Good reads from around the Web.
Last weekend we saw a graph illustrating how widely the returns from key Smart Beta investing styles varied in 2016.
I argued this potential for rubbish short-to-medium term returns meant factor investing was “not easy”. Coincidentally I came across some more evidence this week in an excellent study from Research Affiliates.
The paper takes the perspective of a portfolio manager, and shows how too-short time horizons can see those pursuing these likely winning strategies getting prematurely fired.
The reason is they go through periods where they don’t deliver. When an investor (or a pension committee or whatnot) sees this underperformance, they may ditch the manager.
The following graph sums it up. Notice how the strategy with the greatest record of adding returns (the Y-axis) also comes with the greatest chance of getting the boot!
In short: Traditional asset allocation makes for a safer career.
Source: Research Affiliates
See the full paper for all the details.
Don’t fire, but instead forget for a while
Some people pushed back at the notion that being, say, a value investor wasn’t easy. The returns-enhancing evidence is there, the volatility is known, so just get on with it.
We all like to believe we’re exceptional. But the fact is many years of underperformance will probably bring with it doubt and the gnashing of teeth. And often capitulation.
The paper suggests institutions counter this by reviewing their managers over longer time horizons. The greater the time period, the lower the chance of the weak returns that may prompt unwarranted sackings.
If we armchair investors want to pursue factor investing (and remember many experts such as Jack Bogle and Lars Kroijer say don’t bother) then we’ll have to figure out the best way to handle these challenges for ourselves.
Have a good weekend!
From the blogs
Making good use of the things that we find…
Passive investing
- In praise of incrementalism – A Wealth of Common Sense
- Dow 20,000? Big wow – bps and pieces
- Charles Ellis and the index revolution [Podcast] – Canadian Couch Potato
Active investing
- Trial by hot iron (a 13th Century lesson for value investors) – The Value Perspective
- How to run a short portfolio – Enterprising Investor
- Homemade economic indicators – Oddball Stocks
- Interview with trading psychologist Dr Brett Steenbarger [Podcast] – Ritholtz
- Input request for behavioural study into stock selection [Survey] – Greenwich University
Other articles
- How you can #resist with your portfolio – The Reformed Broker
- Where does it all go? – The Escape Artist
- Financial forecasts and our limited cognitive resources – Abnormal Returns
- An investment tracking spreadsheet for you to try – Fire V London
- Bear market survival tactics – Evergreen Small Business
- Things to know about equity before joining a Unicorn startup – Github
- 2016 in review: Back to plan A – Retirement Investing Today
- Spending time – Humble Dollar
- What James Altucher learned from doing 200 podcasts with his heroes – Altucher
- EU academics being told to “make preparations to leave” – LSE Blog
Product of the week: The Telegraph reports the interest rate paid by the current top easy access savings account has soared to… 1.1%. I know, control yourselves. The Freedom Account is available from RCI Bank, a division of Renault. Note that your savings are guaranteed by the French compensation scheme, the FGDR, not the UK version. The FGDR protects up to the equivalent of €100,000.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
Passive investing
- John Kay: How to get rich slowly [Search result] – FT
- Markets are right more often than you think – Bloomberg
- ETFs are eating the US stock market [Search result] – FT
- Where are we with the robo-advisers? [Some US detail but relevant] – ETF.com
Active investing
- A look at Merchants Trust and its 34 years of dividend rises – ThisIsMoney
- Markets aren’t kind to alternative facts – Bloomberg
- Is the contrarian bell clanging for stocks? – Morningstar
- Pain is coming for emerging market bonds – Bloomberg
- Hedge fund
compensationpay revealed – Forbes - An interview with the first quant, Ed Thorp [Podcast2] – Planet Money
A word from a broker
- Best and worst performing investment trust sectors in 2016 – Hargreaves Lansdown
- Do investors secretly love Donald Trump? – TD Direct
Other stuff worth reading
- Merryn Somerset-Webb: Do you really own your home? [Search result] – FT
- Is equity release a good way to pay off an interest-only mortgage? – Guardian
- How one Bovis home came with hundreds of snags – Guardian
- The multinational company is in trouble – The Economist
- Meet the City types who play farmer at the weekend – Telegraph
- The day Harvard stopped being a hedge fund – Bloomberg
- Frankfurt quietly prepares for Brexit bankers – Guardian
- Businessman honours 10-year old bet by handing over Bentley – ThisIsMoney
- We’re 30 seconds closer to Doomsday – BBC
Book of the week: Being an investing drama junkie, I’m looking forward to Black Edge. It tells of the FBI and SEC’s seven-year stab at trying to prove hedge fund manager Steve Cohen was trading on insider information. The book covers Cohen’s ascent from up-and-coming broker to hedge fund titan, and the aftermath of the investigation. Amazon is taking orders for the Kindle version for digital dispatch on February 7th. The promo reads like a real-life Billions!
