What a lovely frickin day....to be reducing risk!!

[tombgrt]

Here's another bone to pick: the idea that a young guy should't save his money in an extreme fashion, living on rice and beans plus Mom's leftovers.  The truth is that frugalness is the road to riches.  Read about Buffett's early life. 

 

There is a recent academic study that showed even from a Markowitzian perspective of maximizing  the arithmetic mean that it's much better to save as much as possible and be fully invested in risk assets when you're young than to have a more balanced portfolio for a lifetime.

 

+++  :D

 

If I can achieve 'only' a 10% return for the next 30 years, I will have $7+ (adjusted for 3% inflation) for every dollar I invested today. I can live with that but hope to do much better over time. I doubt however that over time I would achieve such results if I try to time the market waiting for the big pitch. I'd rather be all-in now with my low 5-numbers account then wait for valuations that might not happen for many years. The future is unknown and I can only buy what I believe will at least reward me with 15% returns over time.

 

I can still spend money without overworrying about it, I just keep it in check knowing I will be rewarded later. I don't need piles of money to "enjoy my youth". One of the ways I enjoy my youth is by the process of (hopefully) becoming a good investor (and entrepreneur?). I can drive expensive cars and travel around the world when I am 50 if that is what I want to do then. If I die soon, it will be for others to enjoy.

 

The mental reward of saving money and seeing it compound YoY is far greater to me than spending it on material junk that doesn't add to my happiness once a certain level of needs has been saturated.

[tombgrt]

Relevant:

 

Question 19. Are you mindful of the market's overall expense level? If so, do you subscribe to Buffett's methodology, Shiller's P/E, any of Graham's pioneering thoughts, your own proprietary method, or something else? Could you please explain your process, as I find your writing to be even more concise and illuminating than that of Graham's and Buffett's indelible oeuvres.

 

[Greenblatt:] It's hard to answer your question even with the nice compliment attached. Generally, I would choose an amount that I am comfortable being invested in the stock market and stick with the strategy within a narrow range. The market was clearly overvalued in the year 2000 and the zero returns over the next 10 years reflected that reality. However, the Magic Formula strategy actually did quite well during that period because many undervalued stocks could still be found during this period. So, looking at market "averages" can be very misleading about the investment opportunity set. Most institutions like endowments and pensions choose a target allocation size to stocks and then adjust within a narrow range around that number. Then again, most of these organizations don't do so well, but I don't have a better idea. I guarantee "winging it" based upon perceived market "cheapness" or economic conditions will give most investors even worse results.

 

http://www.gurufocus.com/news/128897/gurufocus-interview-with-renowned-investor-joel-greenblatt

[SharperDingaan]

A slightly different perspective:

 

We’re (family accounts) retail investors, but we’re professionally trained (CFA, industry experience, etc). We don’t do retail OPM because we don’t have the patience for the whining. Very occasionally we may do the odd special purpose vehicle partnership.

 

We are effectively capital allocators, & prefer to actually run businesses - versus ‘just’ invest in them. We keep our feet in both worlds, & we try to take the best from each. This board is an excellent way of accomplishing that.

 

Investing in XYZ coy on the basis of business merit, is superb training for the business world. You are forced to apply financial understanding (what the financials represent, what they are telling you, & how they can be manipulated), marketing (product lifecycles, penetration, pricing), & business strategy in live time. Do it well, & you will accumulate wealth. Do it really well, & you may end up owning one of those companies.

 

Investing in XYZ coy on the basis of relative valuation, is gambling. If you invest for the long term you are by default- investing on the basis of business merit. You chose Industry A over industry B, because A’s  prospects were better. Within industry A you chose XYZ coy versus ABC coy, because XYZ’s valuation metrics were better. If you invest for the short term, you have a different perspective. Do it well & you will accumulate trading wealth, but it is a zero-sum game – trade long enough, & you will eventually lose (commission costs).

 

Every profession/industry needs new people. We try to learn from those before us, & from those who are the masters at what they do. The principles stay the same, but application changes with the times. We post to encourage new people to see through the hype, & invest on the basis of business merit.

