Schlenkler’s investment principles

[Deleted User]

Mistermeaner said:

itwasntme001 said:

Diversification also should apply across asset classes as well.  Being close to 100% invested in a diversified global equity tracker is NOT diversified.

Can you please explain this a bit more : I understood that buying just vanguard life strategy or similar is a great way to achieve diversification with simplicity 

Life strategy funds do have multiple asset classes. And it is a great way to achieve diversification with simplicity. The approach is solid; the downside is lack of flexibility. You can also reduce your costs a bit by doing something a bit more complex.

[Deleted User]

gm0 said:

Some seem better than others in that they translate immediately into an action verb i.e. what you need to do about it.

• Pay as little to intermediaries as you can. 
  
  Action: Hold assets with the cheapest reputable provider for your use - accumulation or drawdown.  Review periodically.
  
  
• Diversification reduces your risk. 
  
  Action: Hold multiple asset classes and diversify across industries and geographies - understand your holdings and their overlaps and theoretical correlations, cyclical nature and any tilt you have selected.
  
  
• The market is largely efficient and prices are "correct" to a first degree. (For fixed income, that means yields are "correct".) 
  
  What does this tell you to do - so high yield junk = high credit default risk - does that mean buy it or not ?
  
  
• If you can avoid looking for patterns in what is noise, you'll be better off in the long run.
  
  Lots packed in here about not confusing short term trading with investing and not timing the market on short term fluctuations as well as the traditional old school divide between quants and more mystical chartists spotting apparently meaningful shapes in randomish data
  

It tells me that trying to beat the market is a fruitless endeavour, unless you want to take on lots more risk. And that if your IPS calls for bonds, you should have bonds in your portfolio - even if yields seem too low. Psychologically I am struggling with having to buy bonds at the current rates.  If your IPS calls for junk bonds then go for it. They won’t help you during a bear market but you may have other reasons for buying them. 

Prism

It might also be possible to reduce your risk some areas but enhance returns. At certain times investing in larger less risky equities produces better results than smaller riskier ones. Adding a bit of an asset class like gold might actually boost returns but lower overall risk. Over the last 10 years one of the best performing factor strategies has been quality, which is often associated with safer.

Risk and returns do not always go hand in hand.

[Deleted User]

Linton said:

Deleted_User said:

Norbert Schenkler is known for “inventing” and popularizing a really cool way of lowering the cost of exchanging currency within trading accounts, called “Norbert’s Gambit”.  He also outlined four investment principles, which in my opinion summarize a lot of wisdom in a very succint way:

• Pay as little to intermediaries as you can.
• Diversification reduces your risk.
• The market is largely efficient and prices are "correct" to a first degree. (For fixed income, that means yields are "correct".)
• If you can avoid looking for patterns in what is noise, you'll be better off in the long run.

Pay as little to intermediaries as you can.
Paying plus or minus a few £100 is irrelevent in a portfolio worth n X £100K.  There are more important things to worry about 

I agree that there are more important things than 10 bp in cost but if you have several layers of intermediaries then the costs are usually quite a bit more than 10 basis points.  And that can be damaging even if your have appropriate asset allocation.  Like can you imagine paying 1.5% per year in total costs (platform, TER and IFA) on your bonds which are struggling to keep up with inflation even without that? 

Thrugelmir

Deleted_User said:

gm0 said:

Some seem better than others in that they translate immediately into an action verb i.e. what you need to do about it.

• Pay as little to intermediaries as you can. 
  
  Action: Hold assets with the cheapest reputable provider for your use - accumulation or drawdown.  Review periodically.
  
  
• Diversification reduces your risk. 
  
  Action: Hold multiple asset classes and diversify across industries and geographies - understand your holdings and their overlaps and theoretical correlations, cyclical nature and any tilt you have selected.
  
  
• The market is largely efficient and prices are "correct" to a first degree. (For fixed income, that means yields are "correct".) 
  
  What does this tell you to do - so high yield junk = high credit default risk - does that mean buy it or not ?
  
  
• If you can avoid looking for patterns in what is noise, you'll be better off in the long run.
  
  Lots packed in here about not confusing short term trading with investing and not timing the market on short term fluctuations as well as the traditional old school divide between quants and more mystical chartists spotting apparently meaningful shapes in randomish data
  

If your IPS calls for junk bonds then go for it. They won’t help you during a bear market but you may have other reasons for buying them. 

Junk bonds are rated as such for a reason. Totally unrelated to the type of market conditions. Risk is priced.  Investors should demand a sufficient premium to warrant buying such an asset. More recently P2P was a classic example of investors diving head first into a shark infested pool. As the returns appeared to good to miss out on. Herd investing in full flight. 

itwasntme001

Prism said:

It might also be possible to reduce your risk some areas but enhance returns. At certain times investing in larger less risky equities produces better results than smaller riskier ones. Adding a bit of an asset class like gold might actually boost returns but lower overall risk. Over the last 10 years one of the best performing factor strategies has been quality, which is often associated with safer.

Risk and returns do not always go hand in hand.

Quality has performed well largely because the macro environment of the last 10 years remains unchanged - low interest rates and low inflation.  The real question is whether quality will continue to perform once the regime changes.  Quality stocks are very similar to bonds so are thought of as bond proxies.  And we know bonds don't tend to do well during rising inflation/rates...

And so it follows that whenever you are investing in a particular style or sector or region, you need to be able to time your entry and exits, because holding on is very likely to end up being a losing trade eventually.

Prism

itwasntme001 said:

Prism said:

It might also be possible to reduce your risk some areas but enhance returns. At certain times investing in larger less risky equities produces better results than smaller riskier ones. Adding a bit of an asset class like gold might actually boost returns but lower overall risk. Over the last 10 years one of the best performing factor strategies has been quality, which is often associated with safer.

