Skin in the game

A person close to me, (you know who you are), recently suggested that, whilst they found this blog to be both an interesting read and for the most part factually correct, it lacked an element of substance to sustain its theories.

Now, this feedback could be interpreted in a number of ways, but in my case, being the responsive fellow that I am, I took it in its most literal sense. After all, as the saying goes, “the proof of the cake is in the eating”. With this in mind, I intend to apply a more practical approach to my rants. Translated, this simply means that I will put some “skin in the game” and invest in a basket of value stocks and periodically review and publish here the performance of said portfolio for all who care to see it. This basket will be referred to as the “Uncertain Future Portfolio”.

For those that have read the previous articles dating back to October ’09, this more pragmatic approach is likely no surprise. After all, I have spent some considerable time (and effort, it must be said) dissecting and publicising the obvious limitations of the asset management industry as well as the inherent advantage available to the individual investor once one chooses to apply a set of simple to understand, yet difficult to apply, principles.

In the interest of full disclosure (I am beginning to sound like a true professional here…) I must begin with two caveats however:

1. I intend to, at least initially, invest only between 5 and 10% of my liquid assets on the “Uncertain Future Portfolio”. The reason for this is two fold:

a. Markets cannot be timed and hence a gradual entry is advised

b. I have been lucky enough to have found 2 deep-value investors with considerable track

records and hence the remaining 90% of my “investible” funds sits with these rare but very capable hands.

2. I will start the process from zero as soon as attractive investment opportunities have been identified and analysed in sufficient depth. As such my current direct stock holdings will not be a part of this “Uncertain Future Portfolio”

Initiating this stock portfolio ought to complement the reflections shared on the blog and also serve to confirm or invalidate its assumptions. One thing it will not do, however, is to replace or diminish the inquisitive nature of the author on investing related topics. Nor will it become a short-term measure of investing prowess. In short, I will continue to publicly reflect on what it means to be a “good” investor in the broadest possible sense of the word.

Clearly, if the initial results are not positive, (in an absolute sense), it would be easy for me to claim that not enough time has elapsed to pass judgement on the validity of the ideas hereby expressed. Whilst that is a real and present danger, on the flip side, no credit will be taken for initial short-term positive results as validation of the same ideas and theories. To put it clearly, it will surely take time (measured in years, not months) to gather sound conclusions from the performance of the Uncertain Future Portfolio.

Readers can, as I certainly do, expect the Uncertain Future Portfolio to serve as a solid empirical test of all the suggestions, observations and maxims shared to date on this blog.

To, once again, use the words of the father of value investing, Benjamin Graham, I will seek to make my own business-owner type judgements and take the market gyrations as what they truly are :

“ an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal”

More information on the construction and performance of the UF Portfolio will be shared as available…

Investing is simple, not easy

5 months have passed since I started this blog by posting some rather pessimistic views on the remarkably poor array of investment vehicles available to individual savers. However those of you that persevered and endured the entire article, probably remember that it did actually conclude on a positive note as I exhorted the benefits of a do-it-yourself approach to investing.

Almost a half-year on, and fresh from a multi-month asset rally (just think equities and gold since March of last year), I can’t bring myself to resume my optimistic “mode”. Some of this is surely due to the dire economic circumstances of my home country (as one of the poorer performing ”PIIGS”, second only to Greece in terms of scorn received by EU’s economic authorities). But the lion’s share for my bearish sentiment has little to do with location and much with the dawning realisation that, to put it bluntly, we as humans are just not prepared for the investing game.

Man’s fickle nature is not exactly a new and revealing finding for me having long been both an observant and admittedly a prime example of its most evident traits. It is nonetheless the realisation of the extent to which we are so “hard-wired”. To make matters worse, and despite popular thinking, merely acknowledging certain psychological or behavioural shortcomings in ourselves (often after attending a seminar or reading a book on the subject) is clearly insufficient in its impact on these very same issues. James Montier, famed market strategist of Societé Generale fame, now operating out of Jeremy Grantham’s GMO organisation, put it best when he stated:

“Every fund manager who comes to one of my presentations takes a 20-question test that convinces them they suffer exactly the same biases as everyone else. People respond to that in one of two ways: The first is to say, "Now I understand it, I'm smarter than everyone else, so I can outthink everyone else." No, you can't! You've just failed behavioural economics 101, which explains that we are all overconfident in our abilities. The other response is, "Okay, I understand my biases. Now help me develop processes to spot where they are most likely to occur, and minimize the scale of these biases."

The previous quote is but a drop in the vast, vast ocean of fundamental human biases that stand in the way of our success as investors. If the morally questionable nature of the asset management industry wasn’t detracting enough for individuals (with its high fees, an perverse incentive systems), we now have to add our own self-placed traps. Overconfidence, as referred to earlier, is merely the tip of the iceberg as far as the catalogue of investing traps goes.

Unsurprisingly, the very few investors who obtain above average total after tax returns over the long-term share a set of behaviours that are apparently obvious in their nature and yet deceptively difficult in their application. Below is a brief list of behavioural patterns I have weeded out form the writings of successful participants (as opposed to and often in direct contradiction with detached academics!)…

1. Be patient: (we all are in theory!) but picture a period of 7-10 years vs. 3 to 6 months when making investment decisions
2. Approach theories with healthy scepticism: look for information to challenge your assumption and thus do away with “self confirmatory bias”
3. Focus on investment process, not outcome: a lottery ticket win does not reflect a wise number selection process
4. Act out your contrarian instincts: eliminate the “herding” bias
5. Learn from history: Remember that the 4 most dangerous words in investing are: “this time it’s different”


As if often the case in matters of money and investing it pays to heed the words of the wise, as Warren Buffet once said:

“Investing is simple, but not easy”