ED CROFT | from Stockopedia
ED CROFT | from Stockopedia
Ed Croft is the CEO and co-founder of Stockopedia. In this episode he vividly describes how his psychological biases led him first to lose money, and then inspired him to find better ways of assessing stocks. He recognised how we talk ourselves into believing the narrative around a particular company even while the price says otherwise.
"We all believe in Hollywood endings and we think that that, you know, a share has gotta end up in that closure of the story that we're looking for. But the reality is messy."
Ed says that getting consistent returns in the stock market is less about buying the individual story of the share, and more about making sure that you are exposed to shares that are good quality, good value, and have strong momentum. The factors that lead to continually positive returns.
“You can look at quality in terms of cash flow, profitability, high margins. Are they self-funding, high return on capital, stable margins. The kind of things Warren Buffet really likes."
FACTOR INVESTING EXPLAINED
While investment fads come and go, certain factors have outperformed persistently over many decades and across different sectors and regions. And while there is still a little disagreement, in stock markets the following five factors are generally recognised as being most enduring and most investable:
- Quality - profitable stocks beat unprofitable stocks.
- Value - cheap stocks beat expensive stocks.
- Momentum - improving stocks beat deteriorating ones.
- Size - small stocks beat large stocks.
- Volatility - low-volatility stocks beat high-volatility stocks.
Ed has been the steward of the Stockopedia mission since day one with the goal of building the systematic toolkit to solve his own behavioural biases. Ed was an Oxford Scholar, graduating with first class honours before going on to work as an asset manager and private client broker at Goldman Sachs. Ed has a mystery song on Youtube that gets playlisted more than the Beatles and likes to bowl awkward fast medium bouncers.
TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE
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Shares for Beginners.
We scan the news to find every story that actually, that agrees with us. And, and that is a, it's a human trait. It, it's, we always search our environment to, to confirm that we're right on things. We don't look for conflicting ideas and conflicting advice. So that was a, a huge lesson. And, and I was very, very attached to the fairytale ending. The kind of, I think it's known as the narrative fallacy now, the fact that stories, we all believe in Hollywood ending and we think that that, you know, a share has gotta end up in that closure of the story that we're looking for. But it does. The reality is messy and it doesn't work like that.
G'day and welcome back to Shares for Beginners. I'm Phil Muscatello. What are the behavioral biases that hamper the returns of investors? Does a world-class education and experience in the finance industry inoculate you from getting things wrong. To find out more, I'm joined today by Ed Croft from Stockopedia to discuss all of this and more. G'day Ed.
G'ay. Good to see you
Phil (1m 1s):
Phil. Yeah, thanks for coming here. So Ed's been the steward of the Stockopedia mission since day one, with the goal of building a systematic toolkit to solve his own behavioral biases. Ed was an Oxford Scholar graduating with first class honors before going on to work as an asset manager and private client broker at Goldman Sachs. So tell us about your time at Goldman Sachs. What was
Ed (1m 22s):
Your role? Well, it was a long time ago, and as he said, I was working in the private clients department and we were really dealing with ultra high net worth individuals being Goldman's. They had that cache and brand to bring in, you know, very, very wealthy individuals. And I worked in a very small team running up two, one and a half to 2 billion US dollars in private client assets. And it was a mixture of execution only brokerage for some particularly proactive individuals and then most of it discretionary. So we, we invested, you know, they gave us the mandate to invest on their behalf and so on. So it was, it was quite an education. It was on the, it was on the equities floor. It was not on the asset management floor back then.
Ed (2m 4s):
So this was sort of pre .com, up to .com when it was particularly hot in that department. And after the .com bubble, they basically separated it and they split it off from the equities department and merged it into the asset management department. And it was all on a commission basis back then, which meant that there were some tension. You
Phil (2m 25s):
Lived and died tensions by the sword,
Ed (2m 27s):
Did you? Well, there were, there were definitely tensions in in that you were incentivized to deal. Yeah. And that meant you weren't necessarily acting on the best interest at times of the clients, which wasn't something which really sat well with me, I have to admit.
Phil (2m 42s):
Yeah, I think that is a bit of a problem in the industry as well. You know, some of the incentives that Yeah. People that you, ordinary investors come along and trust people, but not even thinking about the incentives that are involved.
