Excellent point @ArrowTrades

I should also mention that there's no rule that says we have to be small cap focused. It was never designed to be specifically for that -- it's just how things evolved.

So, if you want, your SM portfolio can be entirely focused on the large caps. Or even most of the ETFs. Anything goes!

In terms of the overall returns, I reckon it's more a function of the starting points for each index @Vandelay . However your question is comparing apples to apples in that you are only looking at the past 1 year. Perhaps it gets back to when people created their portfolios. And what prices they paid for their shares. And if they stubbornly held on while some of those positions had share prices heading south at a good clip.

If we look at the Strawman Index (non-premium members) - their worst position in their top 12 is AVA (at #4) with a -10.79% p.a. return. They have 5 positions in their top 12 with positive returns. We have three in our top 12 in the green.

Alcidion (ALC) is a positive for them, but it's returned -41.71%p.a. for us. So it's lost us -41.71% per year. That has to be because the starting point in our index must be the ALC share price when our index was created rather than what those members paid for their ALC - which would have been PRIOR to the Strawman premium index being created - and at much lower prices for the most part - just as is demonstrated in the non-premium Strawman Index where they have a +0.97%p.a. return on ALC - and it's #3 in their index so held by more people.

Our index has 8CO (8Common) at #8 with a -36.93%p.a. (negative) return. 8CO is not in their index. Over 60 Premium members hold 8CO.

Both indices contain 3DP - at #6 with a -62.45%p.a. (negative) return for us, and at #14 with a +15.47% (positive) return for them.

HAS to be that our index took the share prices on the day it was created as the starting point, not what people had paid for those shares.

My understanding is that the starting point is the share price of the company on the day it is added to the index, or the closing price on the previous trading day more likely, and in their case those shares were generally added to their index before our index was even created and at lower prices. When our index was created, the share prices that day - or the previous day - were used as the starting points.

And our index was created on August 3, 2021.

If you look at the Strawman Premium index and go back to the start and hover over that starting point, that's the date that appears - 3rd August, 2021.

That's it, in a nut shell. Starting at the peak, with nowhere to go but down, until the market gets it sh!t back together and resumes its longer term uptrend.

OK, however... if you look at the relative performance of the two indices over the past year, the share prices of the companies they hold have declined by less than the share prices of the companies we hold.

But... Unless you equate share price volatility with risk, I don't think you can assume that we hold riskier stocks, just that the share prices of the companies we hold have been more volatile.

Possibly that's because we have some high conviction holdings that we do not cut loose easily. They say the more research you do on a company, the happier you are to hold them when the price is falling, because you're not as worried that there's something the market sees that you can't see, or hadn't thought of. It could still happen, but the liklihood is less if you've done a good amount of DD on a company.

But there are certainly some less risky stocks in their portfolio as well, like SOL and NDQ (the Betashares NASDAQ 100 ETF). Less risky, but the argument is that the upside is not going to be as explosive as a small cap's share price might be when they get it right, or get taken over. So I would say SOL and NDQ may have less risk to the downside but also less upside potential, i.e. the upside is somewhat limited compared to companies that can potentially 10-bag.

I think the all-time returns are explained by the relative starting points of the two different indices, and that the 12-month returns are really not too dissimilar to each other (-34.5% vs. -27.9%) - and I also think that 1 year is too small a timeframe to draw any accurate conclusions from with a high degree of confidence.

That's my two cents anyway.

@Vandelay as i have written several times before active returns are a function of skill, luck, risk and style bias. the SM index, imo and as i think i have pointed out in the good times, is almost totally comprised of high beta stocks with considerable styles bias, (micro/pre profit). comparing it to a b/m full of mature low growth companies (banks miners etc) makes little sense to me. in fact i have written a piece on appropriate of b/m hopefully post one day. in summary i would expect the SM portfolio to o/p in a strong bull mkt and u/p in a bear mkt.

when you compare a portfolio to an inappropriate b/m you need a full investment cycle, ie full bull and bear mkts to assess whether value is being added, assuming style/risk etc is maintained at the portfolio level.

thats my view could be wrong.

I think @Bear77 & @Solvetheriddle have nailed it.

At the end of the day, the SM Index simply tries to measure what a collective portfolio would look like based on the largest holdings across the entire membership. There's a hundred different ways we could do this, but whatever approach we use the most important thing is consistency.

Perhaps we are missing something @Vandelay

Are we asking the right question to begin with?

We could talk about why one Strawman group is doing better than the other, or perhaps we should be asking ‘why are both groups performing well below the market for the last 12 months?’.

Perhaps the question is ‘How can we improve the performance of the the Strawman index as a group?’

Should we be questioning how the top stocks become so popular?

Is there too much ‘Groupthink’? Investopedia defines Groupthink as ‘a phenomenon that occurs when a group of individuals reaches a consensus without critical reasoning or evaluation of the consequences or alternatives. Groupthink is based on a common desire not to upset the balance of a group of people.’