 

It used to be that in western societies everybody wanted to be a ‘rockstar’-  because it got you copious amounts of glamour, status, drugs & sex. Then it changed to ‘investment banker’ -  because it got you copious amounts of money with which to ‘buy’ the glamour, status, drugs & sex. Yesterdays ‘rockstar’ overdosed, today’s  ‘investment banker’ is the scum of the earth (Greece). Apparently there is redemption though – the Rolling Stones still play live at an average age of 67+!

 

To everything there is a season.

 

SD

 

[merkhet]

Good reference, tombgrt.  I'd combine that with the following:

 

Question 8. How did magic formula stocks do in the market crash of 2008? Are there any red flags you would look for in eliminating MF stocks from consideration? For example, what if a company's earnings appear highly unstable?

 

[Greenblatt:] Great question, also. Magic Formula stocks, in general, fell almost as much as the market in 2008. Their rebound, however, was much stronger than the S&P 500 in 2009. I think the best way to look at this strategy, as in all stock market investing, is over the long term, though. This method seems to work because on average we are trying to buy above average quality companies at below average prices. What the market does with these stocks in the interim can be almost anything and in a difficult year like 2008, the best assumption to make is that they will not offer more short term protection than the popular market averages. Over longer periods, this method makes sense and seems to outperform the market averages by a significant margin. We have found that eliminating stocks with certain specific characteristics is problematic. The Magic Formula method in aggregate systematically buys companies where the short term outlook is usually uncertain or negative relative to the recent past. These are precisely the stocks that investors systematically avoid, which is where I believe the potential excess in returns could come from. So, eliminating companies from the strategy where the negative attributes are already well known is not likely to help your results. However, as my father always says, "have an open mind but not a hole in your head," so if you discover anything great, please feel free to email me.

 

Now, I'm sure some might respond to this by asking -- how did this work during the Great Depression (dunno if there's enough data there) or Japan in the last twenty years (probably enough data, but not sure if anyone has worked on this).  I have no idea, but I'd be interested to find out...

 

What's interesting is that every investing discipline, to some extent, operates on faith.  For value investors, we subscribe (on faith and limited experiential observation) that "in the short run, the market is a voting machine but in the long run, the market is a weighing machine."

 

I think the two sides that are arguing at this point can effectively be reconciled purely by saying, "there's a lot of risk out there (true) and it wouldn't hurt to increase your margin of safety requirements (also true)."

 

Additionally, I think people are confusing investment style vs. business style. 

 

Investing in a 50 cent dollar now and having it drop to a 25 cent dollar in a year before becoming a full dollar three years down the road is not terribly worrisome when considering investment risk -- so long as the business is chugging along fine.

 

The business risk of redemptions and investors freaking out, however, is a different story -- and reasonable people can differ as to how and whether to dampen volatility to assuage the psychology of their investors (or themselves).

[Santayana]

We all have different risk tolerances, but at the end of the day it should be all about what lets you sleep at night.  Moore may think it's stupid, but I've chosen to take a very risk averse stance since around 2002.  Very different from how I invested in the 10 years prior.

 

I may only be up 30% since 2009 which is all Moore can focus on, but I'm up 400% since March 2003.  Once again, I have no need or desire to worry about outperformance over a short 2-3 year time frame.  All that matters is that I am comfortable with my own financial circumstances as I consider the long term.

[twacowfca]

We all have different risk tolerances, but at the end of the day it should be all about what lets you sleep at night.  Moore may think it's stupid, but I've chosen to take a very risk averse stance since around 2002.  Very different from how I invested in the 10 years prior.

 

I may only be up 30% since 2009 which is all Moore can focus on, but I'm up 400% since March 2003.  Once again, I have no need or desire to worry about outperformance over a short 2-3 year time frame.  All that matters is that I am comfortable with my own financial circumstances as I consider the long term.

 

 

That's a great perspective.  :)

[alertmeipp]

"..to be reducing risk!!" - how come u don't just say " to reduce risk"... is there a different meaning to say "to be reducing risk"?  I am a ESL.

[moore_capital54]

Misterstockwell,, I would like to extend a personal apology to you. I have taken the time to read your post history and the consistency, logic, and lack of emotion in your posts indicate to me that I was wrong and you are in fact not a retail investor.  What more you clearly recognized the market was cheap in 2009 and most likely deployed significant sums.