Ed (2m 54s):
Exactly. That's very true. And, and I think that happens all across the industry and even today. And it's that power of incentives, which really drives behavior and it always has. And I think that really sewed the seed for me to try and move towards, you know, more self-reliance in investing and, and ended up really, if I look back on my journey, it's about everything I do now is about trying to sort of develop tools and, and information education for private investors or retail investors, you might call 'em here, to make their own decisions to try and be, you know, be able to avoid some of those issues that before those who become clients of, you know, of different institutions which may not have their best, best interests at heart.
Ed (3m 36s):
Not say they all don't. I know some very, very fantastic professionals and fantastic businesses out there that
Phil (3m 42s):
Some people have morals too in the
Ed (3m 44s):
Industry. Yeah, me too. Yeah.
Phil (3m 46s):
What did you read at
Ed (3m 47s):
Oxford? I read chemistry, so, okay. I was a, yeah, I was a scientist and I, I did a four year degree and that really made me, I think, deeply on, you know, numeracy and all kinds of analytical ways of measuring and analyzing all kinds of things. And I think that's what I remember. I really don't remember the chemistry now, so don't ask me to read out the periodic table. I am much more of a somebody who just sort of applied that kind of method of thinking to everything I I did since.
Phil (4m 17s):
So did your experience with science, does that have any bearing in the way that you think about investing?
Ed (4m 22s):
It definitely does. It's a, I began applying more data. I was very attracted to the more data driven side of investing from a, from a young age. And my father got me into investing by leaving me a little tax efficient portfolio to sort of manage on my own. And I, when I started reading, I started reading books on some of the traits of, you know, stock market winners and, and interested in reading around the subjects. And I think it, while it took, I had a lot of kind of missteps along the way, and I'm sure I'll talk about some of them later. But I always wanted, I always bought quite well, I always tried to buy with shares, which had a very good set of characteristics on the data and, and when I was at Goldman's, I was trying to apply some of those principles to the client portfolios, but invariably they wouldn't let me.
Ed (5m 17s):
So, which probably was quite good at that time because I was so young and naive wouldn't let you, or No, no, no. My, my, my more seniors. But yeah, it was, cuz you always had to sort of stick to the buy list. You had to stick to what they mandated. And actually that was one of the problems there is that you had were often incentivized to buy what was on the list or to, or to, you know, sell to your clients, the things that came with a really fat sales commissions. So I, I think that I struggle with that because of my more scientific background. And I think when I left there and moved on to becoming a more full-time private investor, I retail investor, I started applying more of those principles.
Phil (5m 59s):
Gee, that's a caring father. He did not only gave you a portfolio but a tax efficient portfolio.
Ed (6m 6s):
Well, in, in, in the UK they were called PEPs, they were called personal equity plans. And they've now become what are called the irs, I'm sure you have similar here, individual savings accounts they're called now. And they're terrific. You, you're able to save a certain amount of cash every year into an ISR and you, you know, it's free from, it's free from tax. So you know, the capital gains tax is no, is no issue. And that's a, a great benefit. And actually it's something that is bit undervalued by so many investors, but not having toose tax, pay this taxes gives you the opportunity to do different kinds of strategies. So yeah, it was very good of him and he was always interested in the stock market and I think that sewed the seed for everything I've done since.
Phil (6m 45s):
Was there anything in your experience at Goldman's that contributed to your learning
Ed (6m 50s):
Phil (6m 51s):
Or was it more of a reaction to what you learned there?
Ed (6m 54s):
I think they gave me a very, very good education in yes, financial statements analysis and in how the industry works and how dealing works and dealing floors work and how that client relationship works. And especially, but the big takeaway that I took from it was that they weren't necessarily always acting in the client's best interests. And I, I will give one example that there was one account that we managed to make a 12% yield on in terms of fees over a 12 month basis. That account was actually a very active account, so he, the client nearly matched the market that year, but it was extraordinary the kind of commission take that happened off that account.
Ed (7m 41s):
And he actually seemed to be okay with it. He was a bright guy because he was getting huge information flow and also getting into a lot of the .com, you know, hot names that were being floated and so on and so forth. But it, it just, that headwind that, that the clients were facing on the fees was really significant. So yeah, I I think that's the biggest takeaway is that you've gotta be super careful on on fees when you are, when you have professionals acting on your behalf.
Phil (8m 7s):
So what was the transition like? Going to become a private investor?
