Schlenkler’s investment principles

[Deleted User]

The problem with “quality” is that everyone defines it differently. Buffett’s focus on moat, value and good management, arguably, translates to quality.

itwasntme001

Prism said:

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.

Risk can come in all sorts of ways - regions, sectors, asset classes, styles, type etc.

Prism

itwasntme001 said:

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.

At the very beginning he was very much a value investor but then pretty early on changed approach to only looking at high quality businesses, which are easy to understand, long track records, moats etc. Its pretty much the definition of a quality investor.

The last time we had rising interest rates and inflation was the 70's. Its been going down ever since. I wasn't investing back then being just a kid but if we look back at the charts of companies that were I see no evidence that the banks and oil companies did any better than any other company during that time - at least in terms of share price. What I would expect in terms of company performance is that higher quality cash rich companies would survive better than indebted ones.

Risk is problematic to define and even harder to compare. Mordko in the original post mentioned diversifying to reduce risk. One question could be risk of what? How do you measure it? I assume we are all agreeing its not volatility in this particular case. What does owning a part of 6000 companies give us that 200 doesn't?

[Deleted User]

Free lunch. 

AnotherJoe

itwasntme001 said:

AnotherJoe 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.

That assumes that reducing your risk is a good thing. 

Which it may not be.

I know people who are far too risk averse and it's cost them a lot of money.

That assumes that increasing your risk is a good thing.

Which it may not be.

I know people who took on far too much risk in 1999 and 2007 and it's cost them a lot of money.

No, it doesn't. It states that for some people, you can be too risk averse, whereas the original assumes that for everyone , (since it makes no exceptions or qualifications) reducing your risk is a good thing.

itwasntme001

Prism said:

itwasntme001 said:

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.

At the very beginning he was very much a value investor but then pretty early on changed approach to only looking at high quality businesses, which are easy to understand, long track records, moats etc. Its pretty much the definition of a quality investor.

The last time we had rising interest rates and inflation was the 70's. Its been going down ever since. I wasn't investing back then being just a kid but if we look back at the charts of companies that were I see no evidence that the banks and oil companies did any better than any other company during that time - at least in terms of share price. What I would expect in terms of company performance is that higher quality cash rich companies would survive better than indebted ones.

Risk is problematic to define and even harder to compare. Mordko in the original post mentioned diversifying to reduce risk. One question could be risk of what? How do you measure it? I assume we are all agreeing its not volatility in this particular case. What does owning a part of 6000 companies give us that 200 doesn't?

When did he change from being a value investor to a quality investor?

Energy companies out-performed in the 70s because oil prices rose.  Not sure what happened to bank stocks.  Just because a company has a strong balance sheet does not mean it will necessarily do well - it still needs to deliver returns to equity holders as assumed in the price of the stock and if that return is not enough to compensate for higher interest rates (that makes valuation multiples contract) for example, it will still suffer in terms of performance.  Sure it may not go bankrupt, but it can still be detrimental for your portfolio.

If you own 6000 companies, you are making sure you own those few companies that may end up doing really well long term compared to the 200 you own that can easily miss these same companies.  The problem is worsened if you own a Fundsmith or LT where only 30 companies are owned and you pay a fee of 1%.

If you are basing your investment decisions on funds being low volatility such as Fundsmith - its important to realise that it can give a false sense of security.  You don't know whether the Sharpe ratio has been well supported due to genuine performance or because it has become more of a crowded trade.  The history of the fund is just too short - only been around under one economic environment.  We don't know how it will perform under a new economic regime.

Hence these funds are useful as tactical short term (less than 1 or 2 economic cycles) positioning.  But for the long term a tracker is going to make much more sense because using anything else will mean you probably HAVE to market time in order to get at least just the market returns.  If you are in your 30s or 40s, you are most likely going to see at least 2 other economic regimes in your lifetime.  Someone who is 60 or older will probably only see one more (and so holding Fundsmith long term MAY make sense).  Makes a big difference to investment decisions.

Linton

Prism said:

itwasntme001 said:

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.

......
Risk is problematic to define and even harder to compare. Mordko in the original post mentioned diversifying to reduce risk. One question could be risk of what? How do you measure it? I assume we are all agreeing its not volatility in this particular case. What does owning a part of 6000 companies give us that 200 doesn't?

