In our TraderTalk series, we interview some of the most interesting and best performing investors from the worlds of social media, CopyTrading platforms, traditional asset management and private traders. Below are the insights from Pietari Laurila, an eToro Popular Investor.
Pietari is one of the UK’s most popular investors on eToro with around 8,000 followers and over 1,500 copiers. CopyTrading allows copiers to invest their own money to proportionally replicate Pietari’s positions. He has developed a successful Long Equity strategy, with a 2021 return of 37.4%.
AP: First of all Pietari, could you give us a bit of background on how you first got into trading/investing?
I studied Computer Science and becoming an investor was never part of my plans. Then almost by chance, I took a course on finance at university, which sparked my interest in the subject.
I studied finance more on my own, reading everything from classic investing books to more recent academic work. An important early influence for me was a book called Beyond the Random Walk, which presented a number of strategies that had historically beaten the market. The book helped me develop my first strategies.
I opened my first trading account in 2004. By 2011, my account had grown sufficiently that I decided to become a full-time investor.
AP: At what point did you think of exploring the option of becoming a Popular Investor on eToro and allowing investors to copy your strategy?
I had managed friends and family capital for a number of years on another platform, but that had to stop because of Brexit.
I looked for an alternative platform and eToro came up. I did my research into eToro and found eToro offered a way for people to copy my trades. It also offered free stock trading and had more than 1 million users.
I opened my account at the end of 2020. Since then, I have been impressed by the Popular Investor program. eToro ran an advertisement in the London tube last year asking “Are you on the wrong platform?” In my case, before last year, the answer was probably yes!
AP: What does your day-to-day routine look like in running a portfolio with significant assets copying you?
In the morning after I wake up, I read the Financial Times and a couple of other newspapers to find out what’s going on in the markets and the world.
Then, if one of the positions in my portfolio is nearing the target price I’ve set for it, I run a computer program I’ve written to screen for new opportunities.
The computer program produces a list of candidate stocks which I will then research in more detail manually.
I’ll go to the company’s investor relations website, read their latest investor presentation, earnings press release and conference call transcript.
I will then look for any other information on the company I can find on the internet – news about it and its industry, and articles published on Seeking Alpha and other websites.
Afterwards, I’ll make a call as to whether the company is cheap enough to merit inclusion in the portfolio. I like to buy companies that have declined in price due to identifiable macro or company-specific factors, which I think will reverse over time.
From time to time, to develop my strategy, I browse through research recently published in academic finance journals to see if there are any ideas worth pursuing. No strategy will work for ever, so it’s important to keep evolving.
AP: When looking at a potential opportunity in the markets, what filters to you apply?
The basic value metrics I use are P/E, EV/EBIT, and P/NAV. Each has to be looked at relative to other companies in the same industry, and also relative to a company’s own history. Some companies are better than others and deserve higher valuations.
Beyond these basic metrics, I will look at growth and quality. For quality, ROE works for companies in the financial sector. For non-financial companies, I use operating profit margin, relative to the peer group.
I like to buy higher-quality companies, all else equal, because academic research shows they have produced positive alpha in the past.
AP: Talking about opportunities, could you give us your brief take on the outlook for financial markets for 2022?
I expect that 2022 will produce lower returns and more volatility than 2021.
2021 was an exceptionally easy year for investors. In 2022, the difference is that markets can no longer count on the same support from central banks as in the last two years.
In the US, the Federal Reserve is expected to increase interest rates three times. Markets usually don’t like higher rates. For example, there was a so-called “taper tantrum” in 2013 after the Fed said they would reduce their asset purchases. After the announcement, bond markets fell and stock markets temporarily sold off, too.
Despite this backdrop, I’m cautiously optimistic about parts of the stock market. I invest in Value stocks and they are currently very cheap. On some measures, they are the cheapest they have ever been, relative to Growth stocks.
Growth stocks, such as the Big Tech stocks Apple, Microsoft, Google, Amazon and Facebook, have performed well for many years, but in 2022 I expect that higher interest rates and tougher year-on-year comparisons for the Technology sector will benefit Value over Growth.
AP: What do you think is the biggest mistake that private investors make in the stock market?
Simply not being invested as a result of selling during downturns.
In the long run, the stock market is a fantastic compounding machine. Historically, stocks have returned about 5% a year after inflation. Over a period of 100 years, this means multiplying your capital by 131 times!
But to get these returns, investors had to stay invested through severe drawdowns. The S&P 500 index suffered a 34% loss in 2020 as a result of COVID, but that drawdown was extremely short by historical standards and not nearly as painful as the 57% drawdown in 2008-2009, the 49% drawdown after the tech bubble burst in 2000, or let alone the 83% drawdown investors suffered during the Great Depression in the 1930s.
When drawdowns like these occur, the general economic situation will be bad and the news horrible — just think back to March 2020. The natural human tendency is to stop the psychological suffering by selling and forgetting all about stocks until times improve. But by acting in this way, investors risk missing out on the great returns the stock market has produced in the long run.
The better way to think when stocks are in a drawdown is, “will things get better or worse from here?” Usually, if the current situation is bad, they will get better.
AP: Finally, if you could give one piece of advice to the traders and investors reading this, what would it be?
Have a clear idea of “why do I expect to outperform?”
It is known from academic research that most investors — both professional funds and individuals — underperform the index in the long run.
There are several ways to outperform — taking on more risk than the index, selecting superior securities, market timing — but none is easy, and competition in the markets is tougher than ever.
For example, hedge funds, supposedly the smartest of investors, had an easy time producing positive alpha in the 1990s and 00s. But since 2010, their alpha has been negative.
So, why do you expect to outperform these guys? It’s not impossible, as I believe there are still pockets of inefficiency in the markets, but it’s important to understand where you might have an edge and then to keep developing that edge. To reiterate: no strategy will work in markets for ever.