Ed (8m 10s):
My mother got very unwell and, and eventually she had had cancer before and cancer came back and it was really a personal decision that led to me moving on to go and look after her and then have a real think about my future. And so that was a very, you know, personal time and I'm very glad it did it and spent time with my siblings and, and then moved on and, and had a real, had to sort of really think about, do I wanna go back into the industry or do I wanna do something else? And I actually ended up running a family fund for some time and, and then really managing on my own personal account as well beyond that. And you know, having saved up a bit of money from Goldman's and also from my, and some inheritance from my mother, I started taking a lot more seriously and that obviously went through the .com period after the k.com period and I started building up some pretty significant positions in small caps in the UK market, you know, as it as the market started bottoming after the dot-com bubble.
Ed (9m 9s):
So that was a really kind of pivotal time in in my life.
Phil (9m 13s):
You had a highly concentrated portfolio at that time. What was it like? You say it was small caps, but was it in any particular sector?
Ed (9m 21s):
It was, well I I at the time I didn't realize what a sector focus bet I was actually making because they weren't in, they were, so, I'll tell you, I, I started buying a range of shares in amongst the kind of, as the market started recovering and I started buying, you know, based on strong traits and characteristics that were, you know, using valuation ratios like the PEG ratio. So these were generally profitable companies, so, and, but they were, they came with a very strong narrative because they were Chinese AIM shares. So the AIM market in the UK is, is like the junior markets, the small cap market and it has much looser listing requirements and it can be a bit wild west.
Ed (10m 10s):
And some of the shares on there that I started picking out, I started noticing these valuation anomalies on these Chinese companies that are listed there. With hindsight, I now know that why they were listing there, but I started buying those up and I had some very, very good success in some of these shares. And there was one called rcg, there was another one called Ren Solar. And I ended up pyramiding my position up as the prices rose. So there's a lot in the literature about the value of pyramiding you, you know, edge in on positions than companies that you like and then start buying more when they move north. And that was a big part of my trading philosophy then.
Ed (10m 51s):
And I was pretty disciplined on the way in whenever I was buying, but I was starting to make such strong returns in these as it moved through 2004, 5, 6, 7. And I remember actually, I remember exactly when it was, it was my son, my youngest son was born here in Sydney in the North Shore hospital. And I remember that I had had a fantastic year in the markets and I remember running down the beach, I was up in the northern beaches somewhere and thinking this is gonna be my year 2007, this is all set. And I'd had a fantastic run in a couple of shares and one of my shares had become more than 50% of my portfolio. And I think the other one was about 25, 30%.
Ed (11m 31s):
So I had probably 75% of my portfolio in just two names. And I had a little tail of other stocks that hadn't done as well. And I was convinced those big positions were gonna run and run. And having that maxim of run your winners sell your losers, I wasn't gonna let my winners go. And that really was the, the, the crux of that focus portfolio. And I think I drunk a bit from the Kool-Aid of the literature on investing where there are, there are some books which will tell you you, you know, or even quotes from Warren Buffet, the diversification is a hedge for ignorance or you should, you know, own only five stocks and you know, keep all your eggs in one basket and watch the basket.
Ed (12m 15s):
Phil (12m 16s):
Warren Buffett's got that thing too, where he talks about only, what is it like 30 stocks in your whole life? Something like,
Ed (12m 21s):
Yeah, it's that punch card idea. Yeah. And, and of course, you know, I, I was making fantastic returns in these shares. I really was, it was, it was, I'd done extremely well, one of 'em quadrupled on my original purchase price and so on. So I was very, very happy with how I'd done, but I didn't realize what was happening to me on the psychological side of owning these shares in such large size. And really the attachment I had to those positions sort of led to some pretty negative, negative moments. So that kind of led onto the second part of that story and it was another kind of pivotal thing in, in my life which led to setting up, stockopedia and the things I do now.
Ed (13m 3s):
Phil (13m 3s):
You started that answer by mentioning the PEG ratio. Yeah. What is a PEG ratio?
Ed (13m 8s):
So the PEG ratio I got particularly interested in from a, a great British stock market classic called the Zulu principle by an author called Jim Slater. And Jim Slater was a great capitalist, he was a great conglomerate capitalist in the seventies and he eventually actually went, I think he went, might have, might have gone bust in the eighties, but then he made his fortune back writing children's books and then having a column at the Telegraph. And he eventually went on and wrote this fantastic book called the Zulu Principle, which was all about investing in small caps but using the data to pick really good shares. And Slaters went on and set up Slater Investments, which is now one of the most successful small cap fund managers in, in, in London.
