Wisdom From Cliff Asness
Tren Griffin posted a profile of sorts of Cliff Asness that included a list of 12 investing related quotes from Asness, a couple of which I wanted to point out and review. Interestingly there is progression to some of them that I see when rearranging Tren's order.
The first one was;
The rules are quite simple: Diversify. Rebalance. Keep costs low. There aren’t many others. But no one writes that book because it’s three pages. Global diversification to us is about the chance that it turns out that your country is the world’s basket case.
Interesting that he says it would be a three page book that no one writes because there are so many investors, professional and do-it-yourselfers from whom this concept seems to get away. I would add keep turnover as low as possible. Ten of the stocks/ETFs I own for clients I've had for more than 12 years plus one other stock that I've had for eleven years and one ETF that I've held for almost ten years. These simple building blocks for portfolio construction and management when combined with an adequate savings rate can get the job done. Where it gets trickier is the behavior component to participating in capital markets. There have been Nobel Prizes won on this issue which if nothing else tells you the concept is important. It is also why I write about behavior so frequently.
... But people overuse the word bubble. They use it for things they don’t like. They say “it’s in a bubble” when they really mean “I think it’s a bad bet as I think it’s overpriced." I believe bubbles happen but much less often than many claim.
This is a point I have made more times than I can remember. On one of my early appearances on CNBC I was asked to come on and talk about a negative article I wrote for theStreet.com about investing in solar. At the time the niche was very hot because oil prices were skyrocketing. Melissa Francis asked me about the bubble in solar and my first answer was, it is not a bubble, the entire market cap of the ETF (not sure if I was talking about TAN or KWT) is around $100 billion (back in 2008), it is a mania not a bubble. Bubble is a word that scares people into acting. There are far fewer bubbles than there are manias. An implosion in a niche with a market cap the size of Union Pacific Corp (UNP) is not going to trigger a 18-30 month bear market (typical bear market duration). Be skeptical when someone talks about a bubble. As much as I believe in the cannabis theme, if the whole thing were to go to zero it would have almost no economic impact. Ditto blockchain. Both are examples of recently cooled manias that were never bubbles.
I’m in a business where if 52 percent of the days I’m right, I’m doing pretty well over the long-term. That’s not so easy to live with on a daily basis. When I say a strategy works, I kind of mean six or seven out of 10 years or just a little more than half the days.
No strategy can always be the best, I say that all the time. Whatever strategy you choose, you should have some basis to believe it can help you meet your financial objective, fully understanding there could be big chunks of time where your chosen strategy will lag. This is of course about patience and while you might not realize it, I am telling you that some investment professionals have problems with this concept. Overcoming this issue is a matter of training. A do-it-yourselfer needs to be able to remind themselves why they chose their strategy and not give up on it when it has a run where it lags, that is called performance chasing and it tends to end badly.
I used to think that being great at investing long-term was about genius. Don’t get me wrong, genius is still good, but more and more I think it’s about doing something reasonable, that makes sense, and then sticking to it sticking to it like grim death through the tough times. If you have a three year period where something doesn’t work, it ages you a decade. You face an immense pressure to change your models, you have bosses and clients who lose faith, and I cannot really convey the amount of discipline you need.
In part this reiterates some of the things already discussed. I do want to touch on the stock picking comments. I have always used a mix of individual issues and investment products (mostly ETFs). Picking stocks for me isn't necessarily because I think it will go up 3X of 4X its sector or group for some period of time but maybe can be a good proxy for that sector or group with some additional, favorable attribute like maybe a stronger dividend yield or I might think a given stock might be a better proxy for a country or theme than an existing fund. For example, the iShares MSCI Singapore ETF (EWS) has a ton of financial sector exposure, 47%. There could be a scenario where a destination (EWS is just an example) is attractive but the composition of the country fund is not. Why would anyone buy EWS if they weren't favorably disposed to Singaporean banks? And if you happen to get lucky with some stock picks and they go up a ton, all the better.
Charlie Munger has said 'it is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent." This sentiment has a seat at the table of this blog post and ties in with behavior as mentioned above. Investing can be simple, but where money is involved, so too then is greed, ego and eventually fear. I believe most people can train themselves out these behaviors where investing is concerned (sorry, not every one can) and once you do, every aspect of managing your portfolio becomes easier.