Risk and returns do not always go hand in hand.

Quality has performed well largely because the macro environment of the last 10 years remains unchanged - low interest rates and low inflation.  The real question is whether quality will continue to perform once the regime changes.  Quality stocks are very similar to bonds so are thought of as bond proxies.  And we know bonds don't tend to do well during rising inflation/rates...

And so it follows that whenever you are investing in a particular style or sector or region, you need to be able to time your entry and exits, because holding on is very likely to end up being a losing trade eventually.

It may well be the case but this has been going on for a lot longer than 10 years. Inflation has been hovering somewhere between 2.5% and 1.5% for the last 27 years now and interest rates have been slowly dropping since then too. I have not seen any evidence of a change of style needed in my entire investing lifetime - we shall see. Buffet has been using the quality investing style for much longer than that, including during the 80s rampant inflation and interest rates.

Anyway, thats not really the point. The point is that higher risk does not mean higher returns. And sometime balancing two or more higher volatility funds give you a lower volatility overall - and possibly better diversification.

[Deleted User]

Its true, high risk does not mean higher return. But to beat the market one needs to take on more risk.  Buffett certainly did. In the olden days his portfolio was incredibly concentrated.

I once beat the market by investing 5 Euros in Monaco’s casino. Put everything on a single number and returned several hundred euros in a few seconds. It was my first and  only time. Everyone advised to place my bet on something with better probability of success like colour or odd/even, and to bet several times.  Problem was, I wanted to win. By making lots of small bets I was guaranteed to get the average, aka to lose money. So I took a single large bet and beat the market. 

Mathematically, it was the only way to go for someone wanting to beat the averages.

Prism

Deleted_User said:

Its true, high risk does not mean higher return. But to beat the market one needs to take on more risk.  Buffett certainly did. In the olden days his portfolio was incredibly concentrated.

I once beat the market by investing 5 Euros in Monaco’s casino. Put everything on a single number and returned several hundred euros in a few seconds. It was my first and  only time. Everyone advised to place my bet on something with better probability of success like colour or odd/even, and to bet several times.  Problem was, I wanted to win. By making lots of small bets I was guaranteed to get the average, aka to lose money. So I took a single large bet and beat the market. 

Mathematically, it was the only way to go for someone wanting to beat the averages.

Yeah you need to do something different. Being more diversified might do it by including emerging markets and smaller companies. Being less diversified might do it by excluding certain companies, sectors or countries. In most of those cases I wouldn't say you are beating the market - just choosing a different market.

I generally disagree that being more concentrated means that you have a riskier portfolio. It might, but that would need to be proven by actual poor performance because of that focus. At some point it doesn't matter. Is the FTSE Global All cap index less risky than FTSE All World because it holds twice as many stocks? Fidelity Index World holds 1600 companies but also has 4% Apple and 3% Microsoft and Amazon. I don't have any single company allocation that high but only hold about 250 companies. Judging risk by number of holdings is subjective.

itwasntme001

Prism said:

itwasntme001 said:

Prism said:

It might also be possible to reduce your risk some areas but enhance returns. At certain times investing in larger less risky equities produces better results than smaller riskier ones. Adding a bit of an asset class like gold might actually boost returns but lower overall risk. Over the last 10 years one of the best performing factor strategies has been quality, which is often associated with safer.

Risk and returns do not always go hand in hand.

Quality has performed well largely because the macro environment of the last 10 years remains unchanged - low interest rates and low inflation.  The real question is whether quality will continue to perform once the regime changes.  Quality stocks are very similar to bonds so are thought of as bond proxies.  And we know bonds don't tend to do well during rising inflation/rates...

And so it follows that whenever you are investing in a particular style or sector or region, you need to be able to time your entry and exits, because holding on is very likely to end up being a losing trade eventually.

It may well be the case but this has been going on for a lot longer than 10 years. Inflation has been hovering somewhere between 2.5% and 1.5% for the last 27 years now and interest rates have been slowly dropping since then too. I have not seen any evidence of a change of style needed in my entire investing lifetime - we shall see. Buffet has been using the quality investing style for much longer than that, including during the 80s rampant inflation and interest rates.

Anyway, thats not really the point. The point is that higher risk does not mean higher returns. And sometime balancing two or more higher volatility funds give you a lower volatility overall - and possibly better diversification.

I thought Buffet was/is a value investor as opposed to a quality investor?

Just because inflation has been low for so long does not mean it will continue - in fact its usually the reason for it to come up sooner, the longer it has remained subdued.

And when you get a sudden regime change to one of higher interest rates and inflation, those stocks held by people like Fundsmith and LT, those stocks which as supposively "quality" with a PE of 20, will suddenly have to halve in value, not because earnings will likely drop, but because higher interest rates has that kind of an impact to stocks that are priced as bond proxies with PE of 20.

And god knows what will happen to a fund like SMT LOL.

I do own both SMT and fundsmith.  So its not like i am talking my own book.  But i know things can happen that can seriously damage your wealth even though seemingly you think you have bought into good funds and companies.

Which is why trackers make a lot of sense for one's portfolio - its gonna include those banks and energy companies that Terry Smith hates so much, because they will be the supporting ballasts in the tracker that will do well in a rising inflation/rates environment.

And this brings me to your last point, how do you define risk?  How do you define it with a backdrop of potentially a changing economic regime?  You can't (at least not easily) and thats the whole point of a tracker vs timing things with a style.

But yes agree that you can have two higher risk asset classes combined to form a lower risk portfolio that produces a higher return assuming the asset classes are somewhat uncorrelated.