Abnormal Returns is on a bit of a respite this week. That does not mean that we are content-free. As we have done in previous years we asked a panel of highly respected independent finance bloggers a series of (hopefully) provocative questions. Below you can see the blogger’s name, blog name and Twitter/StockTwits handle. We hope you enjoy these posts as much as we do. Feel free to jump in the comments with your own answers to the questions.
Question: Think back to the last edition of this series a couple of years ago. Have you changed your mind about something (big or small) over that time period? If so, what and why? (Answers in no particular order.)
On the stock-picking research and development side of things, not much changes to be honest. Buy cheap; buy strong; and hold ’em long. In other words, value and momentum are the big elephants in the room, and when working as a system, there really isn’t anything else that can hold a candle to these concepts for a long-term, career-risk-be-damned, investor. But, as with all sustainable ideas, they work, but they can’t work all the time. So nothing really new there.
When it comes to asset allocation and portfolio construction we’ve found more of the same and one major breakthrough. On the “more of the same” front, we keep coming around to long-term trend following ideas — they work, but not all the time. On the “breakthough side,” we’ve decided to ditch modern portfolio completely and think more like the manager of a reinsurance underwriter. Volatility doesn’t matter; crisis kills. In fact, volatility is great because so many short-term horizon investors don’t want to deal with it. So the answer is to embrace volatility, but avoid crisis. “Crisis alpha” is front-of-mind. We wrote a basic piece on the subject, and we’ve done some extensive internal thinking on the subject. Exciting stuff and we’ve already rolled these ideas out via private investment vehicles.
There are two main ways in which my thoughts have changed over the past couple of years.
First, I’m much more conscious now of what I don’t know, more open to new ideas and much more inclined to listen those who have a different view to my own.
Secondly, I’m even more cynical about Wall Street and the City of London than I was before. To quote my favorite financial journalist, Jason Zweig, “No matter how cynical you are about (this industry), you aren’t cynical enough.”
Ben Bernanke would beat Paul Krugman in an arm wrestling competition. I used to think differently, but based purely on beard strength, Bernanke appears to have amassed a sizeable advantage over the years as his beard has sustained a certain perfection that most other men can only dream of.
At one time I was convinced that all people could be taught to become better investors and handle their finances on their own. And while I still think this is true for a small sub-set of people who are willing to put in the time, I now realize that it’s impossible to save everyone from their own actions when trying to impart wisdom on personal finance or investments. There are probably more people out there who need professional money management advice than would like to admit it (of course finding a trustworthy advisor is the hard part).
I’ve also come to realize that there are many roads to Rome when trying to manage money. There’s not a single strategy that works above all others. There is a right way and a wrong way to invest, but there are many different ways to make money in the markets. It all comes down to understanding yourself, your flaws and your personality when choosing the right strategy to follow. There is no secret to money management. Many of the best investors have the intellectual honesty to admit that there are many solid strategies available and utilizing more than one approach can be useful.
The market is not going to break hard. Just too much cash, and too much central bank activity to let it break hard-even though it should. Buy the dips.
I can’t think of anything that I’ve done an about face on, but one thing I am sticking with is my conviction to minimize the home country bias. I do not believe that investing in companies that generate a majority of their sales overseas is the same thing as investing in international stock markets. These giant multinationals are highly correlated with their domestic index and do not provide the same diversification benefits.
I’m less convinced there is only one route to success as an investor, but more convinced that the average person, left to their own devices, will generally be a terrible investor. We are simply too susceptible to giving in to our internal flaws to find easy success.
The biggest thing that has changed for me over the course of the last several years is my confidence that ETFs are the best solution for the majority of investors. They provide reliable and transparent exposure at a fraction of the cost of other alternatives. There are certainly some actively managed mutual funds that earn their keep, but they are few and far between.
Two things. I thought that HFT was more benign. I am now convinced that it has hurt liquidity and seriously influenced humans on daily trading. The second thing is the silly link between oil prices and stocks. The two might be related.
I’ve modified my view on averaging down. I limit the amount that I do it to half of my original investment.
As I noted on a recent Aaron Watson podcast, I no longer think that “red teams” should be institutionalized because they become part of the routine and ineffective. Instead, to overcome our many inherent shortcomings and biases, we need to have a highly diverse and talented staff that is both empowered and encouraged to disagree strongly without fear of recrimination. I was in favor of such a staff before but, because I no longer see a “red team” as likely to be effective, the importance is heightened.
Too busy to look, but I’m sure I was wrong about a lot of things. Or that new information has come to light that’s changed my mind. Or some combination of the two.
This may be an odd response, but I’ve recently changed my mind about volatility. Specifically, I think it’s incorrect to see volatility as some kind of gnome that stands above and apart from the market. To put it bluntly, the market doesn’t fall on volatility. Instead, volatility is up because the market is down. It falls when the market rises. The correlation between the VIX and the distance the market is from its six-month high is about 70%. I was surprised to see that it’s true.
Thanks to everyone for their participation. You can also check out yesterday’s edition as well. Stay tuned for another question tomorrow.