks or indexes as we remain confident US corporations that we mostly already know can provide us with sufficient diversification.

DIY Inconveniences


To be honest, DIY investing also has its bad sides. So, let’s discuss some of these inconveniences now.


Probably the most obvious drawback of DIY investing is that it is more complex than indexing. That added complexity can sometimes lead to mistakes. We have to admit we made a few over the years. But their impact has been minimal compared to our benefits.


We manage our holdings as one big portfolio across all our accounts. With withdrawals just starting in the last few quarters, it sure added to our level of complexity. Oftentimes, that withdrawal money ends up back in our TFSAs. In the context, juggling with some of our positions can be touchy.


With good reason, many investors fall in love with the simplicity of indexing. There are no questions asked with indexing. Not doubt it’s much simpler with the same or a similar strategy across all accounts.


With DIY investing, we often leave some money on the sidelines. Staying invested is ideal and it’s surely more easily achieved with indexing. Sideline money is not all bad because having some liquidities to invest on dips is also interesting. Since we never know when, we just have to always be ready for opportunities to arise.


DIY investing is also more time consuming as it requires validation and some monitoring. It’s kind of a hobby for us. We take quite some time toying with it. Don’t get us wrong, we rarely make transactions as we keep them to the strict essential. We just like to fiddle with our numbers. In reality, time we allow to portfolio management is pretty low. We can easily handle it with just about 12 minutes a week.


Another significant hurdle with DIY investing is that it is much more difficult to keep your emotions in check. In that regard, we have a stone-cold temperament but could see it can be a big problem for many investors out there. Nervousness, greed and excitement can get in your way in a hurry.


In a similar fashion, one of the more defining factors of your investing success is how you deal with your big losers and also, your big gainers. That variable is out using indexing. It’s important to set your selling criterions when you buy a stock and not to delay those decisions later. For instance, a dividend cut may be one of those selling triggers. Financial figures not meeting your standards anymore could also be. We like to sell a portion of our gainers when they stray away from our pre-set allocation.


There is no doubt DIY investing poses more challenges. There is also a substantial risk you may not even do better than indexing. We are willing to take on that risk as for us, with no guarantee at all, it looks like it’s generating more rewards.

Being Systemic Probably Helps More than Good Instincts

Some people think investing is as much art as science. Let’s just say for now that for us, good instincts are just not enough.

Sure, good instincts can help you save time and avoid some mistakes, sometimes even crucial costly mistakes. But they don’t guarantee results as they have to be carefully validated.

For example, when our instincts provide us with a new potential stock candidate, we like to put it thru a rigorous analysis process. Some candidates will simply be rejected, and others will make it to our buy list.

Like emotions, instincts can often be in your way and lead to bad decisions. For instance, instinctive fear can lead to no decision. This is as awful as the dreaded paralysis by analysis.

We really think having a system and a plan in place and sticking to it will give you the best chances at success. In fact, having any system in place even if it’s far from perfect is more important than the alternative.


An efficient system should allow you to monitor things, to evolve, and tweak your plan. Just don’t always change things inside and out. Let time do its thing.


You should note that we really believe asset allocation should be an intricate part of your investing process.


Considering all our experience and after much research and reflection, we will conclude by telling you that more than most think, successful investing comes down to skills that can be developed.

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