#114: The Zack One Lap Index

Lesegisha once again showed us the error of our ways. In a last-minute attempt, he managed to save the Listener Love Index from pure obliteration. Here's his argument:

• Although it's been down 5% on average and around 10% lately, it's still a good example of diversification considering how far down Pallinghurst and Steinhoff have been.
• Shares like Kumba that are up by really healthy margins are a good testament that there are also some good picks, which easily could've been missed.
• My main qualm (and lesson) is that we are killing it after just one year. Typically a market cycle lasts about seven years, so it makes sense that over a one-year period a portfolio is underperforming.

It may seem like a trivial point but here's the magic in it.

The law of probability and averages says that the method we used will underperform over half the time and then overperform the other half, giving us an average return over the market cycle.
I concede there's no telling where in the cycle we entered, so it could get worse before it gets better or it really could just go bad. Equally so it can shoot the lights out.

The most important variable then becomes time. The Love Index shows that by our nature we are impatient with our stock investments if we can ditch them after a year (arguably most of us had given up months ago lol), while we can put up with a bad pension fund or retirement annuity to retirement.

"I think we measured a long-distance run using a 100m stopwatch. I would've loved to see how the index performs over a longer period (minimum 5-7 years) and I probably will be tracking it on the side. I'm almost certain the dogs in the portfolio won't recover but a lot of the good-ish companies will outperform the market, especially if dividends are factored."

Shortly after recording, Rudabager also made a plea in favour of our unloved index, "I think the love index was perfect. It was made up of votes from motivated investors who might imagine they have some insights. It was still a mess. That's a much more valuable lesson than it crushing the STX40 and a bunch of people deciding to put all their money on it."

As a result we now have two competing indices. It's been a year since we made the Love Index, so it's due a rebalance. If we get 17 votes to remove a company, it goes. 17 votes for a new company gets it in.

The Zack One Lap Index

In this episode, Zack Bezuidenhoudt compiles an index of beauty. I use the opportunity to ask almost every index question I've had for a year. It's a wonderful time.