Corey Hoffstein’s “Why quants don’t pick stocks” (https://blog.thinknewfound.com/2017/04/quants-dont-pick-stocks/ got us thinking a bit more about risk. Following on our “Island Economies and Risk” piece (https://www.albertbridgecapital.com/drew-views/2018/8/13/island-economies-and-risk) from a few months back, we wanted to expand on the discussion about risk as it relates to stock-picking and portfolio construction.
October unleashed a storm upon financial markets. Here in Europe, we hadn’t had one since Brexit, but had many before then, and will surely have many more. Bad weather is a feature of investing, and as the stewards of long-term capital, we need to balance action and inaction during these bouts of market turmoil.
In the spring of 2008, things were already wacky at Volkswagen. In a structure that still exists today, they had ordinary shares (with voting rights) and preference shares (without them).
There is a tilt in our portfolio toward value stories where we think the consensus investor is biased against processing improving fundamentals.
These are our two cents on whether you, or we, or anyone else can pick the perfect time to increase or decrease exposure to a portfolio of factors like value, quality, or momentum.
As we wrote in “Half-hearted is half-minded – December 2017” we aren’t big fans of dipping our toes in the water when entering a position, nor of timidly reducing when exiting. If we are right more often than we are wrong, it might feel better to inch in or inch out of a position, but it is a suboptimal strategy.
Benjamin Graham is considered by many as a founding father of value investing. Upon a re‐read of the seminal Security Analysis, which he and David Dodd first published in 1934, one learns that many of Graham’s insights were not simply confined to balance sheets and income statements. In fact, he devoted a significant effort to such topics as psychology, overreaction, under‐reaction, and the consensus view.
Following on the tweet below by President Trump, there is again a lot of discussion of the merits of quarterly reporting, potential corporate short-termism, and the impact it might have on managerial decision-making.
In describing a simplistic example of portfolio theory, some economists – such as Burton Malkiel in A Random Walk Down Wall Street – will refer to an example of a theoretical simple island economy.
Imagine every adult has 10% of their savings invested in “the global stock market”, and that each of them also invests 2% of their income in the stock market.