Schlenkler’s investment principles

Prism

itwasntme001 said:

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

There is possibly little distinction between the two as both attempt to benefit from the mispricing of the market. As to when I do not know exactly but one of his most famous quotes is from 1989
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." (Warren Buffett, 1989)
That is pretty much the Terry Smith mantra..

itwasntme001

Deleted_User said:

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

It's important to realise diversification AND rebalancing is what gets you the superior expected returns for less risk.  If there is no rebalancing, its pretty much a coin toss whether or not diversification is of benefit.

If you have a bond and stock portfolio and do no rebalancing, if bonds do better than equities over the long term, your diversified portfolio will do better than 100% stocks but do worse than 100% bonds.  With rebalancing, you take away those coin toss odds such that it becomes less about chance.

Diversification and rebalancing are the only free lunches to a long term investor.

[Deleted User]

itwasntme001 said:

Deleted_User said:

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

It's important to realise diversification AND rebalancing is what gets you the superior expected returns for less risk.  If there is no rebalancing, its pretty much a coin toss whether or not diversification is of benefit.

If you have a bond and stock portfolio and do no rebalancing, if bonds do better than equities over the long term, your diversified portfolio will do better than 100% stocks but do worse than 100% bonds.  With rebalancing, you take away those coin toss odds such that it becomes less about chance.

Diversification and rebalancing are the only free lunches to a long term investor.

Not correct. Rebalancing reduces returns and certainty does not improve them. But it does keep your asset allocation on target. Without rebalancing your investment would drift to equity and expected returns would improve. You also benefit more from momentum. Bonds are not expected to outperform equity in the long term. 

Diversification within the equity portfolio reduces volatility without reducing expected returns. 

itwasntme001

Prism said:

itwasntme001 said:

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

There is possibly little distinction between the two as both attempt to benefit from the mispricing of the market. As to when I do not know exactly but one of his most famous quotes is from 1989
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." (Warren Buffett, 1989)
That is pretty much the Terry Smith mantra..

I really do wonder whether or not Terry or Warren thinks "fair price" is really fair if/when interest rates go higher...

green_man

itwasntme001 said:

Deleted_User said:

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

It's important to realise diversification AND rebalancing is what gets you the superior expected returns for less risk.  If there is no rebalancing, its pretty much a coin toss whether or not diversification is of benefit.

If you have a bond and stock portfolio and do no rebalancing, if bonds do better than equities over the long term, your diversified portfolio will do better than 100% stocks but do worse than 100% bonds.  With rebalancing, you take away those coin toss odds such that it becomes less about chance.

Diversification and rebalancing are the only free lunches to a long term investor.

It did take me a while to get my head around this.   It doesn’t really matter whether you (for example) choose 5% uk exposure or 20 % exposure, 5% EM or 20% EM.  But what then matters is maintaining the levels you choose. This ‘locks in’ gains and takes advantages of dips which over the long term make a big differance.

itwasntme001

Deleted_User said:

itwasntme001 said:

Deleted_User said:

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

It's important to realise diversification AND rebalancing is what gets you the superior expected returns for less risk.  If there is no rebalancing, its pretty much a coin toss whether or not diversification is of benefit.

If you have a bond and stock portfolio and do no rebalancing, if bonds do better than equities over the long term, your diversified portfolio will do better than 100% stocks but do worse than 100% bonds.  With rebalancing, you take away those coin toss odds such that it becomes less about chance.

Diversification and rebalancing are the only free lunches to a long term investor.

Not correct. Rebalancing reduces returns and certainty does not improve them. But it does keep your asset allocation on target. Without rebalancing your investment would drift to equity and expected returns would improve. You also benefit more from momentum. Bonds are not expected to outperform equity in the long term. 

Diversification within the equity portfolio reduces volatility without reducing expected returns. 

I never said rebalancing increases returns.  But it does improve returns adjusted for risk.  Which is what any investor should be after.

itwasntme001

Adjusted for risk, bonds and stocks should return the same.  Because markets are efficient.

itwasntme001

green_man said:

itwasntme001 said:

Deleted_User said:

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

It's important to realise diversification AND rebalancing is what gets you the superior expected returns for less risk.  If there is no rebalancing, its pretty much a coin toss whether or not diversification is of benefit.

If you have a bond and stock portfolio and do no rebalancing, if bonds do better than equities over the long term, your diversified portfolio will do better than 100% stocks but do worse than 100% bonds.  With rebalancing, you take away those coin toss odds such that it becomes less about chance.

Diversification and rebalancing are the only free lunches to a long term investor.

It did take me a while to get my head around this.   It doesn’t really matter whether you (for example) choose 5% uk exposure or 20 % exposure, 5% EM or 20% EM.  But what then matters is maintaining the levels you choose. This ‘locks in’ gains and takes advantages of dips which over the long term make a big differance.

Yes and the simple example of why it works well is because it takes a 100% return to recover a 50% loss.  Minimising draw-downs is thus more important than maximising return.

It does matter for your starting allocation what you choose because that's defined by you and its essentially a view you are taking.  Taking the passive approach becomes less about your view and more about the market view.

itwasntme001

The other way to think of it is that say on day 1 you had 50% stocks 50% bonds.  Due to stocks rising a lot and bonds being flat, by the end of the year you have 75% stocks, 25% bonds.  If you do not rebalance, you are saying you got your original allocation wrong.  You should have been 75% stocks 25% bonds in the first place, and you would have had better results.  Because to think any different would mean you are easily swayed by the market - i.e. you are simply a momentum trader. I.e. a market timer.  i.e. you will get burnt eventually.

Linton

itwasntme001 said:

Adjusted for risk, bonds and stocks should return the same.  Because markets are efficient.

Isnt that somewhat circular as that is the definition of adjustment for risk?   Or do you have another definition?

However I am not convinced in this instance.    Most large buyers of bonds would not see equity as a satisfactory alternative so for them there is no price competition.