 

I disagree with your position of being more worried since 1995, but your posts are of high quality and I should not have grouped you together with the other two.

 

The problem with this board is that there are a ton of members and its not always so easy to know who you can trust and who you cannot.

 

I find going back and reading post history as the most effective method.

 

I think that if I have to summarize my position after this long debate, it is this:

 

Personally, I have no problem with debating and deconstructing specific investment ideas with anybody on this board. I believe that I can learn from anyone regardless of their size or age. But when it comes to Macro and doomsday please at least do me a favour and identify yourself as a retail investor, so I know to put things in perspective.

 

I know a guy on this board who's a retail investor with >30% compounded returns from 2001 to present.  Would you discount his posts?  Ericopoly has even better returns as discussed many times on the board.  Would you dismiss his posts because he keeps chickens?

 

Twacow, I think you misunderstood my statement. I have said several times that Ericopoly is one of my favourite posters on this board he is clear, logical, and has a unique way of simplifying things by applying mathematics. Quite simply, when he posts I will spend extra time reading what he has to say and rarely rush along as I find myself doing with others.

 

With regards to the personal spending and cultivation habits of the members, I think here too you misunderstand as I went on a little rant on that thread commending these individuals and supported the younger generation members for employing such strategies. I even threw out a favourite Confucious quote of mine, which I use a lot with my family members and occasionally my wife :)

 

Now to the second part of your post I have to draw a line in the sand.

 

There is no doubt that you know a lot of retail investors that have compounded at 30% or better in their PA's, but that still doesnt make them a professional investor. I have compounded at better than 40% in the PA I pasted here, but I have achieved nowhere near those results in my fund. I could afford to be more concentrated, and was 100% equities mostly with a little cash as you could all see.

 

If any of the users you mentioned could continually compound at 30% or better, they would be starting their own partnerships by now and attracting AUM. Its very easy to start a hedge fund, I started mine with just $1.3 million dollars in 1994. So if the users you mentioned could so easily compound at those rates they would have done it by now, because running a fund hands you a call option on other peoples money.

 

The pressures of managing money for others, having potential redemptions, audits, fair value accounting, marketing etc. These are all elements the help build an investor over time. It is like the famous line of what going to college tells me? Well going to college tells me you can stick to something and you end what you start.

 

I feel the same way about professional/non professional investors. If you are really so good, stop playing triple A ball, and join the big leagues. Especially in the US where setting up a partnership is peanuts. In Canada the process is a lot more cumbersome.

 

So let me organize where I stand on this, as it perfectly fits in with my previous position.

 

I would gladly listen to the posters on this board with 30% CAGR in their PA's, and frankly I will listen to what they say more often than others. But where I truly value their opinions is in disecting a specific investment idea, because when it comes to Macro we are in a completely different frame of mind.

 

They may have a job to supplement their investment income, they may have such a small PA that it doesnt even matter if the world goes to hell (Generally this is the case I find most often, less skin in the game tends to equal more sensational claims, as the investor dreams of a situation where his little capital can be turned into significant capital with no risk), or they may just get a kick from posting long winded bullshit filled posts which mean nothing to them but everything to the person reading.

 

So your post was inaccurate, but I think you can agree that when you have a mixture of people from all walks of life with different expectations, and incentives from an investment program it is not the end of the world if we know their personal interests when making bold statements. Charlie Munger has spent a  lot of time discussing personal incentives and the importance of knowing what the other side's ultimate goal is.

 

I think we can agree on that. My goal when saying that I am bullish while everyone is bearish is not to get the small members on this board with their personal PA's to buy the market as I don't think that will have any effect on me personally. My goal is to provide balance or expand on my personal position and share my views. The guy with nothing to lose who is crying wolf can cause a lot more damage to members who have no idea what his personal situation is.

 

[twacowfca]

Misterstockwell,, I would like to extend a personal apology to you. I have taken the time to read your post history and the consistency, logic, and lack of emotion in your posts indicate to me that I was wrong and you are in fact not a retail investor.  What more you clearly recognized the market was cheap in 2009 and most likely deployed significant sums.

