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
Taking "risk" since 1995.

thx1138
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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.

halfnine
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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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nisiprius
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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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lassevirensghost
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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:
“Groucho, how do you invest your money?” | “All in bonds.” | “But Groucho, they don’t pay much return.” | “They do when you have a lot of em!”

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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.

Dave

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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.
"John Bogle has changed a basic industry in the optimal direction. Of very few can this be said." ~Paul A. Samuelson

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