Month: August 2015

Importance of Simulations

By Kaschkawalturist (Own work) [GPL (http://www.gnu.org/licenses/gpl.html)], via Wikimedia Commons

Sleep per Day: (Target) 7h30m / day (Actual) 7h26m / day (71 day average)

I’ve mentioned before in “Abursdism” that I’m a very emotional person in nature, which is a bad thing to have when dealing the volatility of stock prices (get overloaded with fear / stress) or when making stock choices or portfolio decisions (get too impulsive).

After all, one of the key factors behind investment success is being rational.

Which is why I’ve been playing two games akin to investment simulation constantly.

One is DICEWARS, a game that’s similar to risk.

DICEWARS

I’ve been recording my stats since 2014 Dec 1st, and of the 456 games I’ve played since, I’ve won 324 times and lost 132 times. This is under the setting of a 8 player game and that I always play whatever game board is presented to me instead of choosing to switch to another randomized game board.

What this game has helped me is to internalize the lessons of margin of safety, importance of discipline and importance of conviction in one’s investment philosophy.

How so?

My 71.05% win rate basically boils down to the fact that every time I attack, I make sure that my attacking square has at least 2 more die than the defending square, ensuring a margin of safety that reduces the probability of losing the attack and thus all my die.

The preservation of die by only making decisions where the risk:reward ratio is skewed in my favor has made it extremely useful in making me much more unappealing for others to attack due to the presence of die, but has also allowed me to be extremely aggressive in attacking when an extremely favorable situation occurs due to the accumulation of die that wasn’t spent when the odds weren’t as favorable.

And the amount of games played has also meant that sometimes I have long stretches of losing games, but it has also helped me internalize the lesson that just because luck is not going your way it doesn’t make a working investment philosophy (value investing) no longer useful.

The other is Governor of Poker

Governor of Poker

 

 

 

 

 

 

Poker is a much more faster paced game than DICEWARS, and also much more punishing. Once you make a mistake of being too committed in one hand that doesn’t play out well may put you in a further unfavorable position of being exploited by big stack bullies.

And I really like that, because in life not every decision will go your way, so being able to keep your emotions in check and move onto the next decision as rational as possible is extremely important in eventually winning the game.

This has also helped me deal with sunk cost bias better, which has always been a huge problem for me as I tended to hang onto losers in hope of them turning around when the the initial fundamental analysis was already revealed to be flawed, or the fundamentals itself has deteriorated.

Hopefully, coupled with my ongoing reading, thinking and writing, these simulations can also train my decision making, so that I’m ready by the time the next bear market hits.

It is after all “of paramount importance to do everything humanly possible in a bull market to prepare for the next bear market“, and I don’t want to be caught swimming naked when the tides go out.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

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Dealing with Envy

By Gabriel S. Delgado C. from Puerto Ordaz, Venezuela (Envidia / Envy: Eyes don’t lie Uploaded by Fæ) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Sleep per Day: (Target) 7h30m / day (Actual) 7h24m / day (69 day average)

A friend of mine got a great opportunity recently (can’t disclose anymore as the information is still not publicly announced yet), and I felt very weird.

I actually felt envious, and I hated myself for feeling that way.

Especially when I keep telling people one of my favourite quotes of all time is “Someone will always be getting richer faster than you. This is not a tragedy.” So by feeling envious I was being a hypocrite.

But I’m thankful that that quote is one of my favourite quotes. Constantly reciting the line and pondering upon it has allowed the sense of envy reside and the lesson internalize even better.

As Forrest Gump said, “Life was like a box of chocolates. You never know what you’re gonna get.” It is after all not what circumstances you get in life that defines a life well lived, but how you deal with the circumstances in life that defines a life well lived.

And it just reminds me of the anchoring bias that our brain is wired to operate. Based on the circumstances, it would seem unfair that he would get the great opportunity rather than me considering the similar competence, but compared to the rest of Hong Kong it would be unfair that I had parents who could afford us to go to international school and university, and compared to the rest of the world it would be unfair that I can enjoy the delights and conveniences of urban life.

And I think it’s a great lesson for me as an investor too.

