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The Cordant Blog

How Do You Know If Your Investment Strategy Has Stopped Working?

by Isaac Presley, CFA on March 29, 2017

Over the last three calendar years, Global stocks (MSCI All Country World Index - ACWI) have returned a meager 3.7% annualized leading some to question their investment approach. Large market moves up are obviously fun, and even big moves down are often easier to ride out (at least you can see something happening) than a sideways markets. It’s extended periods of low returns which test patience and one’s ability to stick with a strategy and let it work over time. 

These periods can be frustrating, causing investors to wrestle with questions like: am I doing the right things to succeed? Is there somewhere else I should be focusing? Are there changes I should make? The pain of patience triggers the question: is my strategy broken?

In his fantastic biography, legendary mathematician, successful gambler, and hedge fund manager, Ed Thorp reveals how he answers this question.

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Contradicting Warren Buffett: When Volatility is Risk

by Isaac Presley, CFA on March 08, 2017

Last week I enjoyed dinner with a group of people, one of which happened to be a hedge fund manager and fellow CFA charterholder. As us finance-types are wont to do, we quickly made our way to a discussion of every investment nerd’s favorite question: what is risk?

Warren Buffett, in his 2014 Berkshire Hathaway annual letter (page 18), shared his views on the topic:

That lesson [that stocks are less risky than cash-equivalent holdings over the long-term] has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. 

Buffett is pointing out that over the long-term stocks are an attractive way to grow capital while cash and their equivalents (i.e., treasury bills) do little more than keep pace with inflation, as can be seen in the chart below. He’s obviously correct on this point, investing in stocks has historically been one of the best things you can do to compound your wealth. 

Now then, does this mean people should ignore volatility and only own stocks? I’d say no. Buffett aside, most of us don’t live in the long-term; we live in the present and volatility is a risk that must be managed in the present.

So, despite my better judgment, I'm going to a disagree with one of, if not the greatest investor of all time and my new friend, the hedge fund manager with the NYU law degree and Stanford MBA to his credit—in other words, two very bright people.

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[W]indexing: When Average Isn’t Average

by Isaac Presley, CFA on February 08, 2017

All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident. ~Arthur Schopenhauer

 

19th-century German philosopher, Arthur Schopenhauer thought truth (and in this case, we'll extrapolate to include “new ideas”) passed through three stages: ridicule, opposition, then acceptance. While the index fund, which turned 40 last year, is a new idea no longer, based on the massive shift in assets that are moving from active to passive, one could argue their “truth” is now self-evident.

According to Michael Mauboussin and others at Credit Suisse, “Since the end of 2006, investors have withdrawn nearly $1.2 trillion from actively managed U.S. equity mutual funds and have allocated roughly $1.4 trillion to U.S. equity index funds and exchange-traded funds (ETFs).” 

This shift from active to passive funds has driven total assets invested in index mutual funds to around $2 trillion with another $2 trillion invested in ETFs. 

Clearly, index investing is an idea that is catching on and gaining momentum.

But sometimes it feels like people are disappointed to have to “settle” for indexing. No one wants to be passive or merely average. It can feel to many like settling for meatloaf because you can’t afford the prime rib.

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The Biggest Mistake Older Investors are Making Right Now

by Isaac Presley, CFA on January 19, 2017

Next month, Cordant is releasing a short eBook titled “Three Mistakes Intel Employees Make as They Approach Retirement.” (Shameless plug: sign up here to join our mailing list and make sure to get notified when it’s released.) One of the mistakes we identify in the eBook is a willingness for late-career employees to take on too much risk with their investments as they approach retirement.

It's a mistake we frequently see among Intel employees, many of which are striving to hit their “number” (a desired net worth) or simply maximize their last few years or decade of accumulating assets. What’s more, this penchant to increasing risk late in one’s career is heightened during bull markets—like we’ve had since 2009—according to a recent article in the Wall Street Journal.

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Should You Split Your Investments Between Two Competing Advisors?

by Isaac Presley, CFA on January 13, 2017

 

 

 

This year on the Cordant blog, we’ll be answering questions that we frequently see, or that relate to a relevant topic for many readers. We'll kick if off with the following question about structuring a competition between two investment managers.

Question: I will retire in one year. My 401(k) will be sizeable enough that I'm thinking of splitting it in half and giving a portion to two different investment companies. I will give them the same expectations I have in terms of risk and goals. I then plan on waiting a year or two and give my total business to the company that provides the largest gain in their respective portfolios. Is this a good strategy? Why or why not?

Congratulations on your upcoming retirement, but please, please, please don’t risk it with this strategy. Here are three reasons why this is not only a bad idea but quite risky as well.