Ed (13m 52s):
He's died now. But he was a big inspiration to the, to everything I've done actually. And I'm, I'm, I was always a fan of his work and he really promoted the PEG ratio, which was the price earnings to growth ratio. So most, one of the first ratios you learn about is the price to earnings ratio and that's the price divided by the earnings per shares. And it's a very, very simple measure of how expensive a share might be against its earnings. So you kind of find that your very expensive shares can be on a P of 40 to 60 or more and very cheap shares can be on P of three to five or even lower. And of course where, where is your buy point? And it's very contextual to know, you know, which, which is the right PE ratio for that stock.
Ed (14m 37s):
Cuz it depends on the growth rate and you know, much more faster growing or higher quality stock would be, would justify a higher valuation. So you might be willing to buy a share on, you know, 30 times earnings or more if it's a really high quality, great growth stock. But if it's not growing you wouldn't. And one of the things that Slater did using the PEG ratio is he divided the PE ratio by the earnings growth rate. And that kind of normalizes that number because, you know, as I said, if the number can be anywhere between one and a hundred or 200 or whatever, how do you know what the, what you know, how do you judge it? So, but if you divide by the growth rate, you could then use the PEG ratio and say, well look, if, if the value of the PEG ratio is one or less, that means that earnings growth is faster than, is a higher number than the price earnings ratio.
Ed (15m 31s):
So if you had a a, a company trading on a price earnings ratio of 20 times, 20 times earnings, but the growth rate was 25% or 30%, that would be, the PEG ratio would be less than one. And of course if a company was on a lowerPEG ratio, it could be on a lower growth growth rate, but the PEG ratio could still similarly be below one. And he looked for shares that were on a peg of less than 0.75 and that meant you were buying growth at a reasonable price. And I think that's a very powerful idea and it's always been a very perennial idea for all investors. If you can buy growth at a reasonable price and do that, you know, habitually you can do well in the market.
Ed (16m 11s):
So, so that's always a principle that I've had in a lot of my investing and I've always keep an eye on the peg ratio and we publish it on the sites, you know, as one of the key ratios on the, on the, on the page. So,
Phil (16m 26s):
Okay, so there you are on the northern beaches of Sydney, you're running down the beach in slow motion with the, the hair ruffling you in the wind. And then what happened?
Ed (16m 37s):
Well, the, the, a very, very difficult year because the markets in the UK started dropping and especially in Chinese AIM shares and the, my two biggest holdings were in this Chinese sector. So it was, you know, it was more of a geographic similarity that the business, the business sectors can be different. You know, one was in sort of electronics, another one in in solar and
Phil (17m 3s):
Ed (17m 4s):
But they were all Chinese and then they started selling off, but at the same time, the Chinese stock market, the Shenzhen and everything were rocketing. They were going higher and higher and higher. And I was thinking to myself, well mine are going down, but China's going up, okay, mine are gonna go up. And what I realized afterwards was that you couldn't sell China, the Chinese markets inside China, like they were locked out from international investors, so they were selling Chinese shares everywhere else and that really was the beginning of a, of, you know, pretty negative runs. So, you know, I was a anchored on the prices I was at and, and the highs and I, and, and the valuations were still very low on those shares, but I was convinced that in the narrative of where these would end up and, and then of course the, the rest of the market then topped later that year and started coming down too.
Ed (17m 54s):
So it was like a double whammy and, and I was just very, very attached and it, it took me a, a a year to really get outta my positions, but by then my portfolio was down 50% or so. And, and, and thank god I got out when I did because the
Phil (18m 7s):
50% from the high
Ed (18m 8s):
Or Yeah, yeah. It was 50% from the high and it was a, yeah, and I, and I really was, I'd started to think that this was my financial freedom, my financial freedom kind of went, went up in smoke when all that started happening. So yeah, it was a huge learning curve and, and, and deeply, deeply disappointing and, and I was very glad I got out when I did because actually one of those companies in my biggest position ended up, I think it topped at about one 40 pence. And I think I ended up getting out of that one at about 60, 65. And then it eventually went all the way down to one p, ended up being a fraud, ended up being a actual fraud where the CEO disappeared.