The recent selloff has seemingly stopped, and the bounce back has actually caused the under-valued stocks in my 74 stocks watch list to drop from 6 to 4.

Although it seems like I missed a great opportunity to buy because I’m strict on the monthly buying discipline (1st day each month), I’m reminded again by David Merkel in his article “When to Deploy Capital” that “Investing has to be done on a “good enough” basis“. There is no perfection in investing, only good enough, and I’ll have to live with that and be happy that I’m sticking to my investment discipline even though others are making lots of paper gains after buying from the dips.

After all, “Someone will always be getting richer faster than you. This is not a tragedy.

Considering Black Swan Events For Decision Making

Ödön Heller [Public domain], via Wikimedia Commons

Sleep per Day: (Target) 7h30m / day (Actual) 7h18m  / day (64 day average)

**I wrote an article that pointed out the flaws of my thinking of this article, you can read it by clicking here.**

I was talking to a friend who just became an insurance agent, and I initiated the discussion of critical disease illness.

For me, a critical disease insurance is very attractive since even though the probability of getting a critical disease is low for my age group, once it does visit me, it would absolutely cripple me financially.

But that’s System 1 thinking, a more educated decision requires sitting down to think about the question in terms of probability and expected utility value, which is essentially “Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do. It’s imperfect, but that’s what it’s all about.

One of the most well known diseases covered by critical disease illness is cancer, which as a male, I statistically have a 43.31% chance to catching one in my lifetime. However, as a below 45 year old male, I have a 6.23% chance of getting cancer at this stage of my life.

What this implies is that critical diseases such as cancer is common enough among humans to be taken seriously, but that over-fearing isn’t warranted.

With cancer treatments usually lasting 4-6 months, and cancer treatments costing 10,000 USD or more / month, the cost of cancer treatment may cost from 40,000 USD to 138,000 USD.

So the decision of whether to buy critical disease illness (if cancer is the only concern) would boil down to whether I can afford the expected utility value of cancer treatment (probability of getting cancer at current age * cancer treatment cost), and if I can’t then how much should I pay in terms of insurance premium?

The expected utility value of cancer treatment for male below 45 year old is $8,597.40 USD [1], which I could afford right now.

But the critical disease insurance covers up to 39 more situation besides cancer. What this means is, if the expected utility value of every other 39 situations is 50% [2] of expected utility value of cancer treatment, then the total expected utility value for critical diseases is 176,246.70 USD, which is something I can’t afford as of now.

So faced with a 176,246.70 USD expected utility value of critical disease treatment, how much should I pay for insurance premium? Since the payout ratio of claims to insurance premium is around 1000:1, the amount I should be willing to pay is 176.25 USD, which is around 1374.75 HKD.

The same decision making process can be made in terms of what market conditions is most favorable to invest for investors who are just starting out and have shorter investment horizons (eg. <= 3 years).

Historically, the average duration of bull markets is 68 months, while the average draw downs during bear markets is 35.88%.

The decision for whether a investor who is just starting out would be basically boil down to the probability of a bear market to happen * the average draw down – the probability of the bull market to keep going * the average investment return possible in a bull market.

Since the last part of the component is susceptible to your investment strategy (average investment return possible in a bull market), the question needs to be inverted to see whether the average investment return is realistic or not when making an informed decision to enter the stock market or not.

So an example would be if probability of a bear market to happen is 50%, the average draw down is 35.88%, the probability of bull market to keep going is 50%, then the investment return needed to make investing sane would be at least 17.94% for the remainder of the bull market.

Another way to look at this question is how long will it take to break-even the the average draw down.

In order to break-even a 35.88% loss, a 55.96% return needs to be achieved before the next loss is occurred. If the bull market is expected to continue for 2 years only based on historical pattern, then an average return of 24.88% required would put into perspective whether it is realistic that the investor can generate this amount of returns before the next bear market hits.

But of course, the present doesn’t always repeat exactly what the past has done, but it’s always important to use these historical probabilities as a reference point if there’s no substitute for accurately predicting the probability of certain events happening.

