You can beat the market — just not in the traditional way
There has been a lot of Woodford-bashing going on. Neil Woodford, the star stock picker who launched the Patient Capital Trust Fund felt there was more value in playing the long game in lesser known stocks. He bought stocks that he expected to go up over the longer term rather than through short term volatility. His mistake was also making the same fund “liquid” and allowing redemptions.
The problem he ran into was that a lot of the underlying investments were illiquid, not being traded on a main stock exchange. So when some investors wanted to withdraw their funds, they were unable to do so quickly. This, in turn, caused panic and a run on the fund, causing a fire-sale of the underlying positions which, not being liquid, were then down-valued and the spiral went down.
In essence, I agree with Neil’s idea. It is very difficult to beat the main market with standard, highly liquid stocks. It has been proven that no fund manager, no matter how good, can consistently beat the market. The “market” being the main stock indices. Markets are, to a large degree, efficient. This means that all information is reflected in the share prices. Anyone beating the market using highly liquid and heavily traded shares is considered lucky at best. It has been suggested that you’re better off investing in a tracker which, over the longer term, will deliver the same or better results than a star stock picker.
To beat the market you have two options — either be able to take huge positions that can move the market themselves like Warren Buffet does, or to move away from the “market” altogether. The value, as always, is in what people don’t see. Illiquid or non-listed stocks and other non-correlated assets are the only way to beat the market. Contrary to popular belief, this is remarkably easy to do.
Most people are not experienced investors so they can only look at the main markets for their investments. Like many, I have dabbled in some stock trading over the years, considering myself to be the next Warren Buffet. The reality however is that Warren Buffet made his best returns when stocks were not so liquid and not so easily traded by every man, his neighbour and his dog. Nowadays, even Buffet has resorted to huge positions in manufactured positions, such as backing large mergers and acquisition activity.

Nowadays, non-mainstream market investments might be referred to as “Alternative Investments”. That’s just a fancy term for something that many people have known for years. There is opportunity all around you if you look for it and are willing to put in the time and effort to understand it. It won’t be found on mainstream investment sites.
Several years ago, I noticed that ex-local authority flats in Central London were selling for a fraction of the price of the new build luxury apartments being built all around them. I also noticed that many ex-local authority flats were built for families after world war 2 and over the following 30 years. That meant that they were well built, often low-rise and, best of all, very spacious with many housing 3 or 4 bedrooms. If you wanted to purchase a new build apartment with three bedrooms you would spend over £1m, and there are very few of them.
By contrast, I was able to pick up four bedroom flats for around £400,000 in the same area. The families that had lived in those flats had grown up and kids had flown the nest, so many were put up for sale. Many had bought at a fraction of the price in the 1980s and 1990s under Margaret Thatchers Right to Buy scheme encouraging home ownership and were very happy to cash out. I also noticed that students and young professionals want to live with their friends in Central London and, given the shortage of 3, 4 and 5 bed apartments, these flats I was looking at would be in very high demand.

I tested this theory on a 3-bed flat I had purchased in Waterloo in 2001 for £200,000. I completely refurbished it bringing it up to a good standard and advertised it for rent. I was inundated and there was a queue of people on the open day. In the end, several groups of friends that wanted to rent the flat competed against each other and I rented it for £600 per week. That’s a damn good return on equity. Over the next few years I did the same again and again and built up a decent portfolio.
My point is that you can find market beating returns, you just need to figure out where to look. People often ask me how it is that Shojin is able to offer such good returns. There must be a catch, or perhaps it’s a scam. It would actually be easier for us to offer lower returns that people have more belief in, but then that wouldn’t be fair on investors. The fact is that higher returns equate to higher risk, and there it is.
When you look at alternative investments, there is higher risk. The most notable risk is the lack of liquidity. You cannot exit your investment as easily as you can a FTSE 100 traded stock. There are also other deal-specific risks in alternative investments, and it is essential that investors understand these. It is especially important to look at who is managing those risks and whether they have a good track record in mitigating those risks. Ultimately though, when you look at alternatives, in many cases the higher returns far outweigh the higher risks.
As long as you are careful in spreading your risk through holding a diversified portfolio, alternatives can help to deliver market beating returns. Unless you are going to do it yourself, it is essential that you do find reputable firms to work with. There are many scammers and chancers out there so carry out your own due diligence on the opportunity as well as the company behind it. Also never, ever, work with a firm that is not itself regulated by the FCA. While the FCA licence is no guarantee that the investment will be fruitful, at least you know that the firm and the people behind it have been vetted and are considered suitable for running such a firm.

So Woodford had the right idea but, having spent his life in liquid markets, was too keen to offer liquidity. Had he not done so, he could have done rather well. But then, many of the institutional investors in his fund may not have invested because their mandate may require them to hold only liquid funds. As individuals however, we can all make direct investments into funds like Woodford’s and, personally, I believe that in the long term funds like his should beat the market. We need more fund managers like Neil Woodford.
The opinions expressed in this article are my own. Nothing in this article should be considered financial advice. With investments, there is always a risk of losing your capital and I would suggest that investors always seek formal financial advice when considering investments.
Originally published at https://www.linkedin.com.
