What does Adam Fayed think about eToro?

In this blog I will list some of my top Quora answers for the last few days. 

If you want me to answer any questions on Quora or YouTube, don’t hesitate to contact me.

What does Adam Fayed think about eToro?

Thanks for asking for my opinion on this investment platform. There are a number of points to make here.

Firstly, it isn’t a bad investment platform. There is nothing inherently wrong with it at all.

In all honesty though, most do it yourself (DIY) platforms in the majority of developed markets have similar features now.

The bigger issue isn’t EToro, it is more how it is used by many people.

Vanguard, the world’s second largest fund house which also has its own DIY platform in some countries, has done some excellent research which has looked at how the average investor performs vs the market.

Various studies, including the ones below, have shown that advisors can deliver “alpha”.

Not necessarily beating the market, but in the ability to improve your returns.

Putting a value on your value: Quantifying advisor’s alpha

There is a simple reason for this. People sell low and buy high. We saw it in 2000, 2008 and also 2020.

Fidelity released a study which showed that 30%, yes 30%, of over 65s completely sold out between February and May this year.

That isn’t even factoring in those people who partially sold or stopped investing due to emotional reasons like fear.

Look at Quora during February and March. All those panicked questions about the markets crashing.

All the usual slogans and comments – “this time is different” blah blah.

Of course, this time wasn’t different. Markets recovered, but then people started panicking about the US Election in 2020.

Just as they panicked in 2016…..and just like in 2016 markets went higher.

So, platforms like eToro are fine if somebody has the self-discipline to deal with the ups and downs of the market, in a robotic way.

The only major “issue” I have with eToro is their advertising implies that you might miss out on some big events if you don’t trade.

We have all probably seen these adverts:

Yet good investing isn’t about always finding the next Amazon or Netflix.

It is often about doing little, and just patiently accumulating. Doing nothing was certainly the right thing to do, for most people at least, during the crash of 2020.

That is where the value of advice or guidance is – the emotional support.

Not everybody can afford that. For those people it is a good starter DIY platform.

I heard that the average client only has a few thousand invested on eToro – many have 2k, 4k and 6k even though some have invested a lot.

For that kind of money it is fine.

What is the most important and the most overrated skill to have as an entrepreneur?

Traits or attributes are more important than skills. That is because anybody can learn skills. They aren’t as rare as traits.

One of the most important attributes, and seldom mentioned for that matter, is the ability to control your emotions to a greater degree than your competitors.

Most private business people get emotional about “their baby” – their business they started from scratch.

Yet life isn’t always fair and those that accept that can thrive. Let me give you an analogy.

Let’s say you are a sports star and one of the most successful players in the world often cheats.

We have all seen moments like this in sport

But let’s say that sports star has better statistics than you. They score more goals, or are better in other ways.

An emotional response to the cheating would be to assume that they are only winning due to the cheating.

A more rational response would be to admit that they are doing better than you, and as a result of that investigate why that is the case.

If there is a reason beyond cheating that could explain even just 1% of their success, it makes sense to take note and see what you can learn from “the cheat”.

The same in business. Many people get emotional when they see things like:

  • A social media star making millions selling courses in subjects that they have never been good at in the real world, when “I know more than they do”.
  • A business owner gaining more traction in the market even though their product, service or knowledge is inferior to your own, especially if they are using short cuts.

Yet a more rational response is to ask some tough questions. Why are people “beating you” if they know less, or their products are inferior?

What have they taken advantage of that you haven’t? What can be learned from their success?

We see the same things in politics. When Trump won in 2016 as a political outsider, some people just thought it was ridiculous that a man with zero experience could become President.

Yet a few of his smarter critics learned from his success. Alexandria Ocasio-Cortez went from being a waiter to beating Joe Crowley in one of the biggest political upsets of recent times.

I personally think that even though she is a huge critic of Trump, she learned from his social media campaigning.

She spent less money, but got more traction, by using newer tactics.

So, there are always two types of people. Those that think life isn’t fair and we should deal with it, and those that think life isn’t fair and we can do something about it.

But even those in the latter category often fall into two groups.

Namely, those that merely complain about unfairness, and those that learn key lessons from that unfairness and harness it for their own goals.

Is it better to invest or save money?

If you think about something, why do banks give people interest rates on their money?

They can make more money on those deposits and pocket the profits.

In some countries, those fixed return investments that pay higher than the normal rates are only possible because the bank are making a profit by investing in other projects or financing other projects.

Of course, how banks make money on people’s savings depends on the country, regulation and many other things.

The point is, saving money in the bank has been a losing game compared to investing “forever”.

It is just less volatile as per the graph below which shows the volatility of stocks, and to a lessor extent bonds:

The only thing that has changed is that since 2008, interest rates have been low (or even 0%) in most developed countries.

Even in many developing countries, interest rates have consistently been below inflation.

