Adoption and Developing Investment Strategies

[JCD]

I have been thinking about the C6 chain (Copying-comparing-compiling-calculating-coordinating-creating) and how that relates to people’s views on investment strategy. I have made one of the largest C2/C3 lists of strategies I have seen. The very next section of the ERE book is about complexity and how large, complex compiled lists are insufficient to keep track of all the concepts. The fact that I’m trying to keep to the strategy level and have taken some efforts to abstract these out, suggests just how insane it would be to keep track of all the underlying tactics. Furthermore, if you believe different strategies apply to different situations, having the proper lookup for which strategy to apply and when seems important. So I’m interested in hearing how people convert all these strategies into a general theory. Basically, how do you compress all this information down?

I want to review one obvious approach in general is to adopt a general investing philosophy such as ERE or JL Collin’s “Simply Vanguard”. These are some level of pre-made, roll your own culture, C6s, although designed at different levels of sophistication. I suppose “Dividend investor” is a similarly a pre-made C6, but that style of approach feels limited since it is one of a constellation of strategies. The same is true for JL Collin's approach, in that it is just one small aspect to an entire finance, much less, life philosophy. ERE doesn't have that limit, ERE has an entire life philosophy behind it, but more importantly, ERE has very explicit flexibility built in. It is a system for building a life, not a prescribed solution. While ERE does have something to say about finance, it doesn't really give any ready-made model. In rough, it says you need to figure that out for yourself. I get there is the financial coursework jacob recommends. Is that how you build the deep models that become a general theory? When you can take any approach at any time, with practically total and absolute freedom within the investing universe, how do you create a your working philosophy?

I have some of my own philosophy, systems and models, but I want to hear other people’s approaches to the problem.

This is my C2/C3 list of investment strategies. Before reading it, I have some notes on its construction. These are labels for investment strategies, they don’t express how the strategy works nor do they express the strengths and weaknesses of these strategies. That means that some strategies could be considered goals (e.g. Limit losses), or tactics (e.g. Stop loss to implement goal of limiting losses), depending on how they are implemented.

This is not a taxonomy or meant to have too much rigor, these categories are just an effort to express the concept not to precisely label, nor is it complete, just an effort to capture some major strategies I’m aware of. I also know that some of these are strategies may sound the same to some. For example, some deny that you can gain alpha and thus would call many activities as synonyms for speculation.

I know many of my descriptions are very limited definitions, like MLPs, don’t get hung up on that, it is just meant to be enough to jog someone’s memory, not complete descriptions.

