Invest for the long term

Investing over a long time horizon brings many benefits:

  • Lower volatility

  • Most absolute benefits of compound investing come in later years

  • Higher tax efficiency if invested in appropriate vehicles (UK ISA, US 401k, etc.)

  • Asset price driven by “value” not “perceived value”

  • Many opportunities overlooked

  • Lower transaction fees (because it requires less active management)

  • More asset classes available

It also comes with unique drawbacks:

  • Requires nerves of steel

  • Lower liquidity

  • Lower feedback loops

  • Require more data, reasoning to support decisions

To quote Sam Altman:

One of the few arbitrage opportunities left in the market is time. I think we have gotten really good at High-Frequency Trading, we have gotten really good at [measuring] the price of things. We have gotten worse at [measuring] the long-term value. I don't think you can go and beat the market in a lot of ways. But the one way I do is by making a long-term commitment to something. My new belief for how long I should hold stock in the best companies I invest in is forever. In a world that is increasingly focused on the tick and the quarterly revenue cycle, you should go the opposite way.

References

Sam Altman: How to Build the Future

Race to suffer

“Race to suffer” is a psychological operating system to be employed in sport racing which is focused on maximizing effort & perceived exertion to achieve the best possible outcome.

“You cannot beat Lionel mentally, because Lionel isn't out there to win. Lionel isn't out there to beat someone else. Lionel is out there to suffer and hurt himself. He had a 3 minute lead on me at St. George, he was going as hard as he possibly could. You cannot defeat someone like that, because they are harder on themselves than they are on the competition.”

References

Lionel Sanders 2018 Ironman World Championship interview

25 investing rules

1. Define what you’re incapable of and stay away from it.

2. You’re not proven until you’ve survived a calamity.

3. Plan on every plan not going according to plan.

4. Every product that changed the world was once belittled by the crowd.

5. The crowd is usually right.

6. Work for companies you would invest in and invest in companies you would work for.

7. Nothing’s free, so figure out the cost of investment returns – emotional, analytical, whatever – and be prepared to pay every cent of it.

8. Most great companies focus on the intersection of customer empathy and competitive paranoia.

9. Most great investors focus on the intersection of patience and contrarianism.

10. Most contrarianism is irrational cynicism.

11. Three types of businesses: Solve a customer’s problem, scratch a customer’s itch, exploit a customer’s vulnerability.

12. Solving a customer’s problem is the most lucrative and enduring, especially as access to information proliferates.

13. The biggest risks are things that aren’t in the news, as people aren’t preparing for them because they’re not in the news.

14. Reducing your desires has the same effect as leveraging your assets, but with no downside risk.

15. Spreadsheets cannot model trust and honesty, so due diligence always has to have a soft, subjective side.

16. Read fewer forecasts and more history.

17. Study more failures and fewer successes.

18. Reject existing beliefs as easily as you are persuaded by new ones.

19. No amount of intelligence can counteract the influence of extremely strong political beliefs.

20. Absorbing manageable damage is more realistic than avoiding risk.

21. Everything is ten times more complicated than it looks.

22. Solutions should usually be ten times simpler than they are.

23. The cure to overconfidence is constantly reminding yourself that you’ve experienced maybe 0.00001% of the world.

24. Highly overrated: Forecasts, goals, and multitasking.

25. Highly underrated: Options, systems, and getting along with people you disagree with.

References

Short Investing Rules by Collaborative Fund, Morgan Housel

On-boarding deals

The strategy of using acquisition offers from businesses to reduce or optimize spending.

Start-ups and larger companies often resort to offering discounts to facilitate customer acquisition. By following a non-traditional usage pattern of switching from one company to another during an offer, a user can exploit these acquisition offers for significant financial benefit.

References

How to Live in San Francisco Without Spending Any Money

Money Savings Expert (UK)

Risk parity

Risk parity is an improvement over traditional diversification methods. It allocates assets so that different asset types have equal overall risk exposure influenced both by allocation weight and volatility.

Illustratively, imagine you have to allocate $1,000 across stocks & bonds. We're also given that stocks are 2x more volatile than the bonds. Traditional diversification would advocate buying $500 worth of stocks and $500 worth of bonds - a 50-50% split. However, according to risk parity, we should buy $667 worth of bonds and only $333 worth of stocks. Risk parity research merits that this new allocation will have the optimal risk-return characteristics of any allocation.

Q: Do returns of the individual asset classes matter in this model?

A: Risk is more important than returns in this model, but it's important that volatile assets have higher returns and less volatile assets have smaller returns.

Q: Wouldn't this portfolio have a lower overall return?

A: Yes, a portfolio can have a better risk-adjusted return but lower overall return. To increase the absolute return of a risk parity portfolio, all asset classes are leveraged.

Risk parity can also be applied recursively within an asset class.

References

Bridgewater All Weather Strategy

Wealthfront Risk Parity

AQR Whitepaper on Risk Parity

 Wealthfront

Wealthfront

15 uncorrelated bets

15-20 uncorrelated investments (at any risk level) offer significantly better risk/return characteristics than a single investment. Also called the "Holy Grail of Investing".

I asked Brian Gold, a recently graduated math major from Dartmouth who’d joined Bridgewater in 1990, to do a chart showing how the volatility of a portfolio would decline and its quality (measured by the amount of return relative to risk) would improve if I incrementally added investments with different correlations.

..

I saw that with fifteen to twenty good, uncorrelated return streams, I could dramatically reduce my risks without reducing my expected returns.
— Ray Dalio

References

Principles by Ray Dalio (page 56-57)

For a model portfolio of a Risk Parity strategy, refer to Reverse Engineering AQRs Risk Parity strategy

The hierarchy of investor needs

Possibly the first thing we should understand about investing:

You can be brilliant on one hand but still fail miserably because of what you lack on the other.

There is a hierarchy of investor needs, in other words. Some investing skills have to be mastered before any other skills matter at all.
— The Motley Fool
 The Motley Fool

The Motley Fool