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- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]
- Note the player button is subtly hidden in the top left of the page. [↩]
I agree it is damned hard to follow factor investing especially a single factor. 20 years underperformance can occur! Due to this only 2 types of fanatic believers can stick to it: a mad or a genius. I’m not genius just a mad fanatic believer:) No pain no gain.
Thanks for some fabulous links this weekend, TI. Such a wide spread and so much to choose from. TEA shoots an arrow through the heart of that most January of preoccupations — the household budget. I’m also shamed by his list of objections to sale and how many I’m reaching for — and delighted by his light and humourous touch. Thanks for the kitten. Great stuff. I personally choose to monthetise ™ everything possible: if I can have it as a monthly direct debit — even if it’s a tiny bit more expensive (why?! DVLA, I’m looking at you). The regularity and predictabilty of outgoings has some value (as holders of ITs think about regular incomes) and is most helpful for budgeting. My income happens not to be nicely regular and predictable and it would confound the Micawber in me further to have everything unpredictable. Lovely piece. And as a rejoinder, I liked the Hollow Dollar on frugality as a state of mind — but do we really need to go as far as the bulldog clip wallet (FT today)? Surely beauty and joy has some space in our budget.
The promo for Black Edge should sound like Billions – Billions was based on the SEC’s pursuit of Steve Cohen!
Fire V London’s spreadsheet looks awesome, thanks for linking that. I’ve made an attempt to unitise my portfolio but while I’m good with Excel formulas, I’m terrible at maths! This looks like it will do all of the leg work for me.
The Harvard piece was entertaining.
As for The Blessed Merryn: it’s easy for her sitting in Edinburgh to mock the English house-buying system. Having bought under both systems, I second her derision though.
That altucher article reminded me how I’m completely done with silicon valley lifestyle evangelism. Garbage. The whole genre is a self licking lollipop. Lollipops are for kids.
I notice that Richard dyson of telegraph money section has effectively cut and pasted TIs currency hedging post into his column today.
Ok, I looked at Google to no avail. In the figure, can someone explain what ‘4 Orlandos’ means 🙂
@mroptimistic — As explained in the research paper it’s four random portfolios selected by a data scientists cat, who is called Orlando. 🙂
@mathmo — Glad we hit the spot this week. Yes, the Escape Artist does have a great way with Mustachian tinged words.
@TheRhino — Haven’t seen that! Lots of hacks do read us though. Currency hedging etfs have had little to no coverage to date.
Europe is so miserable. There are only two useful book for passive investors (Investing Demistified and Smarter Investing) and only one comprehensive blog for small investors (http://monevator.com). Plus we lag behind the USA not only in factor investing but in saving too:
http://www.marketwatch.com/story/americans-are-bad-at-saving-money-but-europeans-are-much-worse-2017-01-26
Ah: should I have known? Thanks. I’ll leave the question as to how you fire a cat to others. Probability it was fired by my calculations was about 48%.
Regarding RIT’s plans to move overseas, I wonder whether he’s considered the loss of tax free status for ISAs once resident overseas. Even the tax status of pensions are unclear to me if you don’t move it into a QROPS.
