“The measure of intelligence is the ability to change.” ― Albert Einstein

It’s Blogger Wisdom week here on Abnormal ReturnsAs we have done in previous editions we asked an esteemed group of  finance bloggers a series of (hopefully) provocative questions. The answers are not edited and the author’s name, blog name and Twitter handles follow. Yesterday’s post looked at the expected growth in ETF assets under management. We hope you enjoy these posts as much as we do putting them together.

Question: What is one thing you have changed your mind about recently in the investment world and why? (Answers in no particular order.)

Jonathan Clements, Humble Dollar, @clementsmoney, author of How to Think About Money:

In looking at my own portfolio, I used to start with a core position in U.S. stocks and then figure out how best to diversify it. Today, I start with the global market portfolio–the investable universe of stocks, bonds and other assets–and then decide what to subtract. I end up in a similar place, though this latter approach has made me more willing to invest abroad.

Dan Egan, Daniel P. Egan, @daniel_egan:

(1) Active management might have positive expected value in the fixed income space. (2) Bitcoin/Ethereum might be worth holding a little bit of, to hedge the downside if you don’t hold any and it gets huge.

Wesley R. Gray, Ph.D., Alpha Architect, @alphaarchitect, co-author of Quantitative Momentum: A Practitioner’s Guide to Building a Momentum-Based Stock Selection System:

Dan Egan hooked us up a tour at Betterment. I used to believe that human advisors were always going to be required to serve as a “behavioral coach” for their clients.  I now think technology can potentially serve as the “behavioral coach.”

Cullen Roche, Pragmatic Capitalism, @cullenroche:

I used to be on a voracious search trying to understand everything about money, finance and economics. In the last few years I’ve come around to the realization that it’s impossible to know everything and probably self defeating to try. I’ve learned that I know a lot less than I think I know. It’s a liberating feeling actually. Knowing your weaknesses and limits helps you set realistic parameters for managing a portfolio, your money and your life. Or, as Ray Dalio says in his fantastic new book “Principles“: “I want to establish that I’m a dumb shit who doesn’t know much relative to what I need to know.” Dalio goes on to explain that knowing what you don’t know is a key to success. I think I am getting there – not the success part. The realizing I am a dumb shit part. 🙂

Tobias Carlisle, The Acquirer’s Multiple, @greenbackd, co-author of Concentrated Investing: Strategies of the World’s Greatest Concentrated Investors:

Unless it inflicts pain to hold or is too small for professional investors, everything gets arbitraged away. Strategies only work over the long-term because they don’t work in the short term. Old practitioners die off and new ones arrive ignorant of recent pain.  Many investors knew the mortgage market would blow up, but got there too early and were carried out feet first. Many value investors gave the game away in the late 1990s so a new crop could get famous in the early 2000s. It’s happening again now.

Andrew Miller, Miller Financial, @millerak42, guest blog at blog.alphaarchitect.com:

I used to think the pursuit of alpha was worthwhile.  In reality, alpha is just unexplained return…and who wants any return in their portfolio that they can’t explain?  Now I think that cost effectively building a portfolio that has exposure to many different academically and empirically tested return sources (factors or style premia) is a better approach.

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Phil Huber, bps and pieces, @bpsandpieces:

I have become less dogmatic about the “our way or the highway” approach to managing client assets. Like most advisory firms, we have preferred portfolios at different risk levels. But something we have done more recently is provide clients a few different “levers” to pull in certain areas of the portfolio. Not comfortable with factor tilts? Fine, own market cap index funds. Don’t understand alternatives? No problem, we can omit them even if we think certain ones add value. Have socially responsible/sustainability objectives you want to implement? Sure, we can incorporate some ESG focused funds. In other words, I would say my mindset has shifted more towards investor outcomes as opposed to investment outcomes that exist in a behavioral vacuum.

David Shvartsman, Finance Trends, @financetrends, newsletter:

Going back to our first Q&A question (the passive vs. active investing bet), I’d have to say that I’ve definitely shifted my view on the role that passive index investing can play. First, let me acknowledge that the current vogue for passive investing may soon pass, with the pendulum swinging back to active investing. This is based on my own experience as a mostly active trader/investor.

There were some very frustrating periods and strings of losses along my long learning curve as a trader. If I had shifted more of my dormant capital (or even the capital from my truly marginal trades) to index ETFs, I probably would have done a lot better performance-wise over the last 7-8 years. Now that I’m more aware of my limitations, I’ve been allocating money to sector ETFs such as SMH (semiconductors) and XBI (biotech). I am also looking to put a portion of my longer-term money into the leading US and global index ETFs. This is a definite shift for me, and I’ve come to realize that most individual investors would be well advised to invest via low cost index and sector ETFs.

Morgan Housel, Collaborative Fund, @morganhousel:

I’m coming around to crypto. I’ve moved from “scam” to “skeptically interested.”

Tom Brakke, the research puzzle, @researchpuzzler:

Lots of little changes, but I can’t think of any big ones recently.  Markets still befuddle me and, worse yet, my own behavior sometimes befuddles me.  It’s a constant battle to adapt and align without sacrificing core principles for expediency.

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David Merkel, The Aleph Blog, @alephblog:

I must be stubborn.  I can’t think of a thing where I have changed my mind over the last few years regarding investing.

Ivaylo Ivanov, Market Wisdom and Ivanhoff, @ivanhoff:

Algorithmic trading is not the enemy. It is stupid to fight it. It is the future of short-term day and swing trading. It can be a great tool and an additional income generator.  You still need to develop different strategies for different market environments and to know when to switch on and off the various algorithms. Anything that can be done by a human, can be done by a program more consistently and efficiently.

