Principles And Paradoxes Of Investing

by: SA For FAs

Cashflow Capitalist: Contrary to stocks which tend to focus only on the next few quarters, family businesses have the freedom to look out into the next few years or decades.

John M. Mason: Brexit is undermining U.K. and European competitiveness.

Thought For The Day: You don’t have to be a data scientist to capture strong investment returns.

Family-Owned Businesses

“Family-owned businesses have the ability to invest in opportunities that may yield no immediate returns but will position them well in the future. They also have the option to refrain from investing if no compelling opportunities present themselves. Contrary to stocks with a more diffuse ownership which tend to focus only on the next few quarters, family businesses have the freedom to look out into the next few years or decades.” (Cashflow Capitalist)

Property Tax Limitation Impact

“A wealthy client noted that, with the property tax limitation and the AMT removal, this client, who owns two very nice homes – one in Northern Chicago and one on the West Coast – will see an increase in their marginal tax rate from 27% to 38% in 2019 and the loss of a $150,000 property tax deduction on just one of the above properties alone.” (Brian Gilmartin, CFA)


“Most analysts are saying that the next move by Ms. May is to get a lengthy extension to when the British exit will take place. At this particular time in history, one has very little hope that this ‘new’ kicking of the can will achieve anything more than what has been achieved at present. This result is not good for the global competitive position of either Great Britain or the European Union.” (John M. Mason)

Evidence-Based Investing

“The basic premise is that investors should rigorously test the validity of an investment idea — or rely on credible research that has done so — before putting their money behind it. The problem is that evidence-based investing has been a bust over the last decade. Everything investors had been doing wrong, according to the evidence, turned out to be right.” (Nir Kaissar, Bloomberg)

Thought For The Day

According to Nir Kaissar in the above-quoted Bloomberg commentary, Americans made the “mistake” of listening to the evidence in the decade since the 2009 market low. Fund flows have moved decisively toward foreign stock funds, whereas “home bias” used to prevail, and toward value stocks, which the evidence suggests beat value over the long-haul. And yet, despite this evidence, U.S. growth stocks have dominated investment scorecards this past decade. Says Kaissar:

While I think the last 10 years are going to turn out to be an anomaly, I wouldn’t be surprised if evidence-based portfolios become a tougher sell for the average investor.”

I offer no brief against non-U.S. or value stocks. Regardless of what the “data” – today’s favorite buzzword – say, non-evidentiary first principles support their ownership: In the case of non-U.S. stocks, the principle of diversification tells us that we could come to regret having all of our eggs in one basket when those eggs are out of favor; and with regard to value stocks, the principle of buying low and selling high supports ownership of cheap assets.

The problem with evidence-based investing is the quality of the “data.” To my mind, a dataset encompassing two centuries of New York Stock Exchange trading is inadequate. The U.S., despite its primacy in the global economy, is something of an anomaly, historically; its political and economic system encouraged a rapid and sustained high level of growth for most of its history, until the past couple of decades. Time will tell whether the recent uptick in growth will endure, but it seems to me that it will return to its 21st century new normal, and I would expect that might clip average stock returns over time.

So rather than focusing on the data, I prefer to focus on the principles and paradoxes of investing. The fundamental investing principle is “no pain, no gain,” meaning you need to be primarily oriented toward taking on investment risk in order to profit. But that doesn’t mean storming into a battlefield without armor while bullets whizz around your head. To the contrary, one should enter that battlefield with all sorts of protections: diversifying among asset classes, diversifying within asset classes and by buying cheap. As Jeff Miller routinely puts it in his “Weighing the Week series:”

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards.”

I also emphasize what I think is the greatest paradox in investing, because it seemingly (but only seemingly) contradicts what I stated above about investors’ need to orient themselves toward risk, and that is the success-enhancing benefits of holding a lot of cash. As Rob Marstrand stated in a recent article:

Over a typical investment career, the net real profits on stocks are likely to be 100 times greater than cash deposits.”

In other words, the data say that cash is a drag on returns. It’s just that savvy investors can use the optionality that cash provides to buy assets that the investing crowd dumps, thus facilitating the “buy low, sell high” principle that underlies successful investing. That is key because the data scientists aren’t able to help you with the timing of your investments any more compellingly than their warning to lighten up on U.S.-based growth stocks this past decade.

Opportunities come when they come, and their form is diverse, be it Midwestern farmland a decade ago, or Apple’s (AAPL) nearly 20% returns since just the start of the year. You don’t have to be a data scientist to capture these returns either. By targeting risk broadly, encompassing real estate and stocks, and including multiple holdings within these asset classes, while keeping a pile of cash on hand to buy when prices are low, investors will see the evidence accumulate over time that their portfolios are indeed growing.


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