The ISA wouldn’t lose its tax free status – he just wouldn’t be able to put more into it.
@Fremantle @arty
I’ll use Cyprus as an example of my thinking and it’s also important to point out I’m not a tax professional.
Once I become resident of Cyprus I won’t be able to make any more contributions into my ISA. I’ll therefore invest £20,000, the 2017/2018 limit, before I leave as a contingency against a return to the UK given it’s use it or lose it status.
In Cyprus the ISA will be subject to tax however this is where it gets interesting. In Cyprus the dividends aren’t taxed but they are subject to a Special Contribution for Defence of 17% unless you are a non-domicile of Cyprus which I will be. I therefore won’t pay this charge for the first 17 years so the ISA is still effectively tax free for that period.
The ISA will spin of dividends which I’ll reinvest in the ISA. My strategy is about living off the dividends so I’ll sell down capital from non-ISA/pension savings/investments to the equivalent of those dividends to eat. Once that’s all gone I’ll start spending the ISA which hopefully doesn’t run out before I can access my personal pension.
Pension wise, when it’s time, I’ll get a UK NT (no tax) code from HMRC as I’ll be non-resident and my pension will just be from SIPP’s. The pension will be fully taxed in Cyprus. Today you have two options in Cyprus:
– taxed like income where the first EUR19,500 is tax free; or
– taxed at a flat 5%
If your pension is low then the first is the best choice and if it’s high the second is a better option. It’s likely the first will be the situation I find myself in however if I do ever get a State Pension (I’m not planning on one) then the second will be more appropriate.
@RIT Thanks for the insight.
Here in in Spain, if you are working, you can claim Special Tax Regime status, which entitles you to lower income tax (24% flat), but no tax on worldwide income sources, for 10 years. It is known as the Beckham tax, as he was one of the first to take advantage of it when he was playing for Real Madrid.
Not sure of the situation if you are not working.
@Fremantle
I understand to be eligible for the Special Tax Regime you need to effectively:
– not have been a Spanish tax resident in the previous 10 years; AND
– the move to Spain should be because of an employment contract.
So a footballer heading to Barcelona on £200k or so a week with plenty of wealth already stashed is going to do alright. As a FIRE’ee I believe I miss out. In my planning I’m assuming my effective tax rate will be 20%. I do think that with the home and pension exemptions I’ll be able to avoid wealth taxes though.
Cyprus on the other hand is far more favourable. I’ll start out on effectively 0% for 17 years (or until the rules change) and worst case I’ll approach 5% if I manage my non-pension to pension transition well.
Of course there’s a lot more to this move than taxes though… How do you find living in Spain? Pro’s/Con’s?
I find Spain quite frustrating a place to live, but I’m also not 100% committed as my family are still in London. The bureaucracy is mind numbing and Madrid is just another big city. If I was in my 20s I am sure I’d enjoy it more.
I’m enjoying learning a new language having failed previously in my attempts to learn French. Much easier when you are immersed in the country, although English is the language in my office.
I find myself here by happen chance and to be fair I never expected nor had any real desire to be living in Spain. I had an option for the east coast of Italy on the same project, and as much as I love Italy, their tax system is a nightmare.
@Fremantle @RIT — I love Spain, and prior to the Brexit vote had vaguely floating around in my head the idea that I might move there in a year or three to work remotely for a period or maybe even do some active investing version of the FIRE thing, who knows.
Clearly I am still taking the referendum result to heart, because for me it changed everything and that idea was immediately crash landed. (I might say think about living there for 3-6 months sabbatical or similar, but there’s no way I’d be planning how the tax system would treat me in 17 years with all this hanging over our heads).
I’m not saying I’m right to think this way; given that a great many people seem to be shrugging and carrying on with their previous plans I probably do need to challenge my thinking. And yet…
British in Spain will become a bargaining chip for a populist Spanish government sabre rattling over Gibraltar some day when the UK has lost the cover of the EU.
There is no way I’d subject myself permanently to Spanish law, and you certainly wouldn’t find me buying property here.