There And Back Again: My 180 Back To Simplicity

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Random Walker
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There And Back Again: My 180 Back To Simplicity

Post by Random Walker » Mon Aug 12, 2019 9:46 pm

https://alphaarchitect.com/2019/08/08/t ... implicity/

Found this article at Alpha Architect. Think it will be of interest. One investor describes his investing evolution as he gained knowledge, thought he was smarter than he actually was, got super complex, and with gained investment wisdom, ultimately pointed back towards simplicity. TSMers might be disappointed that he didn’t ultimately land at a three fund portfolio. He strongly advocates value, momentum, international diversification. Nonetheless he has simplified by systematically accessing known factors, avoiding home country bias, avoiding individual security selection and market timing. He also spends a fair amount of time describing how he incorporates his own human capital into his 100% equity asset allocation decision. Interested in what others think

Dave

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dogagility
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Re: There And Back Again: My 180 Back To Simplicity

Post by dogagility » Tue Aug 13, 2019 4:55 am

Thanks for posting this, Dave.
Random Walker wrote:
Mon Aug 12, 2019 9:46 pm
He also spends a fair amount of time describing how he incorporates his own human capital into his 100% equity asset allocation decision. Interested in what others think
Dave
I found myself in much of his thinking about human capitol. My reasons to be 100% allocated to equity for some 20 years echoed his reasons. I trusted my human capitol during times of economic calamity and was utterly detached psychologically from my portfolio balance during these 20 years. So, I agree with his premise of having a 100% equity allocation under these conditions.

It's only recently that I've deviated from this allocation. I see the coming need to begin spending my portfolio. As a result, I've decided to reduce equity exposure somewhat.

I respect his investment decisions. However, I've chosen to tie myself to the typical Boglehead investment approach rather than value and international. For what reason?... eh, it may be sufficiently diversified, and I trust it for the long-term. The "trust" part keeps me from selling during times of newsy doom and gloom... which is nice.

DA
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Re: There And Back Again: My 180 Back To Simplicity

Post by thx1138 » Tue Aug 13, 2019 5:35 am

Is this guy actually for real?
I don’t expect it to take a major hit (job loss or pay cut) in an economic downturn or market meltdown.
Somehow goes along with:
Matt Tracey is an investment management professional in New York, focusing on portfolio strategy for institutional investors.
I don't know Random Walker. I realize his conclusions sort of mirror yours, and they aren't really drastically all that different from mine either. But just because a parrot happens to say something the same as you doesn't make a parrot insightful.
So where has my journey ended? At a smarter and better simplicity. For the next 2-3 decades: 100% long-only global equities with heavy international diversification, expressed as concentrated value and momentum exposures.
Yeah, right - this guy isn't going to change anything in the next 2-3 decades. This type of person changes their portfolio more often than their underwear. Why? Because they craft logically flawed narratives - rationalizations to use another word - that vastly overstate any reasonable level of confidence based on the concepts or data to justify what ever their current portfolio du jour is. That's a red flag - it means first they can't properly analyze risks and second they demand certainty to such a degree they create it out of whole cloth to make themselves feel better about their decisions.

Like this:
A common fear: “What if factors don’t work anymore?” “What if they’re dead?” “Won’t factor strategies suck?” Fair questions, but there’s an equally fair answer. What’s the downside? A factor “dying” would simply mean that its excess return (its “factor premium”) disappears. The downside is randomness. At worst, I figure I own a portfolio of random equal-weighted stocks, and I’ve already argued that random equal-weight portfolios handily beat market-cap-weighted portfolios—the common “passive” benchmark—over longer periods. To be worse-off than randomness, these long-run factor premiums would have to turn outright negative in the future. That would mean investors, in aggregate, stopped buying “cheap” and “winners” for the first time in history and instead started buying…expensive stocks and losers?? I’m not quite sure what that world would look like. The risk of a “false negative” (speculating that these factors are dead, and as a result, not owning them) seems much more insidious than the risk of a “false positive” (these factors are in fact dead, you invest, and you get a random equal-weight portfolio). Big potential upside with a perfectly acceptable downside? That is an asymmetry I like.
Honestly.