• Stock
  • Index (See Multi-Asset)
  • Value Investing
  • Contrarian - Bet against the market
  • Investor Psychology - Who will change their mind, why, when
  • Dividend
    • Stocks that expire - MLPs
    • Preferred Stock
  • Invest by {split by category}
• Bond & Debt
  • Index (See Multi-Asset)
  • Bet on interest rates
  • Future Steam of Income
• Cash
  • CD
  • Savings account
  • Under mattress
  • Forex (Currency)
• Commodities, Gold & other valuable substances
  • Invite ducks to swim in it
  • Store it / Bury it
  • Place in foreign country
  • Hold stock (e.g. someone else stores the gold)
  • Mining
  • Futures contracts
  • Over buy it (e.g. store 10 years of grain in your house)
• Real Estate
  • Mortgage - Interest hedge
  • Live-in
  • Rent
  • REIT
  • Growth: Appreciation
  • Value: Cheap, “affordable” area
  • Grow - e.g. Plant things, share crop
  • Mineral rights, oil, etc.
• Options
  • Range-based (e.g. Value will be > x, < y)
    • Approximately at the money - sideways markets
  • LEAP
  • Futures - Commodities
  • (See multi-asset for many other viable options trades)
• Skills
  • Deep dive
    • Economic - Gain more money
    • Multidisciplinary study - Deep dive in a region of human knowledge
  • Breadth (“...specialization is for insects” - RAH)
  • Exploration - A form of play, without knowing what will come out of it.
  • Insurance / Annuities
  • Discounted “Fixed” payout (may adjust for inflation)
  • Payout upon event (e.g. Death, age)
  • Time-fixed payments (e.g. Secondary market, see bonds)
• Private Businesses
  • Run/Partner in business
  • VC
  • See stocks
• Intangibles
  • Create or buy to sell/lease/litigate around copyrights, patents, trademarks, etc.
• Collectables & Expensive things
  • Arbitrage
  • Use while value goes up/stays flat (e.g. Classic cars)
• Multi-Asset
  • Multi-Strategy (e.g. Diversification)
  • Index
    • “All” of {split by category}
    • Closet Indexing
  • Activist Management & Mutual Fund
    • Beat the market
    • Limit downside risk
  • Timing
    • Enter / Exit market on signals
    • Enter / Exit market daily/nly, regardless of signals (e.g. Options expire, DCA)
    • Tilt or partial retreat on {split by category} by signal
    • Past Histories - e.g. Ray Dalio’s Decade-based strategy
    • Buy and hold - "Our favorite holding period is forever."
  • Long / Short - Will the asset go up or down?
  • Smart Human Theory - Invest in a person (e.g. Warren Buffet or Cramer or …)
  • Leverage - Multiply the effects of your investment
  • Gamble & Speculation
  • Tax-efficient - Investing in ways that limit tax burden
  • Fee-efficient - Investing in ways that limit fees paid in investing
  • Discounted Assets - e.g. Invest in stocks that provide bonus shares when you reinvest, underlying assets are worth more. e.g. NAV above price.
  • Arbitrage
  • All in X, excluding {split by category} - Example: Asia minus Japan. Example:
  • Buy Ford, short all other autos to gain the value Ford itself gains, while ignoring the auto industry's results.
  • Beta/Risk
  • Gain Alpha - Maybe more of a goal than a strategy
  • Momentum
  • Speed - Algorithms - http://www.youtube.com/watch?time_conti ... 43a-KxLFcg
  • Quantitative Analysis and Machine Learning
  • Diversification & Hedging
    • Diversified Portfolio (e.g. Lots of eggs and/or baskets)
    • Concentrated Portfolio (e.g. Watch those eggs closely)
  • Information based
    • News, Rumor vs News (e.g. Early vs Late responses)
    • Macro
    • Fundamentals
    • Technical Analysis - Trends
    • Management Analysis
  • Illegal Strategies… Not listed.
  • Market Maker
  • Bounds Trading - e.g. Stop loss
  • Protect against inflation

Split by Category examples:

• Market
• Sector / Industry
• Value - using P/B, P/E, etc.
• Growth - using P/B, P/E, etc.
• Market-Cap
• Nation
• Region
• Weather
• Dividend

[JCD]

Since no one responded, I thought I'd try to describe my own thinking, using examplars.  These specific examples are not meant to imply this is all there is, just ways to make this less abstract.

So I’m interested in hearing how people convert all these strategies into a general theory.  Basically, how do you compress all this information down?

I write lists like the one above, working on how to compress the concepts.  I use these as a sort of kata, practicing, but also looking at concepts in many different ways.  While making lists and models does help, I also practice by examining trades that I don't actually make.  For example, I once looked at Toys R Us bonds which were paying out some of the best rates.  I considered buying them and what the upside and downside potentials were.  It's been a few years, but I believe at the time it was a BBB bond.  I didn't buy it, I had no intention of buy into bonds, but it gave me a view into evaluating bonds and I get to look at the future (by living it) to see how my evaluation came out.  One mistake I have made is not writing my evaluations down.  I will probably do that in the future.

Having also studied lots of various traders, it seems that there are two big kinds of traders.  Those, like Warren Buffet, who has chosen specialties and stick with them.  They might broaden up a bit, but they tend towards depth based investing.  Then there are others who seem to be more varied, like Jim Rogers, who has jumped from hedge fund to international to shorting the USA.  This second category of folks interest me more.  My current theory is they tend to be more Macro oriented, but I simply can't tell, which is why I opened the topic in the first place.

When you can take any approach at any time, with practically total and absolute freedom within the investing universe, how do you create a your working philosophy?

I don't just do one thing, but my time investing is relatively limited.  I started investing during the crash of '08 and only really started in paper assets world , sans cash, about 4-5 years ago.  I started just by doing simple things like indexing, using portfoliocharts and other tools to weigh different options.  I still find indexing a useful concept, particularly internationally where it is more difficult to invest in individual assets.  However, I find indexing to not follow my natural desire to be contrarian and look for deals.  I also have found I enjoy macro economics.  So as I explore myself I use the above approach as one method for evaluating choices.  However, you can't just toy with non-investments, you also have to pick something.

