Investing styles

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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AltaRed
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Re: Investing styles

Post by AltaRed »

I agree indexing works just fine for 7 digit portfolios as it does small 6 digit ones. MERs of 5-10 bp are a small price to pay for the freedom of set it and forget it.
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Re: Investing styles

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DenisD wrote: 06 Oct 2017 23:46 I get confused when people say it's not worth investing in the index in Canada. But index investing is the best option for the rest of the world. I wonder: do Canadians have an investing inferiority complex? Are we so dumb that we can't price our companies correctly? While the rest of the world can? And if we are dumb, can't those smart Americans come up here electronically and take advantage of us? And fix those prices?
For me the essential issue is the facts of Sector concentration and index concentration in the broad-based Canadian indices, hence a lack of 'proper' diversification. It has nothing to do with inferiority complex or pricing our companies. The Canadian stock market is just too highly dependent on just three sectors: financials; energy (oil and gas); and materials (gold and mining).
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Re: Investing styles

Post by longinvest »

Peculiar_Investor wrote: 11 Oct 2017 09:05
DenisD wrote: 06 Oct 2017 23:46 I get confused when people say it's not worth investing in the index in Canada. But index investing is the best option for the rest of the world. I wonder: do Canadians have an investing inferiority complex? Are we so dumb that we can't price our companies correctly? While the rest of the world can? And if we are dumb, can't those smart Americans come up here electronically and take advantage of us? And fix those prices?
For me the essential issue is the facts of Sector concentration and index concentration in the broad-based Canadian indices, hence a lack of 'proper' diversification. It has nothing to do with inferiority complex or pricing our companies. The Canadian stock market is just too highly dependent on just three sectors: financials; energy (oil and gas); and materials (gold and mining).
Yet, our market is what it is. If I decided to invest in the Canadian stock market according to a different weighting than the index, I would lose one of the main advantages of indexing: that of matching market returns (minus a tiny fee and small tracking error) in that part of my portfolio.

Also, Canadian banks are big. I would find riskier to tilt my Canadian investments away from banks to put more money into smaller players like Bombardier. It's enough that my provincial government is already engaged into such speculation...

The way I compensate for the risks of our domestic stock market is to limit my Canadian stock investments to 25% of my portfolio. I'm aware that using a portfolio composed of indexed stocks and bonds will deliver quite average returns. Nothing flashy. I'm fine with that.
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Re: Investing styles

Post by Peculiar_Investor »

longinvest wrote: 11 Oct 2017 09:21
Peculiar_Investor wrote: 11 Oct 2017 09:05 For me the essential issue is the facts of Sector concentration and index concentration in the broad-based Canadian indices, hence a lack of 'proper' diversification. It has nothing to do with inferiority complex or pricing our companies. The Canadian stock market is just too highly dependent on just three sectors: financials; energy (oil and gas); and materials (gold and mining).
Yet, our market is what it is. If I decided to invest in the Canadian stock market according to a different weighting than the index, I would lose one of the main advantages of indexing: that of matching market returns (minus a tiny fee and small tracking error) in that part of my portfolio.
Agreed. The challenge is balancing the lack of diversification that are inherent in the Canadian broad-based equity indices. As you point out,
one method to compensate properly in portfolio construction and asset allocation is:
longinvest wrote: 11 Oct 2017 09:21 The way I compensate for the risks of our domestic stock market is to limit my Canadian stock investments to 25% of my portfolio. I'm aware that using a portfolio composed of indexed stocks and bonds will deliver quite average returns. Nothing flashy. I'm fine with that.
I was just trying to address DenisD's viewpoint that
DenisD wrote: 06 Oct 2017 23:46 I get confused when people say it's not worth investing in the index in Canada.
And suggest one of the main reasons that I regularly hear. Another common Canadian theme seems to lean toward a dividend growth investment 'style', which differs significantly from the broad-based Canadian equity indices.
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ghariton
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Re: Investing styles

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Jonathan Clements makes what I think is a powerful argument for very broad indexing across the total market.

First of all, start with the fact, not very widely recognized, that a handful of stocks drive the market's return as a whole. It is thanks to them that market averages have grown so nicely. The vast majority of stocks have done badly.
Consider a new study by Hendrik Bessembinder, a finance professor at Arizona State University. He looked at U.S. stock performance over the 90 years through December 2016.

His startling discovery: The market’s entire 90-year gain, over and above Treasury bills, could be attributed to just 1,092 companies, equal to 4% of all stocks. The other 96% collectively matched T-bills.