Ed (18m 49s):
It was a, it was a very strange circumstance and it, and it just goes to show that you've gotta really, really have a lot of trust in the underlying ethics of the business. And, and often I've found that foreign listed companies that come to the London Stock Exchange on that junior market, they're doing it for a reason. And I've seen companies from other countries around the world do the same thing and end up being similar. Not say all of them are at all, but you find there, there is a, it's an odds thing. So I learned a big lesson in that.
Phil (19m 20s):
Okay. So that was one lesson. Was there any other major lesson that you took away from
Ed (19m 23s):
That? Well it's, it was all really the sort of behavioral aspects of it. I, I was very, very much so the, the psycho psychological biases that we go through in, you know, becoming very attached to our shares, becoming really overconfident. I had huge overconfidence. I remember telling my wife that my main position was gonna quintuple by Christmas or something like that. And, and you, you then search for all the information that confirms your opinion. We scan the news to find every story that actually that agrees with us. And, and that is a, it's a human trait. It, it's, we always search our environment to, to confirm that we're right on things.
Ed (20m 6s):
We don't look for conflicting ideas and conflicting advice. So that was a, a huge lesson and, and I was very, very attached to the fairytale ending, the kind of, I think it's known as the narrative fallacy now, the fact that stories, we all believe in Hollywood ending and we think that that, you know, a share has gotta end up in that closure of the story that we're looking for. But it does, the reality is messy and it doesn't work like that. So these are all kind of behavioral traits that we fall into that tend to make us hang onto shares too long. And, and, and then of course we, we refuse to sell them and, and we lose all our discipline. And I think that's what happened to me. I, I lost my discipline on the sell side and whereas I always had discipline on the buy side, but the, the sell side discipline was very poor.
Phil (20m 49s):
So what was the process then taking that and the experience and then moving on to founding stockopedia
Ed (20m 55s):
At that time, a great friend of mine had been working in private equity, which became a bit unstuck duringPEGat de-leveraging process. And the two of us started exploring the idea of starting a website to take some of these ideas and, and, and, and really try and improve a lot of retail investors in, in the UK and hopefully eventually abroad. And we looked at trying to find a good data supplier and we built a website. Most of it was sort of the mechanics of learning to build a website, having not done it before. And we sort of, you know, you know, got competitive about trying to learn to code and trying to put something together and patch it all up. And we did that reasonably okay.
Ed (21m 36s):
It was a, it, it, it worked, it was gathering interest, but I always had this idea of us building a subscription data service because the ones that were available, or either only desktop software you had to have on a, maybe just a Windows machine or a sort of desktop app, but you, there was nothing really very high quality online. And I found that the majority of websites had very poor quality data because they data was always used as clickbait. And because it's used as clickbait, they don't invest in the quality of the data because they're trying to sell, most financial websites are trying to sell advertising. So they don't really, they want the data there so that people will click around but they don't live and die by the quality of that data.
Ed (22m 20s):
So I kind
Phil (22m 21s):
And, and that data can be very expensive as well to to access.
Ed (22m 25s):
It can. It can and, and and, and it is, and the thing is that really is a difference. Paying for data makes sense because you know that if you are paying for it with a, you know, okay, I'm talking my own book here, but this is the reason I set up the biz is because we don't, you know, we don't run any advertising, it's all just paid for by our subscribers. But if we don't do a good job on the data, then people won't subscribe. Cuz you can get data for free here, there, and everywhere, but it's just not high quality enough. So we've wanted to find a way to make it reasonably priced enough so that we could actually attract that clientele. And, and then, yeah, one thing led to another and we managed to get a, find the suppliers who could give us the raw data that we could do our magic on.
Ed (23m 6s):
And, and, and as that we were going through that process, I was going through a complete reeducation in what works in investing because I've recognized that a lot of what I'd learned up to date hadn't necessarily been that beneficial for me. And I dove straight into, you know, all the behavioral finance side of it as well as all of the more quantitative academic aspects of investing, which is something I hadn't gotten education in at when I was in the city and or at Goldman's. But it's something I self-educated on because you started to find, there was just so much free publication of, of academic papers.