I don’t think Straw Folk can be accused of ‘Groupthink’…but perhaps we could do it better?

It is often uncomfortable to have your ideas challenged. It is often seen as being negative. Should we be going out of our way to encourage more contrary views and opinions and welcome it?

Could Edward de Bono’s “Six Thinking Hats” help us on Strawman?

"Six Thinking Hats" is a process groups can use to plan the thinking process in a cohesive way, and to think together more effectively.

Wearing the ‘Blue Hat’ we could think about the process needed to consider an investment idea, then work through each of the ‘hats’ in order as a group. Some ‘hats’ might need more context for investment ideas discussion?

Quoting from Wikipedia, “Because everyone is focused on a particular approach (ie. Thinking Hat) at any one time, the group tends to be more collaborative than if one person is reacting emotionally (Red hat) while another person is trying to be objective (White hat) and still another person is being critical of the points which emerge from the discussion (Black hat). The hats aid individuals in addressing problems from a variety of angles, and focus individuals on deficiencies in the way that they approach problem solving.”

It’s just a thought that might be worth a try on a few investment ideas. The idea would be to encourage and accept more critical thinking and reduce the risk of ‘Groupthink’.

Is there anyone wearing a black hat with a view? :)

Cheers

Rick

@Vandelay interesting stuff, a few points, i think i understand your points and they are valid.

i felt like a party pooper in the bull market, pointing out risk (beta) was helping the SM portfolio, now i say the opposite. it will take time to assess whether value is added over the complete cycle. there were some numbers from 2017 (the old portfolio) maybe they are helpful, if people are keen enough. point to point performance analysis should always be assessed under the conditions prevailing at each end point. a fund manager game is to cherry pick points favourable/unfavourable. im just pointing out the current conditions are unfavourable for SM port. i have no axe to grind at all on this, i just call it as i see it having looked at portfolios for 30 years.

very few fund mangers can change style successfully, most just keep to their core competency eg try and be the best growth manager etc even though that means period of u/p. as you point out there should be judgement but it is over a full cycle for whatever strategy. it needs time for risk, luck and style bias to normalise out. in practice the real comparison for fund managers is against their competitors that match their style-- i think thats fair. when i was running style biased portfolios i would watch the competitors more than the market, so did the consultants. hard to find a comp for SM.

sure it looks bleak for SM port but remember it was created almost at the peak so it is coping the full impacts of the bear mkt. nothing you can do about that except adjust expectations. there is no guarantees that SM will o/p over the full cycle of course that depends on the stock picking over time, again fair enough, but it needs time to play out.

perhaps many SM people, like myself, put in the riskier names into SM as opposed to their full RL portfolios. is that right or not? dont know, but id rather SM come up with new ideas than be filled with CSL, REA like my real life portfolio.. definitely i wouldnt want a style change. just thinking i guess, it in part comes down to what you want from SM, and for me its new ideas and id rather that, knowing full well the risks involved of smaller stocks, than trying to o/p in a bear market by having CSL TLS etc. that is just my view.

finally i dont think their is anything magical about the index except you can buy it cheaply. it is a point on the risk / return spectrum (as Howard Marks has explained), you may like that spot or not. you may choose to be less risky or more risky and judged over time.

sorry for the long rambling response and i hope some of it makes sense. i can be accused of being too judgemental in bull markets and too considerate in bear ones. :)

The lesson here @Vandelay is do the exact opposite of whatever I do! Just like inverse cramer, it's likely a winning strategy :)

In answer to your question, I try to keep focused on the underlying businesses. If they are largely on track, and the price makes sense relative to their trajectory, I usually just try to ignore the ups and downs (easier said than done).

For example, looking at my 5 largest holdings (which account for 60% of the total weighting):

Stealth Global -- revenue up 18% in recent half, profitable and FCF +'ve, on track to double revenues and expand margins in the next 3 years. I get to own a piece of this for something like about 0.1x revenues, and probably something like 5-6x forward NPAT. Thesis on track, but my position down 18%.

AVA -- Double digit organic sales growth and a near 50% lift in sales orders for recent half. Well capitalised and expecting at least $70m in revenues within 3 years, as well as 25% operating margins. Likely trading at roughly 20x forward earnings. Thesis on track, but my position down 11%.

Jumbo -- Profitable, defensive business delivering 18% revenue growth in the recent half and with good tailwinds. $60m in cash and on track to sustain double digit EPS growth in coming years. On a forward PE of about 20 or so. Thesis on track and so far upper single digit annualised return.

