If trading is to be restricted in this way, wouldn’t it make sense to have a clear percentage limit to make the process transparent to the outside as well? The process is a bit odd, as it essentially means that due to the price change, the recommendation aged like a banana and the house’s internal recommendation has actually already been updated, but this isn’t visible externally at all.
What added to my confusion was that I would intuitively think that if trading permission needs to be requested, it would be requested from the analyst. They should be the one to know best whether it’s still worth selling the stock after the price change, and they might, of course, have a research process already underway discreetly.
The exact model of this restriction has changed slightly over the years. A single percentage limit cannot/is not wanted to be set, partly because companies’ volatility/risk profiles are so different that the same limit doesn’t suit everyone.
Perhaps it should be further emphasized that this rule, like all our trading rules, applies to the model portfolio just as it does to the staff in general, and their purpose is to ensure that in all situations investors have the opportunity to act first (blackout period after reports / while research is ongoing) and, on the other hand, to ensure that nothing is done that conflicts with the recommendation or a possible future recommendation. There is absolutely no “internal recommendation”; rather, as stock prices change, a situation may arise where, in practice, the recommendation or target price needs to be updated (or the price needs to change again), and we do not trade before that. It is not enough that an analyst thinks it would be wise to sell (or buy); the public message must be clearly aligned with that.
In fact, usually, the analyst covering the company is responsible for determining whether trading can take place based on the guidelines. In unclear situations, the matter is then discussed with, for example, the head analysts, though that is an exception.
It would be nice if the reports included a return graph and a table similar to the model portfolio’s.
The video revealed that they narrowly made it into the black last year, but the return percentages were secretively left out. They lost to the indices and “must do better”.
I also noticed that the return wasn’t stated numerically in the video. We certainly don’t want to be secretive, so it’s worth mentioning that the return for last year was 1.1%. Just barely in the positive, then, as mentioned in the video
The performance graph hasn’t been added to the site yet, but we aim to present the figures even better in future portfolio updates.
I do follow what Pietari is doing a little bit. eToro’s commissions are high enough that I haven’t joined, but it would certainly be interesting to hear about experiences if anyone has been following him. The returns are quite good.
By the way, today the Inderes portfolio dropped below €300k. It’s quite a steep downhill slide, and it seems a bit like we’ll still have to wait for growth when it comes to small-cap companies.
Since January 2016, Inderes’s portfolio has risen from 279 → 607, i.e. approx. 117%.
During the same period, the benchmark index has risen from 137 → 363, i.e. approx. 165%.
The model portfolio has been beaten by the index over a surprisingly long period. The returns from the first years have a surprisingly large impact on the generation of excess return for the entire period.
This is solely about the mean reversion effect. Inderes can’t predict any better than anyone else; they got lucky in the beginning and, as we know from poker, luck evens out in the long run.
I have also been thinking about this the same way. The theory is quite possible. In the end, a lot also depends on luck.
Another possible theory is that the model portfolio team has changed since the early days and the current team’s level is not as high as it was during the years when they were pulling ahead of the index. This is unpleasant to say out loud, and the intention isn’t to disparage anyone, but if you believe that stock picking can yield excess returns (without particularly good luck), you must also believe that there are differences in the abilities of the pickers.
These theories are not mutually exclusive and can apply at the same time. Initially, there was a better team with good luck, and now a weaker team with worse luck. You can see the result in the graph.
Edit: There are certainly other possibilities as well. It could be that the current team is much more capable, but just really unlucky. If you wanted to be mean, you could say they are completely incompetent but, thanks to good luck, ended up with the current performance (a very unlikely alternative). It takes a very long time for the role of luck to be disregarded.
“So if the portfolio’s annualized volatility is 20 percent (which is slightly more than the historical average of the S&P 500 index), an annual alpha of five percent requires an investment horizon of about 62 years”
An interesting point and a way to try to answer the question using statistical mathematics.
Looking at the model portfolio’s return from the beginning to the peak of the COVID bubble, the 10-year annualized return was 28%. Thus, according to the chart shared by Henri, the model portfolio would have statistically proven its skill in generating outperformance. The following 5 years have shown that statistical mathematics didn’t help here, as the return has been -13% per year. And the portfolio’s value has halved.
Of course, the outlined model would provide a rough indication based on common sense. The more you beat the index, the less time you need to do it to declare yourself an alpha-Ilmarinen.
One must always remember that beating the index in the long run, e.g., over a 20–30 year period, is extremely difficult. Very, very few professionals are capable of it. Almost every contributor on this forum as well will lose to the index over a period of decades. If we talk about a shorter timeframe, say 10 years, luck plays a very large role in the success achieved.
So, if a model portfolio is able to beat the index over a 20+ year period, it’s an impressive feat. However, I wouldn’t bet a single penny on it happening.
I, on the other hand, think it’s very easy. Buy all the stocks in the index, but leave out a few of the worst ones and those going bankrupt in the near future. Following such a model portfolio is just incredibly boring, though, so you have to try to pick winners instead of just excluding losers.
I would hope for some kind of strategy and objectives for the model portfolio. Simply “picking random companies whose financial statements look good” might not be quite enough. I see that there is quite a lot to be gained in the market by following, for example, megatrends or the development of different industries.
