So Long P2P

When I say 30% discount, I don't necessarily mean price to net asset value....I include share price falls driven by recent events (brexit).  So for CP things like SLI, RGT, TOWN (which yield reasonably well)....some of which have bounced back 10%+ since I bought them recently, I considered are 30%+ undervalued (which will be realised in time). Likewise for regular equities, I also bought HSL, MTU and SCP.  They're trading 10-15% discount to NAV but I believe prices are also depressed generally as sentiment is so bad (perhaps by an additional 20-30%).

My point is, P2P loans just keep trading at par and the valuers are notoriously slow at revising their valuations down so I see much more value in investing in investment trusts. My belief is that once brexit is resolved and we have some clarity (whichever way that is, and I'm kind of beyond caring which way now) then UK assets will reprice upwards and I want to benefit from that (and we have seen the move already in the past 3-4 weeks).  If this happens P2P loans will continue to trade at par....the risk reward is skewed.

I wouldn't read too much into P/E ratios.  Even if a stock has a P/E ratio way over current averages or historical averages it doesn't necessarily mean it's expensive.

For example, McDonald's traded at $1.10 a share in 1980 and by 1990 had rallied to $8 with a P/E ratio 18.  Many people probably said, it's gone up 8 times in value and has a higher than average P/E ratio and so is well overpriced.  Today it closed at $182.....even if it had been priced $22 a share in 1990 with a P/E ratio of 50 in 1990 it still would have been 'cheap' and outperformed the marked in the following 28 years....despite having a P/E ratio of 50.

As to the FTSE250, in my experience (of trading markets for a living for a long time), the thing markets hate most of all is uncertainty.  In my view any conclusion to the Brexit uncertainties will in the medium term provoke a positive reaction and rerating upwards....and yes that even includes a no-deal outcome. The UK economy is dynamic, adaptive and flexible.  I would say it's undervalued (and have backed that view by moving significant money into it recently), but it's just my view and it's views that make a market.

An alternative way (albeit still very crude) of looking at this is to say that since the start of 2016 the S&P 500 is up 23% while the FTSE 250 is up only 7%.  Add to that, many UK small-mid cap investment trusts are trading at 15% discounts to NAV's then you get to my 30% undervalued figure.  That doesn't even take into effect the big fall in the GBP.  In USD terms the gap is significantly larger.

When the all time high happened is not really relevant.  On that basis, the FTSE 100 is only a touch higher than where it was in 1999 which makes it very cheap (GDP has grown a lot since then).

IN 2008-9 London property prices fell by up to 25% at one point (I know I was a buyer back then).  What's more the bids just fell out the market - if you were selling at certain points there would have been no bids.  That takes me back to one of my earlier points of selling into a distressed markets which can be devastating for P2P.

Having said that, most P2P loans are written on commercial property.  In 2008-9 commercial property prices fell by over 50% and the liquidity was even worse than residential.....but if P2P had existed then you would still be buying in at par.  That is not good value.  I am still invested in P2P (for other reasons) but have reallocated some funds to equities.

I've judt checked on land registry for price decrease during the 2009 crash.

In the uk it lost around 20% of its value and in london 16%.

And the decrease is comparing peak to lowest value.

So it's not as bad. You certainly have some 25 to 50% decrease but these are outlier. Not average.

The evidence shows that almost no active funds outperform their index and if they do it is not repeated.

We’ll have to agree to disagree but my opinion is backed up by a lot of evidence.

Do you really think you can research companies than all the highly paid, phd, analysts out there?

It is almost definitely luck. Not trying to offend but I’ve heard it all before

I have some sympathy with what you are saying. I am a firm believer that many people think they are clever when in fact they are just lucky.  For example if you had a million monkeys picking stocks by pressing random buttons, some would outperform the index significantly in a year, a small number would outperform the index significantly 10 years straight. I wouldn't invest my money with those 'lucky' monkeys though.

I do however think there are some talented people with a strong understanding of what makes a company strong, likely to succeed in the long term and can pick these companies out.  These are people who invest for the long term, not day traders and they typically buy and hold for several years (if not decades).  I'm talking the likes of Warren Buffet, or on smaller scale guys like Nick Train or John Lee (who is a rare example of an ISA millionaire).  I don't think these guys are lucky, they do research and have a good grasp of what makes a company investable in the long term.  I don't like to pick stocks myself (but do on occasion for fun) but I choose fund managers who share the values and trading style outlined......and I outperform the index.

One other thing...even if you do prefer passive trackers (which is a valid view point), I would still look at investment trusts to take advantage when there are large discounts.  If I can buy a trust that is a closet tracker but is at a 20% discount to net assets then that is much better value than buying a tracker, even if I have to pay an extra 0.5-0.7% in fees a year.  I would look to buy these trusts and switch into trackers when the discount narrowed as sector sentiment improved.

Well of course these funds are stock pickers but given your beliefs re luck in stock picking then perhaps you would consider a fund that has a lot of holdings from a particular index to be close to a tracker?

One of the key drivers of premiums/discounts of investment trusts is sentiment to a given sector (others are underperformance!).  Sentiment is particularly low for the UK market but discounts have narrowed from the lows recently. A good website to look at this is www.theaic.co.uk/aic/find-compare-investment-companies if you want to lok at various sectors.

Some of the trusts I have bought recently (partially because of the discount) are MTU which is benchmarked against the UK Numis smaller companies index. It's trading at a 15% discount despite having trebled returns of its index since launch in 1995.  I bought in last year when the discount was in excess of 20%.    SCP invests in the UK midcap sector, again at a 15% discount, yielding 3.2% and is 50% ahead of its index since launch.

May not be for you but I am happier buying a trust that has significantly outperformed it's index over a 20y period at a 20% discount to underlying assets than a tracker of the index.  In theory you could buy all the shares of the trust, instruct the board to liquidate all holdings and realise the 20% profit.  I tend to stick to trusts when there are large discounts and when they get close to par or a premium I consider switching to ETF's.