[Notes]

[1] 6.23% chance of below 45 year old male getting cancer * 138,000 USD cancer treatment

[2] I don’t have the time to research the probability of being in the 39 other situations besides cancer and the cost of treatments for these 39 situations, but quite a lot of them seem to have a lower probability than cancer by gut feeling, so a conservative 50% discount is used for each of the 39 other situations.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

How to Prevent Buying Too Early

By dave_7 from Lethbridge, Canada (Empty bus) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Sleep per Day: (Target) 7h30m / day (Actual) 7h19m  / day (61 day average)

In “Only Investing in Things You Can Control“, I mentioned that “I’m going with buying US Wide Moat Stocks with my lump sums of money. I can control the valuation and quality of the company stocks I buy, which can offset the diversification risk.”

But how do I solve the dilemma of not having enough money to be comfortably diversified? [1] After all, the biggest thing I want to ensure is to minimize regret so that I can stay the course, so I don’t want to end up kicking myself for buying way too early during a potential bear market.

After all, I don’t want to be the guy “who was left on the sidelines of the booming September 1929 stock market highs, then sat on cash, and plunged in only after shares were 19 percent lower by April 1930. When stocks reached the time of the eventual bottom in June 1932, that investor had lost 83 percent.

So my plan involves two components:

  • Only invest when the number of available stocks [2] is 1.5x (16 – no. of wide moat stocks held) [3] or 24, whichever is smaller.
  • If number of available stocks is satisfied and available cash [4] on hand can afford it, buy 1 stock / month until I have 16 stocks. If available cash on hand can’t afford it, leverage up to the point that I can afford 16 stocks over 16 months. Max stock commission I’m willing to pay per purchase is 1.5% [5].

By the time I have 16 stocks, I’d just invest in whatever is the best stock according to a combination of quantitative factors whenever I have the money. This means I’m willing to repeat purchase certain stocks.

[Notes]

[1] I’m comfortable with at least 16 stocks, since according to Joel Greenblatt it reduces nonmarket risk by 93%. This is important considering I’m investing in a formulaic way, which works well on average, thus requiring adequate diversification to allow me to reap the benefits of a good investment strategy while minimizing the probability of being wiped out due to bad luck.

[2] Available stocks is defined as wide moat stocks that are available at the right price based on my fair value estimate.

[3] 1.5x gives me a margin of safety in the event that when I start the 16 month long journey of 1 stock purchase / month, there will still be 16 available stocks left by the time I finish the 16 month long journey.

[4] Available cash is dependent on net worth * (((US Shiller P/E Actual / US Shiller P/E Mean) – 1) * 100). The rationale is detailed here.

[5] 1.5% stock commission implies a 1% expense ratio over 3 years. The rationale is detailed here.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

Only Investing in Things You Can Control

http://By Frank Vincentz (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

Sleep per Day: (Target) 7h30m / day (Actual) 7h19m  / day (59 day average)

I mentioned in “Start Small” that “I (will) regularly invest in a commission free index fund with leftovers from my monthly salary after deducting living expenses and taxes (until I have 1.5 years of expenses in cash)”, which is what I’ve been doing by investing into the Tracker Fund of Hong Kong (HKEx: 2800, tracks Hang Seng Index) through a zero commission stock monthly investment plan.

And it’s something I’m comfortable with because the Hang Seng Index is by many measures under-valued, even though I consider many stocks in the Hang Seng Index to hold narrow moats rather than wide moats. But the fact that most stocks in the Hang Seng Index are narrow moat stocks means that I’m more than willing to sell my ETF shares once it hits fair value.

With the US Stock Market tumbling for the past few days though, I’m presented with a dilemma. Should I inject lump sums of money periodically into the Hang Seng Index as it tumbles with the global equity selloff? Or should it go into US ETFs to diversify away geographical risk? Or should it go directly into US Wide Moat stocks that I’ve been tracking all this time?

