Author: Managing Your Money

Blog #63 Dumb Alphas, Smart Betas (Last Post)

Investors the world over chase alpha but struggle to get it. Nevertheless, their zeal for alphas does have one lasting effect: it nourishes an active fund management industry that is worth trillions. In the US alone, mutual funds oversee some $16 trillion of assets, six times more than that managed by ETFs (2017 Investment Company Fact Book). Some lessons, it seem, are hard to learn. Having made my point that alphas are expensive but betas (broad factor exposures) are cheap, I don’t want to flog a dead horse. Instead, I want to move on and say a bit more...

Read More

Blog #62 Why You Should Read This

The move from active investing to passive has been a hot topic lately. Fund flows show that investors are voting with their feet. The news media has been all over the story. The Wall Street Journal has done a big spread on it; Bloomberg has covered it extensively as well. Bill Miller, the legendary stock picker at Legg Mason Capital Management who beat the Standard & Poor’s 500 Index for 15 consecutive years, has an intriguing theory about why investors have been abandoning active investments. Although some people see passive investing as a form of active investing, he sees the precise opposite phenomenon: Active fund managers are often...

Read More

Blog #61 The Law of Active Fund Management

I like mutual funds (unit trusts, as they called in Singapore). I like them not because most are great performers, nor because they offer affordable diversification, but because we know what mutual fund managers do everyday. Broadly speaking, they manage their portfolios actively, as opposed to an exchange traded fund (ETF) which is essentially passive. Not only that, we also know that mutual funds are expected to be almost fully invested at all times because investors don’t pay mutual fund managers to hoard cash. Combining these two facts, we have a good picture of what mutual funds do – they spend...

Read More

Blog #60 “I Could Have”

I’ve not talked much about stock picking so far. This is partly because I have no expertise in picking stocks, which explains why I prefer a ‘boring’ diversification strategy to active stock selection. Over the years, diversification has served me well as a risk management tool. It has certainly relieved me of the pressure of constantly trying to find winning stocks like those of Apple or Amazon. Of course, by not picking stocks, I miss out the highs and honestly, I do feel stupid when friends tell me that this or that stock they bought beat the market hands down....

Read More

Blog #59 Dollar Average Compounding

I hope you find the formula given in the previous blog interesting. You can use the formula to estimate your median future wealth after investing $X for a specified number of years. In the example given, X is $100,000 and the geometric mean return is 4.88% per year. After 30 years, $100,000 grows to about $4.2 million.  Remember that this is your median wealth. Due to uncertainty, your actual wealth can be higher or lower than the median. That said, the median wealth is still a useful number because it corresponds to the midpoint of the wealth range. While...

Read More

Blog #58 The Shape of Stock Returns II

I can’t help you to divine where the stock market will be heading next week, but I can show you a formula that tells you what return you can expect will earn if you follow a buy and hold strategy over the long term. There two key phrases in my sentence: “buy-and-hold” and “long-term”. The formula estimates the average return on your investment assuming you are a patient investor expecting a long-term reward from the stock market. It is not a speculator’s formula. Here is the formula: g ≅ µ – (1/2)σ² On the left-hand side, g is the average...

Read More

Blog #57 The Shape of Stock Returns I

If you have been following this blog lately, I have basically been saying that (a) investors try too hard to beat the market by attempting to predict it (b) despite their best efforts, most are doomed to fail. Some of you may think that I’m too negative about active management (I am). Also, since I used he words “noisy” and “unpredictable” on a number of occasions to describe the zigs and zags of the stock market, you may also have the impression that I view the stock market as nothing more than a casino. That would be incorrect though. In...

Read More

Blog #56 Why We Persist in the Prediction Illusion?

The last few blogs sports a central theme: stock market prediction is a loser’s game for 99% of humanity (the other 1% are the odd investment geniuses we now know but wished we had known much earlier). If market timing, momentum trading, contrarian trading, technical analysis etc. are detrimental to our wealth, then why do so many still swear by these activities? I believe that the reasons lie beyond finance and has a lot to do with psychology.  In particular, understanding how our beliefs inform or misinform us is the first crucial step in improving the way we manage our...