I agree that talking about "risk" is problematic.  For those people with a steady income investing for the long term risk aversion seems to be seen as a character defect.  However as a retiree with a lifestyle and a mortgage to support appropriate risk management is essential if I am not going to end up living on beans on toast in a small rented flat thanks to medium term problems, or spending my nights worrying abut the possibility.  Long term performance is sadly of little concern.

Holding 6000 companies rather than 3000 is not likely to make much difference.  However holding too few companies  has major downsides regarding lack of diversification across countries, sectors, company sizes etc etc.  This could be expected to lead to higher medium term volatility without necessarily adding to performance. Once a niche is represented by perhaps low single digit numbers of companies the random behaviour of the price of those companies could outweigh the benefits of choosing them as representative.

If you are going to base a large portfolio on say 200 companies it would be prudent to ensure that your choice is good both in terms of the particular company but also that they are well diversified as a whole.  It is not easy to see how one can do this in practice. The only option I can see other than tradng globally in individual shares is to buy into focussed funds whose management you trust.  However there are not many such funds and in general their success has been built on the manager's, perhaps lucky or perhaps inspired,  preference for particular company characteristics.  This would constrain diversification.  There is also the danger that the market changes making the manager's preferences inappropriate.

So better in my view to choose an appropriate set of funds to cover the niches.  The number of underlying companies required to do that does not matter, though avoiding very large holdings in individual companies may make the task easier.

[Deleted User]

Diversification reduces the risk of major losses without reducing expected returns.  It is a good thing. 

Thrugelmir

itwasntme001 said:

Prism said:

itwasntme001 said:

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.

At the very beginning he was very much a value investor but then pretty early on changed approach to only looking at high quality businesses, which are easy to understand, long track records, moats etc. Its pretty much the definition of a quality investor.

The last time we had rising interest rates and inflation was the 70's. Its been going down ever since. I wasn't investing back then being just a kid but if we look back at the charts of companies that were I see no evidence that the banks and oil companies did any better than any other company during that time - at least in terms of share price. What I would expect in terms of company performance is that higher quality cash rich companies would survive better than indebted ones.

Risk is problematic to define and even harder to compare. Mordko in the original post mentioned diversifying to reduce risk. One question could be risk of what? How do you measure it? I assume we are all agreeing its not volatility in this particular case. What does owning a part of 6000 companies give us that 200 doesn't?

If you own 6000 companies, you are making sure you own those few companies that may end up doing really well long term compared to the 200 you own that can easily miss these same companies.  

Recencey bias has driven the vogue for global equity funds. A combination of monoliths and falling exchange rates have provided exceptional returns to investors. Investing isn't just about picking tomorrow's winners. It's paying a fair price for sustainable returns. 

[Deleted User]

Thrugelmir said:

itwasntme001 said:

Prism said:

itwasntme001 said:

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.

At the very beginning he was very much a value investor but then pretty early on changed approach to only looking at high quality businesses, which are easy to understand, long track records, moats etc. Its pretty much the definition of a quality investor.

The last time we had rising interest rates and inflation was the 70's. Its been going down ever since. I wasn't investing back then being just a kid but if we look back at the charts of companies that were I see no evidence that the banks and oil companies did any better than any other company during that time - at least in terms of share price. What I would expect in terms of company performance is that higher quality cash rich companies would survive better than indebted ones.

Risk is problematic to define and even harder to compare. Mordko in the original post mentioned diversifying to reduce risk. One question could be risk of what? How do you measure it? I assume we are all agreeing its not volatility in this particular case. What does owning a part of 6000 companies give us that 200 doesn't?

If you own 6000 companies, you are making sure you own those few companies that may end up doing really well long term compared to the 200 you own that can easily miss these same companies.  

Recencey bias has driven the vogue for global equity funds. A combination of monoliths and falling exchange rates have provided exceptional returns to investors. Investing isn't just about picking tomorrow's winners. It's paying a fair price for sustainable returns. 

CAD has not fallen like GBP. The returns from having a global portfolio have been good regardless.  Its lessons from 1970s that have taught me the importance of global diversification, as well as more recent events. Hardly the recency bias. Misuse of the term.