2019 has been great for investors as the S&P 500 gained 8.86% so far (through 2/4/2019) in reaction to the release of my investment philosophy. Ok, maybe there were other factors at play. If you missed the posts, portfolios should be Risk-Aware, Focused, Elegant, and Realistic. There were also some investing concepts that just didn’t fit in this framework, but deserve mention. Each of these could be a post of their own, especially the hardest thing about investing.
Time as a Factor
Factor investing tries to identify characteristics of stocks that move up to gain an edge over market-cap based indexes. Factor investing has gained traction over the past few years, beginning with dividend and low volatility funds. Now most investment firms have agreed on four factors – value, size, dividends, volatility, quality, momentum, revenues, profitability, and liquidity. Yes, that’s nine factors, but most product sellers use a maximum of four factors in their multi-factor funds and they all think their four are the “right” ones. Whether that’s driven by their investment research department or their marketing department, I don’t know.
Your time horizon may be the ultimate factor. Stock pickers have to answer to their investors. These investors can be fickle and will often leave with their money after as little as 12 months of underperformance. Your time horizon is hopefully longer than a year (if not, why the hell are you investing in the stock market?). Being able to ride out the ups and downs of the markets is the ultimate advantage. You don’t need to shift around your portfolio constantly to appease investors or the media and the fewer transactions you incur, the better.
It’s in product sellers’ best interest to get you to do SOMETHING… but what’s in YOUR best interest? You don’t want to be sold a product, you want to buy your investments. Product sellers have to lure you in with a steak dinner to hear their pitch on variable annuities, but index investors don’t need any of that. If you’re sold a variable annuity, you’re buying the next sucker’s steak dinner. Too often, investors are sold products that are a solution to problems they don’t have (“income generating” junk, for example).
Financial entertainment provides an investing story with compelling characters and a plot, but it’s not reality. The characters who make predictions on financial soap operas live in a world where their actions have no consequences and their ideas don’t have to agree with reality. It’s just like sports talk radio.
Just Save Money
The first step to investing success is just saving money in the first place. Save and then save some more. Cut out the latte and become a millionaire? You’re more likely to achieve financial success through smarter large purchases like buying the right sized house or used vs new cars. Go ahead and enjoy your coffee. None of this is worth it if you’re miserable for half your life.
Success can make investing more difficult. You don’t become a surgeon or an architect on accident. However, success in a career does not translate into investing know-how.
Illiquid investments remove control from the investor. These products are sold as having a certain amount of liquidity – “Yes, we can gate the flows and quarterly liquidity is limited to a certain percent, but they are really just tools to protect our investors’ capital. Besides, we don’t foresee needing anything like that.” If they truly don’t foresee needing these tools, they wouldn’t be in the 250 page PPM that you’ll never read. Liquidity isn’t about being able to sell your investment tomorrow. It’s about being able to sell your investment in a volatile market. Illiquid investments too often act as roach motels or a Hotel California. You can check out any time you like, but you can never leave.
The Hardest Thing About Investing
The hardest thing about investing is watching idiots make money doing stupid things. The investment collectors (not true investors) that get sold garbage love to talk about it for the month or two that it keeps their attention or until their broker sells them the next product du jour. They are the same folks who will tell you they got out of the market before the 19% drop last quarter, but most of these people aren’t being shown an accurate accounting of their investments’ returns let alone the returns of their portfolio as a whole.