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Re: There And Back Again: My 180 Back To Simplicity

Post by halfnine » Tue Aug 13, 2019 8:03 am

He considers his human capital at 50-75% of wealth. While this maybe true human capital does come with some risk no matter how risk free one believes theirs to be. As such, and as a risk mitigation strategy, I am more inclined to cap this number at 40% when determining the rest of my asset allocations.

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Re: There And Back Again: My 180 Back To Simplicity

Post by nisiprius » Tue Aug 13, 2019 9:15 am

Misdirected attention. Too much attention spent on details within the stock allocation, and not enough on the basic "100% stocks" decision.

I continue to dislike the very term "human capital" because "capital" usually implies ownership of an asset, and you do not own your job. Another problem with the idea of "human capital" is that it is undiversified, and so full of idiosyncratic risk that it can't be usefully quantitied the statistics of your own job, beyond the broadest handwaving--professors are bonds, construction workers are stocks. Almost everyone who's thinking about factor investing is in a white-collar job and is a "bond," so it isn't a variable factor in the equation.

"My human capital—the present value of my future labor income savings—functions kind of like a high-quality inflation-protected bond." Really? Do high-quality inflation-protected bonds carry cardboard boxes out of Lehman Brothers? Do high-quality inflation-protected bonds get multiple sclerosis?

Whatever human capital is or is not, people have always had it. The fact that investment books began talking about it in connection with individuals' investments, circa 2000 or so, doesn't mean anything changed. If 100% stocks is reasonable today, it was always reasonable. If it wasn't reasonable thirty years ago, it isn't reasonable now. The apparent "discovery" of human capital is not something that makes 100% stocks either more or less risky than they ever were.

He asks the question--his italics!--"Could anything rational cause me to abandon ship?" His answer--based on his macroeconomic predictions and the 78th percentile of EBIT-to-value yield--is "no."

The next question he should ask is "Could anything irrational cause me to abandon ship?" He doesn't really consider it seriously.

His answer, if there is one, is "I ask you, friends, to 'tie me to the mast'” and he helpfully includes a painting of Odysseus ignoring the song of the sirens. Quite apart from shuffling off the responsibility to us instead of taking it himself, he does not say how we--or anyone else--is to do this.

How can he be tied to the mast? Has he hung a framed print of this painting by his desk? Is he going to log in and read his own article daily to remind himself of his "Ulysses pact?" Or is this just the equivalent of a New Years' resolution? "I will lose twenty pounds. I will read Paradise Lost. I will quit making behavioral errors in finance."
Last edited by nisiprius on Tue Aug 13, 2019 10:42 pm, edited 5 times in total.
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Re: There And Back Again: My 180 Back To Simplicity

Post by lassevirensghost » Tue Aug 13, 2019 9:55 am

Maybe just me, but my human capital feels much more equity-like than bond-like! :shock:
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Random Walker
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Re: There And Back Again: My 180 Back To Simplicity

Post by Random Walker » Tue Aug 13, 2019 10:36 am

lassevirensghost wrote:
Tue Aug 13, 2019 9:55 am
Maybe just me, but my human capital feels much more equity-like than bond-like! :shock:
Totally agree. Every individual’s circumstance is different and every individual’s perception of his circumstance is different. Human capital can be tenuous. Textbooks say I have a bond like occupation, but I’ve had a stock like roller coaster ride.

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Re: There And Back Again: My 180 Back To Simplicity

Post by Fallible » Tue Aug 13, 2019 10:40 am

I am always interested in keeping it simple, but as a small investor, reading about the author's highly professional background was necessary to keep his article in perspective:
About the Author: Matt Tracey
Matt Tracey is an investment management professional in New York, focusing on portfolio strategy for institutional investors. Matt also conducts research on and writes about secular macroeconomic themes and their implications for investments. Prior to joining his current firm in 2014, he was an investment banker with Stifel, Nicolaus & Co. in San Francisco, working with municipalities and public infrastructure authorities. Matt began his career with UBS Investment Bank in 2007. He has ten years of investment and financial services experience and holds a bachelor's degree from Vassar College and an MBA from the University of Chicago’s Booth School of Business, where he focused on macroeconomics and investment management. Matt is a CFA and CAIA charterholder.
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Re: There And Back Again: My 180 Back To Simplicity