Ed (23m 46s):
There were some great stock market classics and we started weaving all of these key themes and ideas into everything that we, in real ethos and foundation of the service as we started building it up. So that was, that was probably one of the best educational, self educational periods that I've ever been through. And while I was sort of mourning this loss of capital and the terrible terribly stupid things I'd done with my own money. So anyway, there you go.
Phil (24m 13s):
A big part of it was getting, I saw a mention on your website that you wanted institutional grade Yeah. Information, institutional grade financial data at the time. What was the difference between what was available to ordinary investors and what the Instas had?
Ed (24m 27s):
Well there were, there were some data suppliers who had been set up just locally in the UK and they had quite mixed quality and they did kind of pre-compute a few financial ratios, but they didn't take all the nuances of financial statements into account. They didn't have the necessarily the granular data required to really carve out the, the, the best quality ratios. Cause even if you take a, a PEG ratio, there are lots of things that go into that and there's all kinds of companies will report their earnings in all kinds of different ways and they have different year end dates and they have all their obviously simple things like different currencies, but they might not take into account that a company has dual listings or a and b shares, which are some of the complexities of how companies list their shares on the market.
Ed (25m 21s):
And you need to really calculate a really valid sort of earnings number, which takes these factors into account to be able to do, to
Phil (25m 29s):
Appropriately weight those different
Ed (25m 30s):
Phil (25m 31s):
Of factors that are available in there. Yeah,
Ed (25m 33s):
That's just a very simple example, but there's a lot, lot more complex ones. And so we wanted to try and find a very good institutional quality data provider that gave us much more granular financial statements data so that we could make the adjustments necessary to calculate and good sets of fields which could allow us to do valid comparisons against companies. Because when you're doing comparisons across the market and you're looking more cross-sectionally, having being able to compare like for like makes such a difference.
Phil (26m 1s):
So part of the process of putting together Stockopedia was looking at some of the academic research that you referred to before. Yeah. And you mentioned factor investing, well on the website that's mentioned as factor investing. What is factor? Is that
Ed (26m 16s):
The correct factor? Invest
Phil (26m 17s):
Yes, that that yeah. Factor investing
Ed (26m 18s):
The way to understand that, and that's something we actually labeled it as much later as it became a theme in the industry. But ultimately the way of thinking about it is that shares are, are driven by certain traits or characteristics that have now sort of become known as factors. But for example, if you were to take the price earnings ratio, the PE ratio we talked about earlier and sort the market from cheapest to most expensive by that f by that ratio, and you could then chop up the market into buckets. So say you took five different buckets in increase from the cheapest to the most expensive and then track it as a portfolio over time and find you, you would find if you did that and then every year you did the same thing and you, you moved the cheapest portfolio into the next set of cheapest stocks a year later because they all change in price individually over the year.
Ed (27m 19s):
And if you track that over time, over the very, very long term, you tend to find that cheaper stocks outperform more expensive stocks. And so that became an idea, one of the most studied ideas was this kind of idea of value investing or that the value factor is a powerful and pervasive and enduring factor in the market. So on almost all of these price ratios where you measure valuation, and this is a common theme all around the world, you find that the, that cheap bucket of shares in and it not every year and, and in many periods it underperforms, but over the long term you tend to find that the more inexpensive class of shares will tend to outperform.
Ed (28m 2s):
So that's kind of the value factor. And then there are other factors, I'll just quickly brief you on them. So the quality factor is looking at the most profitable shares in the market and again, doing the same thing, sort the market by profitability. And you can look at quality in terms of cash flow, profitability, high margins, are they, you know, are they self-funding, high return on capital, stable margins kind of things Warren Buffet really likes,i rand higher quality shares have a tendency to beat the opposite. I like calling them junk shares, but they're your kind of capital destroying companies or I, you know, or companies that need a lot of capital constantly to keep going.
Ed (28m 45s):
And you find those sorts of shares which are always on a whi a prayer and they've got a, they've got a story, they've always have a story. It's that old saying of, you know, there's a lot of mining stocks in Australia, but that old Mark Twain quote of, you know, what's a mine is a hole in the ground or the la at the top. But you know, you find that so often in the market, whether it's you're going after a blue sky technology or some significant resource or whatever it is, but they need so much capital to get to that point of positive cash flow. And
Phil (29m 14s):
That's why they're on the, the market, aren't
Ed (29m 16s):
They? They need capital. Exactly. They do need capital, but it's a bit of a lottery and you find that those, those types of stocks underperform over the long term and whereas the high quality ones tend to keep outperforming. And then the last one I kind of focus on is momentum, which is this strange idea that shares that are breaking out or have strong share price strength tend to keep having share price strength. So winning, begets winning and the opposite, opposite, losing begets losing and, and they're all, it's a, it's a strange phenomenon, but if you literally, if you were to buy the sort of top 20 stocks by their highest share price strength over the last 12 and six months, and you do that every year, you find you tend to outperform.