The following are the pros and cons of each option:

  • (Hang Seng Index Pros) Hang Seng Index is under-valued in terms of absolute and relative value, which is something I can measure in terms of acceptable buying price and the selling price. This allows me to avoid over-paying.
  • (Hang Seng Index ConsIf I inject lump sums into Hang Seng Index, I’m essentially tripling down on the prospects of the Hong Kong economy since I work in Hong Kong, I’ve got periodic monthly salary leftovers going into Hang Seng Index and the lump sums would be going into Hang Seng Index as well. If Hong Kong’s economy doesn’t survive, I’ll be completely wiped out.
  • (US ETFs Pros) If I inject lump sums into US ETFs, I definitely diversify away geographical risk. I am also exposed to much more wide moat stocks than is available in terms of proportion or absolute number in the Hang Seng Index
  • (US ETFs Cons) Most US ETFs I’m looking at (VOO, SCHD, NOBL, MOAT, GURU, PKW, CSD) are over-valued in terms of absolute value. Even if this stock price tumbling continues, it may take a long while before valuations drop to levels that are acceptable for me in terms of absolute value. Or I could go ahead and invest but run the risk that the over-paying won’t work out in terms of returns.
  • (US Wide Moat Stocks Pros) I can ensure each purchase is under-valued in terms of absolute value, so I can avoid over-paying. I can also ensure every stock purchase is a wide moat stock.
  • (US Wide Moat Stocks Cons) I don’t have enough capital to have great diversification for a formulaic based investing, so I will be bearing diversification risk.

I think after weighing the pros and cons, I’m going with buying US Wide Moat Stocks with my lump sums of money. I can control the valuation and quality of the company stocks I buy, which can offset the diversification risk.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

What’s Your Edge? (3)

By Marc Majcher from Austin, TX, USA (IMG_4837) [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons

Sleep per Day: (Target) 7h30m / day (Actual) 7h17m  / day (58 day average)

What’s Your Edge series – Part 1 Part 2 Part 3

In the previous article I talked about how a majority of institutional investors pursuing a Passive Investing philosophy in Market Cap Indexing meant that it was very hard to find bargains in the Large Cap space and that if one was to partake in Large Cap investing and beat the market, it would require lots of patience and inactivity.

But what if a retail investor like me doesn’t want to partake in Large Cap investing? The reasons are after all plentiful on why forgoing investing in the largest companies in the world makes sense for retail investors.

One of the biggest reasons why retail investors may not want to partake in Large Cap investing is the fact that most institutional investors (arguably where most of the best investors reside) invest in Large Caps not because they like to but because they are forced to.

In other words, Large Cap investing will never be the investment strategy that will yield the highest returns for a retail investor over the long run.

That’s because investment opportunities become much more limited to institutional investors as they manage large sums of money. In the words of Charlie Munger, “Buying those cheap, cigar-butt stocks [companies with limited potential growth selling at a fraction of what they would be worth in a takeover or liquidation] was a snare and a delusion, and it would never work with the kinds of sums of money we have. You can’t do it with billions of dollars or even many millions of dollars.”

What this means is, if you were to partake in Large Cap investing (with the lure of buying great companies and holding them forever as advised by Warren Buffett), you must realize that you’ll never generate the highest possible amount of returns available for the amount of capital a retail investor has to invest.

One of the most significant advantages for a retail investor is, after all, being structurally able to invest in opportunities with low institutional investor competition but with high potential upside.

Which leads to the second reason why retail investors want to forego Large Cap investing. The institutional investor competition is much much lower in certain areas. And the key to beating the market relies heavily on avoiding the “sharks at the table

So where are the areas where there’s very few sharks? Basically anywhere where there are risks that the sharks cannot compete in.

A majority of these risks can be found listed in Howard Marks’ memo called “Risk Revisited“, namely:

  • Possibility of permanent loss of capital
  • Risk of falling short
  • Fear of missing out
  • Credit risk
  • Illiquidity risk
  • Concentration risk
  • Leverage risk
  • Over-diversification risk
  • Volatility risk
  • Black swan risk (Basis risk / Model risk)
  • Career risk / Headline risk
  • Event risk
  • Fundamental risk
  • Valuation risk

The list of risks can be further refined into a few categories (may have missed a few) in terms of where retail investors can find areas with very few sharks:

  • Un-loved companies / industries due to poor macroeconomic conditions or temporary setbacks
  • Micro to small cap companies
  • Companies with very high volatility in stock price

