Determining the characteristics of superior investing is not a new idea. We hazard a guess that since the first dollar went into the public markets, individuals have spent considerable effort determining short cuts and tricks to identify the items that drive outperformance. Within the modern investment world, both academic and industry attention has been focused on finding those measurable items across large swaths of the market that can help in predicting or explaining both return and the risk present to achieve superior returns.
“Equity investing is about what could happen, not what has” – Michael Goldstein
We have highlighted on many occasions the three facets of investing that most impact performance: market participation, asset allocation, and cost. We can further segment costs into three areas:
Direct costs of management fees and investment vehicle fees that we attempt to contain through the use of low cost ETF’s.
The general and consistent underperformance of active stock selection techniques that we eliminate through the use of index-based investing.
The last, and potentially most impactful, cost is making the wrong decisions at the wrong time to enter or exit the market.
“A person saving for retirement who chooses low-cost investments could have a standard of living throughout retirement more than 20% higher than that of a comparable investor in high-cost investments.”
– William Sharpe
Mutual funds that rely on stock-based investing where once a great idea. However, this investment vehicle’s time has come and gone. Their structure allowed the small investor to invest in a diverse portfolio of companies that was overseen by dedicated professionals. With time, however, things changed and markets evolved. Though mutual funds continue to be used by the public, they no
“And the wild things roared their terrible roars and gnashed their terrible teeth and rolled their terrible eyes and showed their terrible claws.”
– Where the Wild Things Are
Inflation, and our fear of it, is a highly debated topic these days. It is worthy of attention given the role it plays in our economy. With our economy’s dependency on credit, the economic system needs to be concerned about the direction of interest rates and inflation.
Milton Friedman, a great economist, once said that “inflation is always and everywhere a monetary phenomenon.” The more money
“The boiling frog story is a wide spread anecdote describing a frog slowly being boiled alive. The premise is that if a frog is placed in boiling water, it will jump out, but if it is placed in cold water that is slowly heated, it will not perceive the danger and will be cooked to death. The story is often used as a metaphor for the inability or unwillingness of people to react to significant changes that occur gradually.” – Wikipedia
“Sell in May and go away” is a phrase heard by many as a common belief that the
Interviewer: “if you were to be stranded on an island and could have three people join you, who would they be?” (Expecting the answer to include one or more of George Washington, Albert Einstein, Great Grandfather, Barack Obama, Francis Bacon or the Dalai Lama)
Interviewee: “two hula dancers and a coconut chef.”
As shown in the brief interview conversation above, the interviewee decided to answer in a very non-traditional way. Sometimes that alternative thought process is needed. Sometimes it is necessary to open up the discussion by essentially changing the question. Sometimes one needs to go against what is being asked
“An approximate answer to the right problem is worth a good deal more than an exact answer to an approximate problem.”
— John Tukey
Most financial professionals preach the positives of diversification. They promote it as much for risk mitigation as they do for obtaining superior returns. During prior times with more separate economies, more regional trade, markets that were less connected and less accessible to all, it was most-likely true. This has changed as trade, money movements and economies have globalized.
In addition, business cycles have become less dependent on long-cycle industrial activity (an interesting topic
The greatest deception men suffer is from their own opinions.
– Leonardo da Vinci
What better idea than to bring up the Seven Deadly Sins during the holidays? In our constant need to Google everything, absorbing as much data as possible, we came across this graphic created by a Jennifer Hagey. We do not know Jennifer, but she has come to entertain us as a result of this creation. We note how she skillfully cross references each of the Seven Deadly Sins to create a resulting emotion, action, or character trait. We invite you to analyze the graphic at your
“Nature, to be commanded, must be obeyed”
– Sir Francis Bacon
One quote, two stories, and then the point to this newletter.
This quote from Sir Francis Bacon sticks in our minds a lot these days. It fits so many situations as we see numerous examples of people putting their intentions before reason. This leads us to two stories.
We live and work in horse country. The North Shore of Boston has almost as many horses as people (stretching the truth a little). Seeing riders on the back of horses is fantastic. Watching a skilled equestrian is an amazing experience,
“Half a century of analysis has yet to fully answer why investors place such a large proportion of their funds with active equity managers, given the discouraging evidence on the latter’s ability to add net value”
– Rotman International Journal of Pension Management
With this being our inaugural newsletter, it seems fitting that we open with one of the principal elements of our strategy: the active use of low-fee passive investment vehicles. The above quote came from a recent research article examining why so many investors continue to follow a strategy that has consistently shown to be expensive and to