Ed (29m 59s):
And it's a hugely pervasive phenomenon that, that most people can't really fathom, but it's like, it's based on behavioral biases. So these factors, and there are some others, like small caps tend to beat big caps and low risk shares tend to beat high risk shares. But if there are kind of a canopy of what you might call factors and factor investing, and I think this is what I've taken into my investing is that it's less about the individual share, like getting consistent returns in the stock market is less about buying the individual story of the share and more about making sure that you are exposed to these factors that you buy stocks that have these characteristics and you are disciplined about it.
Ed (30m 40s):
So the discipline enactment of a strategy of owning shares that are good quality, that are good value, that are strong momentum, that is the kind of thing which leads to continual, continually positive returns. And and if you lose that discipline, you don't do so well. And so all those things that talks about my personal issues and the, you know, financial crisis was all about me breaking those rules. Like I, I got in on, I got in on the good factors, you know, they were generally quite good, you know, value and quality shares. I thought they were, but actually what unfolded was that I just fell in love with the story and I lost my discipline. And, and I think that's in an essence, the idea of factor investing is trying to keep that strong, I call it strong factor exposure, but it means you're, you are, you are gonna let shares go after a year or however long when they no longer have those traits when they, you know, it gives you, it embeds that discipline into your process.
Ed (31m 35s):
And I think that's
Phil (31m 36s):
And and bypass your psychology presumably as well. Exactly. Yeah. Yeah. And that's a big part of it. You wanna bypass people's psychological
Ed (31m 42s):
Biases. Definitely. Absolutely. Because, and it is the hardest thing to do because we are all prone, you know, I can't help myself. I mean, I try not to, I try not to learn about the shares I invest in because I, I I I, I believe now so strongly that that that these, this idea of factors is so much more powerful if you want to continually try and beat the market. Of course, if you just want to, if you just wanna get to know the companies and the management of the stocks you own and, and you know, people have different motivations in the market. You know, there are, you don't, but I'm, but I'm particularly interested in trying to sort of beat the market and, and so that's the way that I think works best.
Phil (32m 19s):
Tell us about the process of coaching investors because it's not just about handing out tickers is it, Stockopedia No. Which is what a lot of people want.
Ed (32m 28s):
That's right. I i I think it's that ethic of, you know, give a man of fish versus teach a man to fish. You know, if you teach 'em man to fish, they, they can go and find their fish for life. You just give them fish they're just dependent on you. And, but we wanted to try and educate people about the kinds of characteristics of stocks that historically have done well and, and let people go and pick their own shares, but with a supporting environment which help them understand if the shares they were looking at were in that class of shares that historically have done very well. So, you know, again, looking at those factors and we rank the market for quality, we, we have these ranks between zero and a hundred for quality value momentum.
Ed (33m 12s):
And it gives this fantastic scoring system so that anybody can see, oh, if it's a 90 plus rank share that's in the top 10% ranked shares in the market, that means, you know, it's in a segment that historically is outperformed. Doesn't mean it that stock will outperform next year or the year after, but it means that you're kind of, you know, if you're picking shares in, you're not shooting fish in a barrel, but you are, you are, you've got higher odds. And that really allows people to have more confidence in their decisions. And I think a lot of what we try and do is, is is give sort of data-driven product or features which help people have more confidence in their decisions. Of course everybody knows they're self-reliant, DIY investor and you know, so, and I, I've actually never had really ever had a complaint from someone because they, everybody knows that the ethos is that they're making their own decisions.
Ed (34m 6s):
We are there as a, as a, as an aid to that and we give them the data, it helps 'em make fantastic decisions. So I think generally the, the environment we've created while this community and there is publishing and there is, you know, we do a lot on, on the educational side, but the data is really there as the primary kind of crux and support, which helps people make much more kind of guided investment decisions. And I think that is, I guess the coaching aspect rather than just giving people, giving people tickers as you say. So I hope that answers the question.