So, whereas historically the US Stock Market has done 10% (6.5% after inflation) but with different periods doing better than others, and cash doing 1% or 2% above inflation, now you have to take a direct loss to inflation.

Historically people only had to take a relative loss to investing. Now there is an absolute loss to inflation.

The thing is it all compounds as well. Somebody who has left their money in the bank since 2008 has lost about 1%-3% per year to inflation for 12 years.

Compounded and that is a 25% loss in some cases. That isn’t to mention the loss to devaluation that has happened to currencies as diverse as the British Pound, Nigerian Naira and South African Rand.

I was speaking to a friend about this. He has been an expat for years and left his 20,000 Sterling in the bank.

In 2007–2008, that was worth $40,000. Now it is worth about 21,700 pounds or about – about $28,690 today.

That is a 30% loss to devaluation + a 25% loss to inflation over 12 years………$28,690 buys you much less in 2020 than it did in 2007–2008!

With that said, cash does serve some useful purposes. It can give you a cushion in case of unexpected emergencies.

Cash, therefore, isn’t an investment. It helps with cashflow in some situations.

Ultimately, people need to put money to work. That is one reason why almost all wealthy people invest in assets (investments, digital assets and private businesses).

Indeed it was the central theory of Thomas Piketty’s famous book Capital in the 21st Century that one of the biggest drivers of inequality is that assets like stocks go up higher than wages and cash in the bank.

Over time, this compounds, despite the volatility in assets in the middle.

People shouldn’t fear volatility though. Look at this year. There was a huge crash and the recovery happened.

Even in 2008–2009 it only took stock markets about 3 years to recover.

Why should you not invest in China?

We have to make a distinction between investing in private companies vs the stock market.

For private companies, as Andrew has said below, there is a lot of mercantilism.

That is a huge negative, even though China has a huge market for foreign companies to tap into.

China doesn’t have the rule of law in the same way as a democracy can.

It isn’t a “stable” system either, it is just a “non volatile” system Or at least low-volatility.

Long-term, as Nassim Taleb and other experts on probability have shown, more volatility systems are actually more stable than non or low-volatile systems.

For that reason I would bet on India and its messy democracy more than China, even if it doesn’t do as well short-term.

It is human nature to assume the opposite. That is why people were shocked by events like the collapse of the USSR, or are surprised to know that more volatile assets (like stocks) tend to outperform non-volatile assets (cash) long-term.

Or even that the most volatile stock exchanges, like the Nasdaq which went down about 70% from 2000–2002, has outperformed less volatile ones.

Anyway, getting back to your question, the main reasons not to invest in Chinese Stocks specifically are:

  1. The way the Chinese Stock Market operates. Normally, the fact that the Shanghai Composite has under-performed long-term (as per the chart below) would be seen as a buying opportunity. The market was at 6,000 in 2006 and is at 3,400 today. In China’s case though, the market is dominated by smaller retail investors, whereas the US and some other markets are dominated by institutional investors like banks and hedge funds. Therefore, the Chinese markets are heavily dependent on smaller retail investors which makes it more risky in some ways. The volatility doesn’t make it risky, but that fact does

2. You can get access to some of the best Chinese firms on the US and Hong Kong stock exchanges.

3. There is little or no correlation between GDP growth and the stock market. People who bought emerging markets in the 2000s, or sold out due to a “coronavirus recession”, made that mistake. China isn’t an anomaly either. If we compare MSCI Emerging Markets to the S&P500 long-term, the S&P500 has actually done better, even though growth has been higher in those markets.

4. China will shortly have an ageing population issue due to the One Child Policy. Now this isn’t automatically an issue for stocks because the best Chinese firms will be international, and as mentioned before, stocks and growth aren’t strongly connected. Therefore, if China’a growth slows a lot, we can’t automatically say that stocks will do badly in the Mainland. Yet it is still a risk and unlike the US and Europe, it isn’t good at attracting a lot of immigrants.

5. There are now more people in China trying to get money out of the country, than those that want to bring money in.

6. Even most Chinese locals prefer to invest in local and overseas real estate, and international stocks, vs the local stock market due to many of these reasons alluded to.

Against that though, the Chinese stocks markets do look undervalued and some of the issues I have identified here (like the lack of institutional investors vs a more developed market like the S&P500) might be addressed in the future.

So, having 10% in China won’t harm you, and you shouldn’t be concerned that China is in MSCI World or MSCI Emerging Markets.

That will give you indirect access to Chinese equities which look relatively cheap.

Furthermore, every dog has its day in investing. In much the same way that the Shanghai Composite outperformed from 2000 until 2008, it will have its period in the sun again.

Could it be in 2021 or 2022, just as it has had a decent 2020? Maybe. Nobody knows for sure.

What we do know, however, is that China’s biggest risk is its one party (and of course corrupt) system.

Many Chinese consumers are actually very savvy and sensible about this.

The majority of wealthier Chinese people own overseas real estate and stocks because they know about the risks associated with putting all their eggs in the Mainland China basket.

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