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What If….

by Isaac Presley, CFA on January 06, 2017

What if you had the choice between two investments: both earning $100 per year, but one taxed at 30%, and the other at 20%?  For which would you be willing to pay more?

What if investment A was otherwise identical to investment B, but had an upfront fee and significantly higher transaction costs than option B:  Which would you rather own?

Would you be willing to pay more for the ease of having something delivered to your home versus dragging yourself out to a store and then hauling it back home? That is, does convenience justify a premium?

What if alternatives solutions to a problem were lacking: would you be willing to pay more to solve your need than you otherwise would?

Elevated valuations on the US stock market relative to its long-term history are often cited as reason for alarm—like picking up nickels in front of a steam roller according to a recent Yahoo Finance article. And it’s true that current valuations, using the cyclically adjust price-to-earnings ratio made famous by Nobel Laureate Robert Shiller, are above average—27.9 currently vs. the 1881 – 2016 average of 16.7. However, since 1990 we’ve spent 95% of the time above this 135-year average. Valuations do have some predictive power over long-term returns—it’s one reason we think it’s important to have a meaningful allocation to cheaper foreign developed and emerging markets stocks right now—but high valuations don’t necessarily mean we are due for a market crash.

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The Hidden Variable of Performance

by Isaac Presley, CFA on December 22, 2016

What’s your motivation for investing?

Simply answering this question and keeping it top of mind will make you a better investor. So says a recent study by the CFA Institute and the State Street Center for Applied Research.

Whether you’re a D.I.Y. investor, an individual working with an advisor, or a financial professional, understanding the motivation and purpose of individuals when investing should be an easy way to improve outcomes.

Investing with purpose should be easy. It’s not difficult to remind yourself why you are investing in the first place. To set up your strategy and tactics to this aim. To review your results in the context of what you are investing for.

But, all too often, it’s easier said than done. It’s natural to get caught up in short-term thinking and performance chasing. To compare results with a colleague or neighbor even though your goals, risk tolerance, and strategy make it an apple to orange comparison.

Cordant was founded on the principles of purpose. "Intention" is a word we use a lot around here and even the first line in my bio states “begin with the end in mind” implying starting with objectives first. But, it takes constant reflection to keep this in mind.

A recent study by the CFA Institute and the State Street Center for Applied Research shows just how important it is to remember what we are trying to accomplish—to invest with purpose.

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The Key to Great Investing

by Isaac Presley, CFA on December 02, 2016

*This article was origionally published on the CFA Institute's Enterprising Investor blog.

 

All great investors have one thing in common: the “ability to clearly communicate their [investment] philosophy,” Michael Batnick, CFA, observed.

I agree. Whether hedge fund managers, value investors, or index aficionados, the best investment professionals are great communicators.

But great investors, no matter their investing styles, share one other quality: the discipline to adhere to their investment approach through various market cycles.

Great investing is not simply a matter of identifying The Best™ investment strategy. In the 1990s, James O’Shaughnessy documented a variety of effective strategies in What Works on Wall Street. A number of approaches work, however, the key is not so much to find them, but to apply them with consistency.

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Cheaper Doesn’t Mean Do More

by Isaac Presley, CFA on November 21, 2016

 

If more information were the answer, we'd all be billionaires with perfect abs." Derek Sivers

 

We live in a world with more information at our fingertips than previously thought possible. According to Google’s Eric Schmidt, “Every two days now we create as much information as we did from the dawn of civilization up until 2003.” And as a result, many things today are cheaper than ever before. However, in the end, this access to more and more at ever lower prices, ends up costing us more in terms of the outcomes we seek. Let me explain.

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Where Do We Go From Here?

by Isaac Presley, CFA on November 10, 2016

The results of Tuesday’s presidential election were surprising to many and concerning to some, but they’ve left pretty much everyone asking: where do we go from here?

In an attempt to answer this very natural question, we now have the very same pundits, prognosticators, and seers who couldn’t predict the outcome of the election lining up to tell us exactly what will happen over the next four years.

But what do we think? Honestly, our crystal ball is a little cloudy. We don’t know, and neither does anyone else; someone telling you otherwise is probably either lying or selling you something—maybe both.

If we’ve learned anything in 2016, it’s that the prediction business is not a business you want to be in as an investor. First, the “Brexit” vote which few saw coming and now, a billionaire real estate developer with no political experience, has been elected to serve as the 45th President of the United States. Heck, even the Chicago Cubs snapped a 108-year drought and won the World Series.

So, despite the lessons of this year, the desire to know the future remains. We still crave certainty. It’s why the prediction business, no matter how bad the track record, will never go away.

Let’s look at some examples of how difficult it is to predict the future, let alone make money by doing it. Then we will give our thoughts on what you should be doing now.

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