Post by esteen » Sun Sep 01, 2019 11:50 pm

nisiprius wrote:
Tue Aug 13, 2019 9:15 am
"My human capital—the present value of my future labor income savings—functions kind of like a high-quality inflation-protected bond." Really? Do high-quality inflation-protected bonds carry cardboard boxes out of Lehman Brothers? Do high-quality inflation-protected bonds get multiple sclerosis?
Thank you nisiprius this made me lol :D

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Re: There And Back Again: My 180 Back To Simplicity

Post by Valuethinker » Mon Sep 02, 2019 4:43 am

nisiprius wrote:
Tue Aug 13, 2019 9:15 am


"My human capital—the present value of my future labor income savings—functions kind of like a high-quality inflation-protected bond." Really? Do high-quality inflation-protected bonds carry cardboard boxes out of Lehman Brothers? Do high-quality inflation-protected bonds get multiple sclerosis?
Thank you for that.

The employees of Bear Sterns owned 25% of the company - they lost 90%+ of that. Lehman Brothers also had a strong firm equity-linked culture, I believe.

But it's bigger than that. "stable" sectors like Higher Education and Government are anything but, these days. You can be outsourced at the drop of a hat, "TUPE legislation" means your new employer has to offer "equivalent" terms, so goodbye your Defined Benefit pension. And the new employer will be looking to squeeze costs from day 1 and increase productivity (however arbitrarily measured).

Teaching (school) used to be a dead stable profession, long summer holidays etc? Now? In the UK it has one of the highest levels of occupational illness, bullying, medical leave of any white collar profession. Half the schools in the country are run by either for-profit or not-for-profit academies which operate outside the normal purview of employment for teachers (as I understand it).

Change is the only constant in white collar life. Both in financial services and in education I looked around and said "would we really create this if it did not already exist? Aren't there far more effective & efficient ways of doing this?" You are starting to see it in retail financial services - mobile only banking etc. Financial institutions are these giant dinosaurs, unaware that their environment is changing and not able to react quickly enough when they do see it.

Health is another issue. Once you hit 50, it seems genetics and bad luck really kick in ...

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Re: There And Back Again: My 180 Back To Simplicity

Post by nisiprius » Mon Sep 02, 2019 7:18 am

Valuethinker wrote:
Mon Sep 02, 2019 4:43 am
...Health is another issue. Once you hit 50, it seems genetics and bad luck really kick in ...
Bad luck more than genetics.

In the Framingham study, the correlation of lifespan between parents and children was only something like 7%. A popular article from the NIH, Is longevity determined by genetics? says 25%, "It is estimated that about 25 percent of the variation in human life span is determined by genetics, but which genes, and how they contribute to longevity, are not well understood." Newspaper stories about the search for the longevity gene, or genes, come out all the time and maybe the answer is just around the corner, but it's not here yet.

Everybody wants to predict their own lifespan, but the idea that you can learn much by looking at your family tree is not very real. It's mostly something that people say as a placeholder in place of "I don't know any other way to predict your lifespan."

But may this is just sour grapes, because if they do crack the problem of mortality, it probably won't be in my lifetime.

By the way, one of the things I admire about George Bernard Shaw is the originality (AFAIK) of his idea, in back to Methuselah, that there is actually a optimum lifespan and that it is about 300 years! The conceit behind the play is not the abolition of death, but the extension of life to that longer, but still limited time.