Indeed, half the wealth created over this 90-year stretch can be explained by just 90 stocks, including ExxonMobil, Apple, Microsoft, GE and IBM. That’s a mere 0.36% of the stocks that traded during this period. Most of the other 25,000 listed companies weren’t nearly so impressive: Stocks typically stuck around for just 7½ years—and a majority lost money during their usually brief life.

In other words, if you had picked just one or two stocks, the odds suggest you would have got your head handed to you.
So it's very important to hold one or more of that handful of superstars. But how to find them? It's like looking for a needle in a haystack.

Fortunately Clements has an answer:
Feeling discouraged? Don’t despair. There is one strategy that will guarantee you own the next year’s top-performing stocks. It’s remarkably simply: All you have to do is own all stocks.

<snip>

It turns out that the strategy we use to reduce risk—broad diversification—is also the strategy that improves our odds of impressive long-run investment performance. If we use index funds to capture the results of the market at the lowest possible cost, we’ll never have the thrill of outperforming the averages and we can’t be sure we will make money in any given year. But we are guaranteed to outperform most competing investors, whose results will be dragged down by their far higher investment costs.
This discussion illustrates the problem I have with stock screens and related strategies: It's too easy to screen out the big winners. For example, no screen I would ever have designed or used would have led me to hold Amazon. or Apple, or Microsoft for example. So what? one might think. At least my strategy picks up enough of the "good enough" stocks. But it turns out that happens only if you're lucky. Once you screen out a significant part of the market, you have, in essence, become a gambler speculator.

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Re: Investing styles

Post by DenisD »

But a gambler with the odds in your favour.
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Re: Investing styles

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ghariton wrote: 17 Dec 2017 17:21 This discussion illustrates the problem I have with stock screens and related strategies: It's too easy to screen out the big winners. For example, no screen I would ever have designed or used would have led me to hold Amazon. or Apple, or Microsoft for example. So what? one might think. At least my strategy picks up enough of the "good enough" stocks. But it turns out that happens only if you're lucky. Once you screen out a significant part of the market, you have, in essence, become a gambler speculator.

George
To be in the top 4% the stock would have to have made new highs and continued to increase in price.

If you had a stock screen that looked for stocks making new highs :)

If you only held stocks that continued to increase in price. :D
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Re: Investing styles

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Jonathan Clements makes what I think is a powerful argument for very broad indexing across the total market.
I wonder if JC is a member of FWF and publishes articles from here. I think the same article was published on the clippings thread in Feb 2017 taken from a tweet from Norm.

From Norms website there was also a link to an article along the same vein about the positive skewness of the market being a contributing factor to investor under performance as well as fees.
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Re: Investing styles

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BRIAN5000 wrote: 17 Dec 2017 20:20 I think the same article was published on the clippings thread in Feb 2017 taken from a tweet from Norm.
You're right, of course. I had forgotten that.
From Norms website there was also a link to an article along the same vein about the positive skewness of the market being a contributing factor to investor under performance as well as fees.
I believe that the original paper by Bessembinder makes the point. Here is the abstract:
Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages.
I remember debating, on this forum or its predecessor, that it is not enough to look at securities in terms of just their expected returns and their volatilities (as a proxy for risk). Investors seem to care a lot about skewness as well. That was my attempt at explaining the low-volatility paradox. Indeed, for extremely highly skewed returns, people are willing to accept a highly negative expected (or average) return. Lottery tickets may make sense after all. :wink:

In any case, I stand by the main point. Under-diversified portfolios are likely to have lower expected average returns, as well as higher risk.

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Re: Investing styles

Post by NormR »

BRIAN5000 wrote: 17 Dec 2017 20:20
Jonathan Clements makes what I think is a powerful argument for very broad indexing across the total market.
I wonder if JC is a member of FWF and publishes articles from here. I think the same article was published on the clippings thread in Feb 2017 taken from a tweet from Norm.

From Norms website there was also a link to an article along the same vein about the positive skewness of the market being a contributing factor to investor under performance as well as fees.
Maybe, but I doubt it. The paper made the rounds earlier this year on twitter, Bloomberg, etc.
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Re: Investing styles

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ghariton wrote: 17 Dec 2017 21:46
In any case, I stand by the main point. Under-diversified portfolios are likely to have lower expected average returns, as well as higher risk.

George

This is true but only if you don't actively manage your portfolio. These studies seemed to be based on a buy and hold strategy.

With a methodology to keep winners and cull losers or better yet to add to winners there is very little risk.

Using stops and trailing stops limits losses and makes sure that you keep at least some of your profits. As opposed to a buy and hold strategy' you, not the market control your losses.