Read More

Blog #55 Let’s Go Fishing

Unless you’ve been living on another planet, you would have come across experts musing about the potential of technology to revolutionize finance.  To be sure, some of the new technologies are indeed game changers – stuff like e-payments, block-chain and cyber-security. These advances are important, but they are kind of mundane. Investors are more excited about the prospect of software so powerful that they can comb through tons of financial data, pick up interesting patterns and make accurate predictions about future asset returns. If and when that happens, we will surely have arrived at the gilded age of robo-assisted...

Read More

Blog #54 Is Machine Learning the Holy Grail of Financial Prediction?

Since we are in the era of ‘big data’ and fast computers, you may wonder whether machine learning has conquered finance, more specifically whether the computer can now replace humans in making accurate predictions of asset prices. If so, more power to robo-advisers!  If not, we’ve got to downplay the hype. There has indeed been big leaps in in machine learning in specific domains (by the way, I will use machine learning interchangeably with artificial intelligence or AI). In 2017, the world recently witnessed one particularly impressive feat when Deepmind’s AlphaGo program beat the world’s champion Lee Se-Dol in...

Read More

Blog #53 Let’s Talk About Momentum Trading

I tested a popular contrarian trading strategy in blog #50 using Shiller’s PE ratio and found it wanting. The flip side of contrarian is momentum trading, which involves buying stocks after they have risen and selling stocks after they have fallen. So, momentum is about “going with the flow”, instead of against it. Since the contrarian strategy doesn’t seem to deliver the goods, you may wonder whether momentum trading will do the trick. This blog will attempt to answer this question with data. As before, my data is from Robert Shiller’s website and consists of (a) the price levels of...

Read More

Blog #52 Does Goggle Hold Your Ticket to Riches?

Google’s search engine has replaced the encyclopedias that I grew up with in the 1970’s. Nowadays, one goes straight to Google for answers on just about anything, including of course news about stock market and what other investors are thinking about the stock market.  You can probably see where I’m heading – Google search is literally ‘big data’ at your finger-tips, perhaps the ultimate place to become insanely rich by finding exploitable connections between financial variables. So, how good is Goggle as a source of information for predicting stock prices?  This is what I want to talk about today.  I...

Read More

Blog #51 Can You Always Trust What You See?

Confidence leads to trades. If you think you are endowed with a superhuman ability to forecast stock prices, you will most likely want to monetize your talent through picking stocks, timing the market or using charts to divine where stock prices are heading. While some investors do seem to have this gift, research conclusively shows that the vast majority of us sadly do not. So why do so many ordinary folks persist in thinking that they can pick stocks or predict stock market patterns? As I briefly explained in my previous blogs, it is human nature to want to...

Read More

Blog #50 Timing the Market vs Time in the Market

Its time to put the Shiller PE ratio to the test.  As mentioned in my previous blog, Shiller calculates a special PE ratio which he calls P/E10. He defines this ratio as price divided by the average of ten years of earnings (a moving average) and adjusted for inflation. Price refers to the index level of the S&P 500 index, and earnings are those of the 500 constituent stocks. The PE15 trading rule is a contrarian strategy that buys the index when the PE is below 15 and is out of the market when the PE is above 15. It is...

Read More

Blog #49 Is 15 a Magical Number?

Remember this guy? He is Robert Shiller, Yale economist, author of the bestseller, Irrational Exuberance and co-winner of the 2013 Economics Nobel Prize (see blog 27).  Shiller has spent a big part of career studying episodes of insanity in the stock market, especially periods when stock prices went into orbit, reaching levels that were way above its long-term price-to-earnings (PE ratio). Take a look at the following chart and you will see what he means. This chart is downloaded from Shiller’s website just this week. The jagged line is the PE ratio of the S&P 500 index from Jan 1871...

Read More

Like us on Facebook

Follow us on Twitter