Being a fellow SF enthusiast I imagine you remember Robert Heinlein's story, "Lifeline?" As with so many SF stories, I can't actually remember the plotline, only the idea. In four dimensions, a person's body is like an irregular tube, a "pink worm," and (somehow!) someone discovers how to send an RF pulse down it and time how long it takes for the reflection to get back... i.e. to accurately determine when a person will die. To the hour and minutes, of course. Storyline ensues. People trying to evade their appointment in Samara? Insurance companies ruined? I'm pretty sure it ends up with the conclusion that such a machine would not be a Good Thing.
Last edited by nisiprius on Mon Sep 02, 2019 7:25 am, edited 1 time in total.
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Re: There And Back Again: My 180 Back To Simplicity

Post by coingaroo » Mon Sep 02, 2019 7:25 am

Fallible wrote:
Tue Aug 13, 2019 10:40 am
I am always interested in keeping it simple, but as a small investor, reading about the author's highly professional background was necessary to keep his article in perspective:
About the Author: Matt Tracey
Matt Tracey is an investment management professional in New York, focusing on portfolio strategy for institutional investors. Matt also conducts research on and writes about secular macroeconomic themes and their implications for investments. Prior to joining his current firm in 2014, he was an investment banker with Stifel, Nicolaus & Co. in San Francisco, working with municipalities and public infrastructure authorities. Matt began his career with UBS Investment Bank in 2007. He has ten years of investment and financial services experience and holds a bachelor's degree from Vassar College and an MBA from the University of Chicago’s Booth School of Business, where he focused on macroeconomics and investment management. Matt is a CFA and CAIA charterholder.
Unfortunately plenty of investment professionals advocate for poor investments, such as mutual funds with high fees.

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Re: There And Back Again: My 180 Back To Simplicity

Post by Sandtrap » Mon Sep 02, 2019 8:22 am

Random Walker wrote:
Mon Aug 12, 2019 9:46 pm
https://alphaarchitect.com/2019/08/08/t ... implicity/

Found this article at Alpha Architect. Think it will be of interest. One investor describes his investing evolution as he gained knowledge, thought he was smarter than he actually was, got super complex, and with gained investment wisdom, ultimately pointed back towards simplicity. TSMers might be disappointed that he didn’t ultimately land at a three fund portfolio. He strongly advocates value, momentum, international diversification. Nonetheless he has simplified by systematically accessing known factors, avoiding home country bias, avoiding individual security selection and market timing. He also spends a fair amount of time describing how he incorporates his own human capital into his 100% equity asset allocation decision. Interested in what others think

Dave
IMHO this guy's approach has a "low sleep factor" due to complexity alone.
Interesting link, although is "back to simplicty" is still not simple.
Thanks for posting.

Keep investing simple. . . real simple.
j :happy
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Re: There And Back Again: My 180 Back To Simplicity

Post by FIREchief » Mon Sep 02, 2019 1:35 pm

I don't think this guy really understands "simple." Also, when a 34 year old thinks that they have "safe" human capital and never want to retire, they may just not have lived long enough.
For “value”, to maximize returns you’re probably better off owning the very cheapest sliver of the universe on almost any price-to-fundamental metric than owning a much bigger share of the universe on the “best” signal or multi-signal composite.
Isn't the extreme of this just picking the stock with smallest P/E ratio and buying just that? What could go wrong?? :P
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Re: There And Back Again: My 180 Back To Simplicity

Post by Lee_WSP » Tue Sep 03, 2019 12:09 am

Call me skeptical, but I read that as an advertorial written solely to persuade readers to buy the website's offerings. Evidence: Matt is an investment professional in New York. The website is ostensibly trying to get readers to buy into some "winning" strategy. The journey goes from: purge mutual funds (good), diversify globally (okay), factor investing (bad), some forms of what seem to be market timing, then on to the journey back which is: "fully systematic asset allocation" (that's marketing speak for managed fund), anti home bias (except you said it was bad earlier), then "diworsification" (I guess diversification is bad?), then more marketing speak at the top.

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Re: There And Back Again: My 180 Back To Simplicity

Post by james22 » Tue Sep 03, 2019 2:09 am

nisiprius wrote:
Tue Aug 13, 2019 9:15 am
He asks the question--his italics!--"Could anything rational cause me to abandon ship?" His answer--based on his macroeconomic predictions and the 78th percentile of EBIT-to-value yield--is "no."

The next question he should ask is "Could anything irrational cause me to abandon ship?"
Between the two he should ask "Could anything rational cause me to adapt my plan to reflect new information?"

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