Stocks vs. Funds | The Motley Fool UK

TL;DR

Funds are easier to buy and provide instant diversification, while individual shares offer private investors a chance to outperform by finding rare high-growth companies. The discussion says seven out of 10 fund managers underperform the market and identifies only about 13 10-baggers among roughly 700 FTSE All-Share companies studied. Read on for the costs behind fund underperformance and examples including Domino’s Pizza, Rangold Resources, and Tullow Oil.

Transcript

hello I'm Sonia Rael with the mle fool and I'm joined by Stuart Watson our premium Services editor hello Stuart hi Sona and we're here today to talk about funds versus shares now Stuart most people end up buying funds when they start investing why do you think that is um well there's a few reasons I think I mean first of all it's uh it's easier to ... Read More

Key Insights

• 😄 Funds are popular among beginner investors due to ease of purchase and diversification benefits.
• 🇨🇷 70% of fund managers tend to underperform the market, mainly due to costs associated with managing funds.
• 💓 Private investors can beat the market by identifying companies with significant value growth, known as "10-baggers."
• ❓ Examples of successful 10-baggers include Domino's Pizza, Rangold Resources, and Tullow Oil.

Questions & Answers

Q: Why do beginners often buy funds instead of individual shares?

Funds are easier to buy because investors do not need to assess an individual company’s management or accounts. A fund can also provide instant diversification across dozens or even hundreds of companies and a broad mix of sectors.

Q: How does diversification help fund investors?

A fund may hold companies across many different industries. If one industry performs poorly while another performs well, the results can even themselves out.

Q: Does fund marketing influence what people buy?

The discussion says a large marketing machine supports funds. Advertising is particularly visible during ISA season around March and April, encouraging more people to buy funds.

Q: Why do seven out of 10 fund managers underperform the market?

Fund returns are reduced by costs that accumulate year after year. The examples given include an upfront cost of about 5%, an ongoing management charge of perhaps 1.5% each year, and transaction expenses such as stamp duty.

Q: What is a 10-bagger stock?

A 10-bagger is a company whose value has increased tenfold. The example used is a rise from 1 to 10 in value.

Q: How rare are 10-baggers?

A report examined about 700 companies in the FTSE All-Share and found roughly 13 that had become 10-baggers over the preceding 10 years. That represented only about 2% of the companies studied.

Q: Which companies are given as examples of 10-baggers?

The examples are Domino’s Pizza, gold miner Rangold Resources, and Tullow Oil. Over the referenced 10-year period, they rose by about 16–17 times, 27 times, and 12–13 times, respectively.

Q: How can private investors significantly outperform the market?

Private investors can seek good companies capable of substantial increases in value, including rare 10-baggers and multi-baggers. The discussion concludes that investors should look for good companies where other investors are not looking.

Summary & Key Takeaways

• Buying funds is easier than buying individual shares and provides instant diversification across different sectors.

• Many fund managers underperform the market due to costs involved in managing funds.

• Private investors can outperform the market by identifying companies that have experienced significant value growth.

• Examples of 10-bagger companies include Domino's Pizza, Rangold Resources, and Tullow Oil.