I will talk about why these areas provide opportunities with very few sharks and how retail investors can aggressively use this situation to their advantage in the next article.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

What’s Your Edge? (2)

Diego Delso [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons

Sleep per Day: (Target) 7h30m / day (Actual) 7h15m  / day (56 day average)

What’s Your Edge series – Part 1 Part 2 Part 3

In the last article I borrowed an analogy of poker from a Seeking Alpha article called “The Sustainable Active Investing Framework: Simple, But Not Easy” where the key to beating the market is dependent on:

  1. Know the fish at the table (opportunity is high)
  2. Know the sharks at the table (competition is low)
  3. Find a table with a lot of fish and few sharks (sectors of market and overall market conditions)

The findings from the last article indicated that for the institutional investors, the breakdown of investing philosophies were as follows:

  • Passive is 50.75% of the sample
  • Value is 15.54% of the sample
  • Growth is 14.70% of the sample
  • Non-Equity is 9.82% of the sample

So what are the implications?

Let’s first talk about the 50.75% population rooted in Passive Investing (aka Market Cap Indexing). Regardless of whether the index funds are only focused on large caps (S&P 500) or the whole stock market (Total Stock Market), the implication of adopting Market Cap Indexing means that about half of the institutional universe is blindly buying high and selling low.

How so?

When you track a Market Cap Index, the weighting you give to each stock is based on Market Cap, which makes the Larger Caps get larger investments and Smaller Caps get smaller investments. With more and more money flocking into Passive Investing, this creates a positively reinforcing loop of Larger Caps getting larger and larger, which is why Passive Investing is buying high and selling low.

For retail investors, this means that barring severe bear markets where Passive Investors are forced to sell due to non-investment reasons (eg. dealing with job loss or inability to withstand volatility), most of the time its very hard to find bargains in the Large Cap space.

Therefore, if there’s an intention to play in the Large Cap space, a retail investor should adopt a 21st Century Charlie Munger esque investing style, where you rarely invest at all unless its a severe bear market such as the 2008 Financial Crisis. That’s exactly what Charlie Munger did, “sitting around with cash at the Daily Journal for a decade” before taking 71% of Daily Journal’s cash to invest in Wells Fargo and another Fortune 500 company (strongly rumored to be US Bancorp). This move and also the investments in “two non-U.S. manufacturing companies and another Fortune 200 company” during 2011-2012, saw Daily Journal’s equity portfolio cost $45 million but valued at $112.3 million by July 2013.

Besides the methodology of how to play in the Large Cap space is explored, there needs to be explanation of why a retail investor should seriously consider playing in the Large Cap space.

The majority of the world’s best companies reside in the Large Cap [1], which means that you can only have access to companies that can continuously generate good to great returns regardless of market conditions, meaning once you buy a great company at an attractive valuation, you don’t need to sell in order to get good to great returns anymore.

Another catch to why retail investors want to play in the Large Cap space is because any Large Caps that becomes severely undervalued due to events such as a severe bear market will quickly rebound back to full or become overvalued due to the Passive Investing effect, where Index Funds will come back with a vengeance that blindly up-bids the Large Caps back into lofty valuations. This means that Large Caps itself have an inherent catalyst to drive stock prices up in short time frames when under-valued, thus reducing the risk for investors.

But of course, this is dependent on your ability to be patient, even to the point of being patient for a decade in Charlie Munger’s case, because the only time the Large Cap space is extremely fun to play in (think of the aforementioned analogy of finding a table with a lot of fish and few sharks) is when there’s a severe bear market.

If not, a retail investor must be content with either dabbling in individual stocks or index funds while hedging with lots of cash to take advantage of sudden severe bear markets, or to pursue high return investment strategies (eg. net nets, small caps, spin-offs) and hope to earn enough returns to withstand the inevitable drop in stock prices and see the stocks’ underlying non-world class companies get decimated (eg. bankruptcy) during the next bear market.

And I’ve only talked about the implications for retail investors with around half the institutional universe being in the Passive Investing camp. I’ll explore the implications of other Investment Philosophies for retail investors in beating the market.