 

I disagree with your position of being more worried since 1995, but your posts are of high quality and I should not have grouped you together with the other two.

 

The problem with this board is that there are a ton of members and its not always so easy to know who you can trust and who you cannot.

 

I find going back and reading post history as the most effective method.

 

I think that if I have to summarize my position after this long debate, it is this:

 

Personally, I have no problem with debating and deconstructing specific investment ideas with anybody on this board. I believe that I can learn from anyone regardless of their size or age. But when it comes to Macro and doomsday please at least do me a favour and identify yourself as a retail investor, so I know to put things in perspective.

 

I know a guy on this board who's a retail investor with >30% compounded returns from 2001 to present.  Would you discount his posts?  Ericopoly has even better returns as discussed many times on the board.  Would you dismiss his posts because he keeps chickens?

 

Twacow, I think you misunderstood my statement. I have said several times that Ericopoly is one of my favourite posters on this board he is clear, logical, and has a unique way of simplifying things by applying mathematics. Quite simply, when he posts I will spend extra time reading what he has to say and rarely rush along as I find myself doing with others.

 

With regards to the personal spending and cultivation habits of the members, I think here too you misunderstand as I went on a little rant on that thread commending these individuals and supported the younger generation members for employing such strategies. I even threw out a favourite Confucious quote of mine, which I use a lot with my family members and occasionally my wife :)

 

Now to the second part of your post I have to draw a line in the sand.

 

There is no doubt that you know a lot of retail investors that have compounded at 30% or better in their PA's, but that still doesnt make them a professional investor. I have compounded at better than 40% in the PA I pasted here, but I have achieved nowhere near those results in my fund. I could afford to be more concentrated, and was 100% equities mostly with a little cash as you could all see.

 

If any of the users you mentioned could continually compound at 30% or better, they would be starting their own partnerships by now and attracting AUM. Its very easy to start a hedge fund, I started mine with just $1.3 million dollars in 1994. So if the users you mentioned could so easily compound at those rates they would have done it by now, because running a fund hands you a call option on other peoples money.

 

The pressures of managing money for others, having potential redemptions, audits, fair value accounting, marketing etc. These are all elements the help build an investor over time. It is like the famous line of what going to college tells me? Well going to college tells me you can stick to something and you end what you start.

 

I feel the same way about professional/non professional investors. If you are really so good, stop playing triple A ball, and join the big leagues. Especially in the US where setting up a partnership is peanuts. In Canada the process is a lot more cumbersome.

 

So let me organize where I stand on this, as it perfectly fits in with my previous position.

 

I would gladly listen to the posters on this board with 30% CAGR in their PA's, and frankly I will listen to what they say more often than others. But where I truly value their opinions is in disecting a specific investment idea, because when it comes to Macro we are in a completely different frame of mind.

 

They may have a job to supplement their investment income, they may have such a small PA that it doesnt even matter if the world goes to hell (Generally this is the case I find most often, less skin in the game tends to equal more sensational claims, as the investor dreams of a situation where his little capital can be turned into significant capital with no risk), or they may just get a kick from posting long winded bullshit filled posts which mean nothing to them but everything to the person reading.

 

So your post was inaccurate, but I think you can agree that when you have a mixture of people from all walks of life with different expectations, and incentives from an investment program it is not the end of the world if we know their personal interests when making bold statements. Charlie Munger has spent a  lot of time discussing personal incentives and the importance of knowing what the other side's ultimate goal is.

 

I think we can agree on that. My goal when saying that I am bullish while everyone is bearish is not to get the small members on this board with their personal PA's to buy the market as I don't think that will have any effect on me personally. My goal is to provide balance or expand on my personal position and share my views. The guy with nothing to lose who is crying wolf can cause a lot more damage to members who have no idea what his personal situation is.

 

Thank you for your thoughtful post.  I appreciate your sharing good ideas, and I don't disagree that a doomsday scenario is unlikely with The US Fed's keeping the spigot open.

 

I do, however, think it's advantageous to have diversity of opinion on the board with a big range of sophistication.  Sophistication is no protection from the madness of crowds.