Good reads from around the Web.
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!
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…
- 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
- 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
- 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
- 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
- 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. [↩]