Catapult -- the black sheep of the family, this one has been plagued by poor cost discipline. At the same time, ACV has been growing at a strong rate and group is targeting 40% operating margins at scale. They are the gorilla of the industry, which itself is growing strongly and should be relatively defensive. It's all about execution, of course, but at something like 1.5x ACV it's relatively cheap for a growth stock. Revised thesis on track (I think) but it's been a capital killer so far.

Envirosuite -- an increasingly dominant player in a niche industry, these guys have been growing their recurring revenue at a 15%pa-odd pace for a while now, and looking as though they are approaching an inflection point in terms of profitability. Well capitalised, solid sales pipeline and improving gross margins. Despite the pull back, they've been a great long term investment for me (buying at very low prices and selling when things got a bit silly). Thesis on track and shares trading at 2x ARR

These are very short summaries, and i've only highlighted the positive aspects. But to my mind the last 12 months share price performance is not reflective of what's happening under the hood. To be fair, perhaps the market's reaction is more about previously unreasonable valuations -- ie. Prices went from 'expensive' to 'fair' rather than 'fair' to 'cheap'.

You can also argue that the real question isn't whether you can make a case for these businesses, but whether or not they represent the best risk/reward opportunities available on the market. (Probably not)

Nevertheless, I've been through a few cycles in my investing career and am no stranger to painful and enduring periods of underperformance. But I also know that as long as the underlying expectations are more less right, it'll all work out in the end.

What I genuinely hope is that no one here is silly enough to blindly follow me or anyone else (as i'm fond of saying, you can borrow an idea, but you cant borrow conviction). Moreover, what is really valuable is if others can challenge me on my reasoning, and offer some new ideas.

As @Rick rightly points out, groupthink is a big risk for us, so we need to be alert to it.

Anyway, I have no idea when the worm will turn, and I suspect things get worse before they get better. I could easily see these all selling off more aggressively if there's any material financial contagion. But I'm useless at that stuff, so I'll just stick to my knitting and stay focused on the longer term.

@Hackofalltrades i agree with this. If we could navigate this as a community of intellects who acknowledge what a loser a keyboard warrior is some constructive, yet opposing views would be really good. If we can’t acknowledge this then really this just becomes a financial Facebook and the community ‘feel’ would evaporate.

@Strawman how about a trial of the feature? Or something similar like a poll.

Give a negative and a positive response button and show the results as a %. Each response, positive or negative would count as a ‘like’ to keep other current arrangements.

The way I like to think about it is that we all vote with our own portfolios.

If i like an idea (better than something I already own), I'll add it to my portfolio. If not, it's noticeably absent.

In fact, returning full circle, it's in managing our own portfolios that we all 'vote' on the constituents of the SM Index. Building a good track-record probably helps others take more notice of your holdings, but its posting a compelling Straw/Valuation that'll do the heavy lifting.

And, of course, you can argue against an idea (or at least highlight some concerns) by posting a #BearCase or #Risks etc Straw. (EG I wrote this on Brainchip a year ago).

I hear that @Hackofalltrades

Straws to outline the case. Forums to nut it out. Portfolios to plant your flag.

Allowing replies to straws has been brought up many times over the past 5 years here, and there are two different schools of thought. I am firmy in the school of thought that believes that allowing a forum-type thread of comments below a straw devalues the idea of a straw, which is a standalone piece of work (a bull case straw, a bear case straw, a straw on a company's management, etc.). Having to scroll through pages of comments and feedback would mean many straws just wouldn't get read by people because it becomes too time consuming. The forums are available for that and then people can decide whether they want to engage in discussion there, or even ignore the forums completely if the choose to. There have been many times that I have wanted to comment on a straw or valuation that someone else has posted here, and I have done so, using the "general discussion" forum for that company. You just have to reference the straw or valuation you are commenting on in your forum post. You can do this by inserting a link to that straw or val, if you want to.

If the author of the straw or valuation that I am commenting on then wishes to engage with me further about that, they can do so, in the forum.

That leaves the straws and valuations there as standalone items that can be easily viewed from the company page (each ASX-listed company has a company page on Strawman from which you can find all valuations, straws and forums that have been created by members for that company). You can also see which members are holding that company in their Strawman.com portfolio. Some companies don't have any at all (so no straws, vals, forums, holders or followers) because nobody is interested in those companies. Others have LOTS of content.

For those with the time and inclination, the forums are always there. For those who are not interested or who are time poor, you can switch off forum posts using the newsfeed filter and you will then only see forum posts if you choose to open a forum and read it.

If you allow replies to Straws and/or Valuations, this optionality is removed. Everybody has to trawl through everything, and it becomes very tedious. Like HC, where everything can be commented on or complained about. The fact that discussions are confined to forums here is a BIG plus in my view.

Like here and now, I often engage in forums, but I don't always have the time, and I like that you can choose to ignore long conversations about topics that might not interest you. I like that optionality. And I'm not alone. I'm not sure if it's a clear majority, but there are certainly a number of members who have been here since the beginning or soon after, and we have repeatedly said, "Please don't allow comments and replies for Posts and Valuations. That's what the Forums are for!"