I lately have been listening to varying thinkers in regards to economic ideas, like Warren Mosler (famous for his work in MMT) and Mark Blyth (Economist).  In listening to these sorts of folks, listening to broader news like Market Place I try to piece together a picture of where the world is going.  I by temperament are not a particularly sure person, so instead of saying "X" is where we are going, I try to assign probabilities.  For example, I might say there is a 70% chance Trump will win the election given today's data or there is a 60% chance of a recession in the next 12 months.  I might also try to look at the broader historical parallel, saying things like there is a 40% chance this is like the late 60s and a 40% chance this is like the late 30s.  

I compile these sorts of probabilities into various sorts of trades.  Like in a recession, dividend investing is at some risk, but some sectors are safer than others.  I might try to guess who will be a winner or a loser in a broad sense, then I go looking for a stock that I might be hopeful for based upon that.  If I think things are going badly AND I'm nearly certain they will go badly, I'm looking for the worst stock to short.  That said, I'm rarely that certain.  So instead, I'm going to look for the assets I think might go down enough to make them cheap.  I then might sell a put option, or place a 60 day GTC offer in a option, so if/when the option value goes up  and it will be bought by someone on the other side of the trade.  If I get put, I win.  Sure, I might have gotten it even cheaper, but then I have to play timing games, something I don't find as appealing.  Yes, I risk some sort of unexpected bad news, but if I bought the stock I risked that anyway.  If I don't get put upon, I keep the money.  To me this has been my best strategy to date.  I only get things I want, but get paid to stay in cash until they go to a level I consider fair.

You might notice I have not come anywhere near close to all of the possible methods of investing humans have come up with. That is true. It is why I try simulations, trying methods that may work better than my own, but didn't initially attract me.

[jacob]

To develop metaframeworks, look at commonalities between X and Y (Not differences). For example, corporate bond and stock investing relies on the same analysis of the underlying company. It's just that bonds are senior to preferreds which are senior to equity.

What you have above is akin to a list of all the brand names of canned tomato found in walmart. What do they have in common? The can's shape, material, ... the tomato, preparation method, ...

Basically, the next step is to learn what's under the hood of each investment type. The number of entries here will be much shorter but they will also be connected more intricately.

[JCD]

It seems like your saying that to build a meta framework, you need to be more lumper than splitter (e.g. http://en.wikipedia.org/wiki/Lumpers_and_splitters )? Is that because you feel that the complexity level is just too great or is this just a philosophical preference on your part? I ask as I personally tend to be a lumper by nature and specifically resisted it in this case. I agree that my intention in this case was to be splitter. I have also done katas around lumping.

For example, I tried to figure out what all the major assets were in a model I called the 7+1 Asset Class Model. I agree that isn't exactly the lumping you suggest, but it is of similar effort (shown below for anyone who cares or finds it useful). So far I've been inventing these kata as I go. I only just came up with the "atomized" set of investment strategies as an idea a few weeks ago as I started to feel a bit overwhelmed by the expansiveness of it all. So I started writing them down as I thought of them or heard new ones. I did consider lumping, but went with the principle that principle that "splits can be lumped more easily than lumps can be split."

Total aside, I'm curious, do you know of any resource that suggests these sorts of learning katas around financing and economics?

7+1 Asset Class Model

• Businesses: Equities, entrepreneurship, working for the man. Businesses often use or work with other assets
• Debt: Bonds, collateralized debt (like mortgages). A claim on a future stream of income. Some insurance products might also fall into this category.
• Insurance: Annuities, options, futures contracts, life insurance. Pays out after certain events, either limiting loss or limiting gain. Those who sell insurance do so to gain a premium.
• Real Estate: REITs, MLPs, infrastructure, buildings, land. Real Estate investments maybe designed to protect you from paying out rent (e.g. living there) or providing an income stream.
• Commodities: Gold, timber, oil, steel. These have little direct value, but when transformed by businesses they become extremely valuable.
• Intangibles: Copyright, patents, trademarks, inventions: These are idea-stuff. Often owned by businesses, but you can buy these directly.
• Cash: Currency, Savings accounts, forex

+1:

• Knowledge & Skills: You can invest in growing more knowledgeable and skilled in applying that knowledge.