[Notes]

[1] As a reference, a good proxy of whether a company is world class or not is the presence of a wide moat. Using Morningstar’s Wide Moat Index (Dec 31st 2014 figures), you can see that the $79.8 billion dollars weighted average market cap of the index’s Wide Moat stocks is comparable to the S&P 500’s weighted average market cap of $132.1 billion dollars.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

What’s Your Edge? (1)

By Logan Ingalls from South Boston, MA, USA (11g poker chips) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Sleep per Day: (Target) 7h30m / day (Actual) 7h17m  / day (55 day average)

What’s Your Edge series – Part 1 Part 2 Part 3

I read a beautiful article on Seeking Alpha called “The Sustainable Active Investing Framework: Simple, But Not Easy” that made me re-think about what my edge is in this market and how I can maximize that to beat the market.

The article used an analogy of poker when it came to evaluating where one can have the biggest edge to win, namely:

  1. Know the fish at the table (opportunity is high)
  2. Know the sharks at the table (competition is low)
  3. Find a table with a lot of fish and few sharks (sectors of market and overall market conditions)

I’d like to delve even deeper into each aspect, and I’d like to start with sharks (competition) first.

The author mentioned that the sharks you want to avoid are the hedge funds or institutional titans. Not only are they to be avoided because of the intense competition they will bring, but also the fact that according to the SEC, institutional investors own 73% of the whole US stock market, so what they do and what impact to the market it will subsequently bring needs to be taken into account of.

Among these investors, the different investment philosophies indicate where these investors play in, how their actions affect the market, which will then reveal the path to where a retail investor like me should play in to maximize fishes (opportunity) and minimize sharks.

So what investment philosophies are there in play for these hedge funds or institutional titans? In “Investment Philosophies” by Aswath Damodaran, he has the following categories:

  • Market Timing
  • Charting and Technical Analysis (Technical)
  • Small Cap and Growth Investing (Growth)
  • Value Investing (Value)
  • Information Trading (Information)
  • Arbitrage
  • Passive Investing (Passive)
  • Non-Equity [This is an additional category I’ve added]

I can’t find the specific breakdown of how many of these hedge funds or institutional titans adopt the aforementioned investment styles, but I will use the breakdown of the top 25 mutual funds in the US as a proxy of investment philosophy preference of the sharks [1].

The investment philosophy is also further summarized into four camps, namely Growth, Value, Passive and Non-Equity since one of the better ways to categorize the following funds’ investment philosophy is to follow a third party’s classification instead of relying on my personal qualitative assessment. For this exercise, I will rely on namely Morningstar’s judgment.

The top 25 mutual funds in the US currently as of Aug 19th 2015 [2]:

Rank Fund Name Investment Philosophy [3] NAV ($Billion) [4] % of Population
1 SPDR S&P 500 ETF  Passive  176.92  6.34%
2 Vanguard 500 Index;Adm  Passive  215.39  7.71%
3 Vanguard TSM Idx;Adm [5]  Passive  404.32  14.48%
5
Fidelity Cash Reserves
 Non-Equity  111.67  4.00%
6
Vanguard Instl Indx;Inst [6]
 Passive  199.53  7.15%
7
Vanguard Prime MM;Inv
  Non-Equity  105.16  3.77%
9 Fidelity Contrafund  Growth  113.32  4.06%
10 American Funds Gro;A  Growth  149.47  5.35%
11 American Funds Inc;A  Value  96.99  3.47%
12 American Funds CIB;A  Value  99.18  3.55%
13
Vanguard Tot I Stk;Inv
 Passive 180.79  6.47%
14
iShares:Core S&P 500
 Passive  70.28  2.52%
15 Vanguard Wellington;Adm  Value  90.23  6.74%
16 Dodge & Cox Intl Stock  Growth / Value  68.60  3.23%
17 JPMorgan:Prime MM;Cap   Non-Equity  67.97  2.43%
18 PIMCO:Tot Rtn;Inst   Non-Equity  100.99  3.62%
20 iShares:MSCI EAFE ETF  Passive  61.43  2.20%
21 Dodge & Cox Stock  Growth / Value  60.64  2.17%
22 Vanguard Tot Bd;Adm  Non-Equity  144.98  5.19%
23 American Funds ICA;A  Growth / Value  76.58  2.74%
24 Vanguard TSM Idx;ETF  Passive  108.50  3.89%
25 American Funds CWGI;A  Growth / Value  89.51  3.21%