Wayne Lloyd, Dynamic Hedge, @dynamichedge:

For a long time, I believed the best way to maximize returns was to increase rationality and eliminate behavioral and emotional bias. In other words, invest like a robot. Optimizing for rationality will help you with most things in the periphery of investing but when it comes time to make a decision you can live with, you need to trust your intuition. It’s messy and it doesn’t make any rational sense but offloading all that rationality to your unconscious mind pays off –  if you’ve done the work. Also, understanding and working around your biases is a lot easier than eliminating them. An important book for making this connection for me was The Gift of Fear by Gavin De Becker.

Jake, EconomPic Data, @econompic:

Given many investors, fund managers, and investment organizations would rather have their priors be proven right and/or look smart for marketing / fundraising purposes than make money, I’ve changed my view regarding smaller investors being disadvantaged relative to larger / institutional investors. As long as focus is on outcomes, behavioral biases are kept in check, and opportunities presented are seized, I believe even small individual investors can outperform in today’s market environment.

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Brett Steenbarger, TraderFeed, @steenbab:

I have gained increasing awareness and respect for the role of creativity in generating superior trading and investment returns.  Consistently, I find that managers who outperform look at unusual “out of the box” data and/or assemble existing data in unusual, “out of the box” ways.  Innovation wins; dogged consistency ensures that today’s winners become tomorrow’s dinosaurs.

Robin Powell, The Evidence-Based Investor, @robinjpowell:

I used to think that active management would predominate for the rest of my lifetime. Things are moving so quickly, particularly on the regulatory side, that I now expect passive (or at least rules-based) AuM to overtake traditional active AUM globally within ten years.

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Charlie Bilello, Pension Partners, @pensionpartners:

That the 10,000 hour rule can be applied to trading/investing. There can be no standardized path to excellence in a field that is so heavily dictated by chance.

Brian Portnoy, Brian Portnoy, @brianportnoy:

Not a change but a reinforcement based on spending lots of time speaking with financial advisors and their clients: Behavior is the true source of alpha in investing.

Daniel Solin, Daniel Solin, @dansolin:

I believe the system really is rigged against Main Street investors.  I don’t think continuing to advocate investing in index funds will overcome the well-founded view of many that investing is stocks is too risky for them.  I am starting to investigate alternatives that will permit investors to avoid Wall Street altogether and still reach their retirement goals, without investing any meaningful portion of their assets in active or passively managed mutual funds or individual stocks and bonds.  It will be the subject of my next book.

Jeffrey Miller, A Dash of Insight, @dashofinsight:

In my 12+ years of blogging, I always believed that I was part of a group who were discovering themes that would help individual investors. The Nobel award to Richard Thaler reflects recognition for ideas that investment writers (like those contributing here) have been trying to implement for years.  The problem? People somehow believe that by reading the books, they become immune to the traps. Some might say that this is not a change, but it feels like one to me.  Objectivity about many fields — science, the environment, statistical analysis, to pick a few – has been abandoned.  Without data, everyone is free to confirm their biases.  The damage being done to many organizations will not be apparent for years.

Corey Hoffstein, Flirting with Models, @choffstein:

The largest recent change in viewpoint was on so-called “mixed” versus “integrated” multi-factor equity products.  Prior to Fall 2016, I felt that the arguments supporting the integrated approach were narrative at best.  However, after hearing an explanation from FTSE Russell (see “Factor Indexing: Avoiding Exposure to Nothing” at http://www.ftserussell.com/index-series/index-spotlights/smart-beta-factor-indexes), I explored the argument that integrated approaches can provide leveraged factor exposure and were therefore more capital efficient.  After doing the math (literally; see https://blog.thinknewfound.com/2016/10/capital-efficiency-multi-factor-portfolios/), I agreed.

While I still think that the jury is out that integrated is a definitively “better” approach than mixed, I am now convinced that it should – at least theoretically – definitively provide more factor exposure bang for the buck.

Jeff Carter, Points and Figures, @pointsnfigures:

Wanted to try and short some stocks-you cannot short this market.

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Eddy Elfenbein, Crossing Wall Street, @eddyelfenbein:

I’ve recently changed my mind about the nature of volatility. I now believe that volatility is mostly related to what the market has just done. Bear markets cause volatility, not the other way around. Same for bull markets. People talk about the VIX as if it’s the stock market’s blood pressure. That’s just not so. Also, Tadas takes too many vacations.

Peter Lazaroff, Peter Lazaroff, @peterlazaroff:

Until a few months ago, I classified Bitcoin as “Not Worth Thinking About.” A presentation on blockchain technology at this year’s CFA Institute Annual Conference shifted my thinking. I’m more concerned with implementing a bad idea than missing out on a good one, which makes it tough for me to get behind cryptocurrencies as a long-term asset class. That said, I now recognize that blockchain technology is a very big deal.

Todd Wenning, Clear Eyes Investing, @toddwenning:

Blockchain. At first, I thought it was a niche technology that might have some impact on a handful of financial firms. I still don’t know as much as I need to, but from what I’ve gathered thus far, I think blockchain will have a massive impact on global businesses and economies. Asking about blockchain is now a standard question I ask company executives – “In what ways – good or bad – might blockchain impact your business over the next 5-10 years?” It’s not a good sign if they haven’t considered that question yet.

Thanks to everyone for their time and effort. Stay tuned for my answers to this series of questions.

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