I agree with @Bear77 that the current structure allows you to cover a lot of ground when reviewing straws, without wading through comments.

in addition, because of their standalone nature, it means that straws require the author to more clearly and completely encapsulate their idea or ideas.

On the other side of the argument, I’d welcome comments on my straws, but only if they could be “collapsed” so as not to spoil the overall clean navigation experience, i.e., don’t lose the ability to scroll through a feed of straws without seeing the comments.

i also agree with @Hackofalltrades that allowing an author to disable straw comments (if adopted) would be good for those who perhaps do not enjoy feedback.

The forums are great because some discussions topics can run over a long period, and you can either reply or add a new post within the general theme. If straws raise points for debate and clarification, the forums are a good place to go.

I don’t know the cost-benefit equation of changes, but overall I am very happy with the existing structure and navigation.

@Strawman time to write in ChatGPT as a premium member (like what people have been doing, adding a slack profile that responds to a callout) that can give an opposing view/set of questions to any thesis presented! ;) (joking//not joking)

I think @Bear77 and @mikebrisy make some good points, but I still think that there's some merit to @Hackofalltrades suggestion, as I don't keep a really close eye on the forum and then find I miss some things. Also sometimes I'll see a forum post about some straw that I hadn't read yet and so I have to go looking for it, which is difficult if the forum post is not extremely new.

What about a sythnesised approach like in the picture below.

• With a "Reply on forum" button or something, which then automatically sets up a new forum thread with the name of the straw and the person who posted it.
• The forum post also automatically has a link back to the straw (@Bear77 I didn't know that you could link back to the straw, although I should have figured that out).
• Then on the straw itself there's an icon (that's supposed to be a drawing of a pencil) showing how many forum replies there are so you know if anyone has any comments without having to check the forum first.

I like this @AbelianGrape

What do others think? Probably not too hard to implement, but will only bother if enough people think it's a good idea.

Rather than clog up the feed, you can just vote here. If there's enough demand -- we'll do it.

I like @AbelianGrape's idea. The design might be slightly improved just by having a "N comments" hyperlink, which is a pretty common style you see around the web. e.g. screenshot of macrumors.com below.

I'm a big fan of comments on straws. Straws are often great conversation starters, and it would be a shame that these conversations are not started because of the friction involved.

@mushroompanda very happy to have the design improved as I'm well aware that my graphic design skills are lacking anything approaching professionalism!

As many highlighted, one main problem with the Strawman Index is it seems to use popularity of each stock. So we end up with a mixed bag of underperformers and high performers in the top 10.

Probably adding a performance score such as the returns in the last week as part of the ranking score may be an idea.

I don't mind the idea of weighting things against some performance metric, or filtering what member portfolios are included @edgescape

That being said, i think one week is probably too short a timeframe to be any decent measure of skill, and it'd mean a lot of churn in the index. The other issue is that if we always change methodologies, the track-record losses all credibility. I feel it's important we have consistency.

Still, I'm wondering if we could just provide some interface where users can choose the settings, to some degree. That way, you can choose what approach you like the best.

EG. What is the SM Index if it's just based on the people I follow? What does it look like if it ignores people with a performance track-record below a certain threshold? etc

I'll have a chat to the devs and see what's possible.

Thanks that is an interesting exercise to go through and might help one to decide whether to dig a bit further on research of some of these. I must admit my knowledge of this list is poor. Having said that, one takeaway I get is the amount of comments citing revenue or pre revenue, and the comparative lack of the word profit. That is not necessarily a criticism, because this index has trounced the market's returns despite the recent big drawdown. The lesson one should perhaps take is that if you building a portfolio of companies that are at early stages in terms of any significant profits, be prepared for the extra volatility. Those that adopted this approach 5 years ago probably sitting pretty, those that began their experience in the market with this style only about a year or so ago might be finding it hard to maintain their conviction.

There's always one @Vandelay ;)

But you're technically right (the best kind of right!). The index is ranked by total value held.

And I think that the observation of lack of profit is a valid (and important one) @stevegreenycom. These kinds of businesses will always have a higher associated risk/return dynamic.

Anyway, like I say, this exercise is something to take with a large grain of salt. A more thorough analysis of the fundamental trajectory of these businesses would be interesting.

I'd like to think (hope?) that for those that I hold that things are evolving in a mostly positive direction. Of course, it's easier to believe that when prices are headed north, and it takes a good deal more conviction when the opposite is true!

Almost time for a Strawman ETF Andrew!

No, well played sir. It's not easy to resist!

(But also, it was worth clarifying).

As for the ETF @Shapeshifter, it could be a hard sell given the last 12 months... Let's hope Ben Graham's weighing machine vs voting machine analogy holds true :)