In summary [6]:

  • Passive is 50.75% of the sample
  • Value is 15.54% of the sample
  • Growth is 14.70% of the sample
  • Non-Equity is 9.82% of the sample

I will talk more about the implications of this findings to retail investors such as me in the next article.

[Notes]

[1] The reason why mutual funds is because for the other sharks (hedge funds and companies that run large investment portfolios) it will take a lot of work to find out the NAV of each specific fund or large investment portfolio run by the hedge funds or companies before I can compare the sizes of these funds / portfolios to the mutual funds (where the information is publicly available and easily accessible). The reason why US only is because US’s market cap is 52% of the world, which is a good proxy for the world.

[2] My classification of Investment Philosophy will be highly controversial as some funds aren’t as clear cut. The best I can do is give a rough qualitative categorization.

Eg. American Funds Growth Fund of America invests in “classical growth stocks, cyclical stocks and turnaround stocks“, where classical growth stocks can be treated as growth investing, but cyclical stocks and turnaround stocks could be value / growth depending on the stocks selected.

[3] Based on Morningstar’s Ownership Zone rating. “Blend” is classified as Growth / Value

[3] Based on data from Yahoo Finance on Aug 19th 2015

[4] Includes Vanguard TSM Idx;Inv and Vanguard TSM Idx;Inst+ due to duplication

[5] Includes Vanguard Instl Indx;InsP due to duplication

[6] For funds classified as “Blend” by Morningstar’s Ownership Zone rating, the allocation would be 50/50 to the % of Population calculation.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

Why Investing Is So Hard

See page for author [Public domain], via Wikimedia Commons

Sleep per Day: (Target) 7h30m / day (Actual) 7h16m  / day (53 day average)

Investing is so hard.

The intensity of competition in investing means that there’s “very little upside to outperformance and massive downside for underperformance. In other words, there is a lot of dumb stuff you can do in the stock market to lose money“.

If you start off with extremely small sums of money, stock commissions will kill you if position sizes are too small or if your turnover is high.

If you concentrate your investments with lower turnover to combat it, lack of diversification and lack of in-depth insights will kill you if any one of your positions die.

If you don’t hold enough cash (eg. you’re investing way too much money), lack of pain tolerance and huge volatility will kill you.

Even if you hold enough cash, lack of patience (trading = negative sum game) and lack of discipline (not sticking to an investment plan through a full cycle) will kill you as well.

Thinking too much will kill you when you’re constantly coming up with new investment ideas that might change your portfolio drastically if you don’t have the cash to implement them as they come.

Thinking too little will kill you as well when you insist stubbornly on an investment strategy that is getting obsolete or miss out on opportunities to optimize your portfolio.

Investing is so hard.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

Job Satisfaction

By ayes (Ayesha eating and smiling) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Sleep per Day: (Target) 7h30m / day (Actual) 7h21m  / day (49 day average)

A Management Associate that joined the same year as me is leaving the company, and I thought it was a great opportunity to review what makes me happy at any job.

Because compared to any job I’ve had (albeit it being internships or short term contracts), I’m most happy with my current role in product marketing.

And I think a few things (in descending order of importance) contribute to this:

  • Camaraderie with colleagues
  • Above average compensation
  • Below average working hours
  • Line managers committed to develop me
  • Assignments that stretch me
  • Assignments that has a equal balance between working with clients, working with colleagues and working by myself
  • Opportunities for career progression
  • Opportunities for international assignments

What’s surprising to me is that none of my job satisfaction derive from any vision, which is a huge indication that I shouldn’t work for a non-profit in the future because buying into the vision alone won’t help me if none of the aforementioned non-monetary factors are present.

Which also makes me think, if I were to be a full time investor, how will I get my needs of camaraderie from?