Diversifying over a large number of stocks leads to only average performance. Since only 3 or 4 will produce big profits the remaining stocks drag the performance down.
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Re: Investing styles

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deaddog wrote: 17 Dec 2017 18:54If you only held stocks that continued to increase in price. :D
That one is the hardest. Since all stocks suffer minor reversals on their way up, how long do you hold during a reversal? And does the reversal mean less if the market as a whole is also retreating? Back in the day, I had devised a method that would accomplish this but I finally abandoned it after a few years when I adopted the dividend investing model. It did work and I am sure it would be easier today with the tools available. :thumbsup:
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Re: Investing styles

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kcowan wrote: 18 Dec 2017 07:06
deaddog wrote: 17 Dec 2017 18:54If you only held stocks that continued to increase in price. :D
That one is the hardest. Since all stocks suffer minor reversals on their way up, how long do you hold during a reversal?
Not just minor reversals. This blog post looked at the 10 best stocks of the last decade:

http://theirrelevantinvestor.com/2015/1 ... en-bagger/

Image
A few things really stand out in this table.
  • Nine of the ten biggest winners were all cut in half. Granted, the S&P 500 was as well, but the point is that even the best stocks gave investors plenty of sleepless nights.
  • Even though these winners returned 23x what the S&P 500 did, only Apple and Priceline hit all-time highs more often.
  • The average standard deviation for these stocks was more than twice that of the S&P 500. No pain, no gain.
  • These stocks spent on average 34% of the time in “bear market territory.” That’s pretty wild. One out of every three days these stocks were at least 20% off their all-time high.
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Re: Investing styles

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kcowan wrote: 18 Dec 2017 07:06
deaddog wrote: 17 Dec 2017 18:54If you only held stocks that continued to increase in price. :D
That one is the hardest. Since all stocks suffer minor reversals on their way up, how long do you hold during a reversal? And does the reversal mean less if the market as a whole is also retreating? Back in the day, I had devised a method that would accomplish this but I finally abandoned it after a few years when I adopted the dividend investing model. It did work and I am sure it would be easier today with the tools available. :thumbsup:
Care to share your method?

I use kind of a chandelier stop.

I use moving averages but increase them as the price moves in my direction.

I will start with a daily 3/8 cross; then move to a weekly chart; then increase the averages to a 10/30 weekly cross.

I want to let my winners run but I want to keep a minimum of 50% of my gains.

Using this method took me out of the market in 2008 and has let me hold a few stocks since 2009.

Yes I have sold a few stocks way to early, some I have been whipsawed several times, but the overall performance of the portfolio contimues to exceed my benchmark of the S%P index (SPY).
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Re: Investing styles

Post by ghariton »

Jason Zweig thinks that value investing will make a comeback. The reason? Because it has been out of favour for so long. Duh!

But I like the opening of his column:
Pop quiz: Name the giant store whose customers scoff at whatever goes on sale, but flock to buy whatever costs the most.
It isn’t a supermarket. It’s the stock market—especially over the past decade, when value stocks have moldered in the bargain bin. Such companies, trading at low prices relative to their earnings, net assets or other measures, have underperformed pricier growth stocks by one of the longest and widest margins on record.
He goes on to make his most telling argument:
Why have cheap stocks fallen so far behind? The short answer: Investors, already enthusiastic over high-priced growth shares, have turned euphoric, driving their prices even higher relative to value stocks.

Growth companies, argues the Research Affiliates study, haven’t become permanently more profitable. So value stocks should eventually outperform simply because their shares are cheaper.
Makes sense to me, even if circular. But I'll continue to index the broad market, just in case Mr. Zweig is wrong.

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Re: Investing styles

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Out of idle curiosity, I wondered how different investing styles have done in this downturn. I picked a more-or-less representative ETF for each of four styles.

VTI (broad U.S. market) down 20.29% YTD (but annual dividend of 1.56%, or 0.78% YTD, so net YTD of down 19.51%)

SPLV (low volatility) down 10,11% YTD (annual dividend of 2.44%, so net YTD of down 8.89%)

VTV (value) down 9.68% YTD (annual dividend of 2.53%, so net YTD of down 8.52%)

GMOM (momentum) down 1.03% YTD (annual dividend of 0.81%, so net YTD of down 0.62%)

I found that last one rather surprising.

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Re: Investing styles

Post by Chuck »

A bit of a misleading comparison though.

Those first 3 are different styles of equity investments, GMOM is an all asset class etf (stocks, bonds, cash, real estate, commodities).

A quick look at GMOM's holdings shows it holding about 1/3 cash and short term treasury notes, 1/3 bonds, and the rest in energy stocks, commodities and a few other odds and ends.

A more apt comparison might be to a pure equity momentum fund, say VMFO (down 16.3% YTD - dividends not considered).

But hey, I'll give the active managers of GMOM some credit. They saw headwinds coming for and headed for shore.
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