Phil (34m 40s):
Let's move on to Stockopedia in Australia. So Stockopedia is originally UK and based, there actually is, just before we move on, are you covering stocks from all over the world?
Ed (34m 51s):
Yes, we are. We don't have fully global coverage, although we are planning on extending to that. The, the thing is most, so we do cover the America's and well North America, uk Europe, some of Asia and Australia, Asia, Australian, New Zealand. And we have had that coverage for some time now. But we're thinking about expanding to Latin America and some of the other regions we don't cover cuz we actually have the fundamental data. People have a great home bias in their investing. So most people don't want to go and take on other regions unless, you know, perhaps it's America, you know, everybody because everyone's got Google on, you know, Microsoft products or whatever it is.
Ed (35m 33s):
So, but generally, you know, they are, they have a very strong home bias for their investment portfolios and that's a, a thing that happens all over the world. So yes, we do have other regions and, but I think the UK is our, has been our home. But I guess cuz my actually my original co-founder is a Kiwi, very old friend of mine and I'm married to an Australian, so we always thought, well Australia would be this the region to come. This is the one. Yeah, yeah. And then maybe
Phil (35m 59s):
Those beaches to run down on
Ed (36m 1s):
The beaches. Yeah. And to be able to get out of the UK in, in winter is, I think on a consistent basis is a, is a, is a great dream. My wife and I have had, so
Phil (36m 10s):
Oh, that's been a, a major part of the business plan has it,
Ed (36m 12s):
Certainly my wife's aspect of it, yeah. But no, but
Phil (36m 16s):
Yeah, tell us about coming to Australia and Stockopedia's place here.
Ed (36m 19s):
Absolutely. So some people started subscribing from down here, may have started as expats and you know, British people down here. But then that started growing and we thought, well look, let's take this more seriously. And, and I think earlier in the year we began kind of made a commitment and thought let's try and build a business here and didn't know what was gonna happen. And then we led on to meeting Elio and Chris,
Phil (36m 43s):
Who's, who's lurking in the background just here.
Ed (36m 46s):
That's right. Elio being
Phil (36m 47s):
Very, very quiet. Say hi Elio.
4 (36m 49s):
Hello everyone. And it's very great. It's great to be here, great discussion.
Ed (36m 54s):
And, and so Elio and, and Chris Bachelor who both have great experience of, of running similar services in the Aussie market. And we got talking and one thing led to another and through the year we gradually started configuring the, the site. So we did quite a lot of development work to try and make it much more better localized for Australian investors. And there's still a little bit to go, but we've made a, a lot of configuration changes on the way that it's represented and especially for how the data's represented. We needed to sort of deal with all kinds of strange decimal place differences, how prices are published here versus the UK and there's still some more to go, but we'll be continually improving that and based on their feedback as well.
Ed (37m 42s):
And then just literally a few weeks ago we signed a partnership agreement and, and these guys are taking it on and taking on the challenge of growing it into the Aussie market.
Phil (37m 50s):
And how can listeners find out more about Stockopedia here in Australia?
Ed (37m 53s):
Well, if you can just go to stockopedia.com and you'll find lots of information on the site and there's a, you know, there are free trials of the service and also we have a, there's a lot of material available for, for reading and download on the, on the site. But also there's a chat, little chat icon in the bottom, bottom right of the page where you can actually sort of, you know, ask questions. And I know I've just done a webinar with Elio yesterday, well, today actually I think, and we are, that will be available for people to learn more and there'll be other things like that. So it, it'll be great to do
Phil (38m 32s):
Ed Croft, thanks very much for joining me today. Thanks
Ed (38m 34s):
So much, Phil. Great
Phil (38m 35s):
To be, be here. Cheers. If you found this podcast helpful, please tell a friend, especially if it's someone who needs to start thinking about investing for their future, you'll be helping them and helping me to keep this show on the road
5 (38m 47s):
Shares for beginners is for information and educational purposes only. It isn't financial advice and you shouldn't buy or sell any investments based on what you've heard here. Any opinion or commentary is the view of the speaker only not shares for beginners. This podcast doesn't replace professional advice regarding your personal financial needs, circumstances, or current situation.
Phil (39m 6s):
And thank you for listening to my podcast.
Shares for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any investments based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Shares for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation