Lecture at LSE by Victor Haganis

Introduction

• Hosted by Financial Markets Group at London School of Economics (LSE).
• Christopher Polk introduces Victor Hoganis, speaker of the event.

About Victor Hoganis

• LSE alumnus with a B.Sc. in Economics (1984).
• Formerly at Salomon Brothers, co-founded Long-Term Capital Management.
• Founded Elm Wealth in 2011, introducing dynamic index investing.
• Co-author of "The Missing Billionaires: A Guide to Better Financial Decisions."

Lecture: Why I Stopped Picking Stocks - The Risk Matters Hypothesis

Personal Anecdote

• Discusses conversations with his mother who is a stock day trader.
• Attempted to persuade her against frequent trading due to costs and risk.

Cost Matters Hypothesis

• Originated by John Bogle of Vanguard Group.
• Active stock portfolios, as a whole, mirror the market portfolio minus costs.
• Average mutual fund returns are typically 1% lower than index returns.

Zero Commission Trading

• Rise of zero-fee trading apps has increased retail trading activity.
• Comparison of stock trading apps and sports betting apps.
• Despite zero fees, other invisible costs like risk remain.

Risk in Day Trading

• Overnight returns vs. daytime returns: Most market gains occur overnight.
• Daytime trading often results in losses even if the market is generally up.

Risks of Stock Picking

• Active management typically incurs a risk premium cost.
• Higher volatility of individual stocks vs. diversified investments.

Risk Matters Hypothesis

• Extension of Cost Matters Hypothesis.
• Argues that average risk of active portfolios is higher than the market portfolio.
• Therefore, risk-adjusted returns for active portfolios are lower than for passive investments.

Practical Implications

• Risk has tangible impacts on investment outcomes.
• Importance of maximizing risk-adjusted returns rather than nominal returns.

Conclusion

• Advocates for more awareness around risk management in personal investing.
• Suggests improvements in metrics and nudges for better financial decision-making.

Q&A Highlights

Key Questions

1. Global Asset Allocation:

   • Encourages investment in liquid, low-cost, large asset classes like global public stock markets.

2. Market Efficiency vs. Indexing:

   • Rising indexing might make markets more efficient by minimizing inefficient active trading.

3. Young People’s Financial Advice:

   • Focus on education, career, and housing.
   • Invest in equities and develop saving habits early.

4. Risk and Long-term Holding:

   • Long holding periods might mitigate some risks.
   • Diversification remains crucial.

5. Market Concentration Concerns:

   • Larger companies in indices reflect market trends.
   • Global diversification can reduce concentration risks.

Closing Remarks

• Importance of risk awareness in investing.
• Urges the use of index funds to mitigate unnecessary risks.
• Concludes with applause and thanks to Victor Hoganis.