Guest post: How I invest

[jacob]

I think this post is mostly useful for highlighting a few things for those who want to build out their investing game.

https://pictureperfectportfolios.com/ea ... nd-fisker/

Some article typo/errors in the process of being fixed. Most importantly, I do NOT analyze stocks. If something passes my screens, the most I do is to look up a candidate on CFRA to look for red flags. The process works as follows: I identify where I think we are in the market cycle vis-a-vis where the market thinks we are. I look at whether the market may come around to my stance. I set up a screen for securities that do well in that case. It typically gives me around 5-15 candidates. I pay attention to when these are mentioned in the financial media. I look them up on CFRA. I start accumulating. (On exit, I sell the whole position.)

[OutOfTheBlue]

Thanks, Jacob. That was a great read. Inspiring. Warrants a reread too. If it was a forum post, I think it would go straight into that "best of" collection.

I retired early at 33 so my portfolio has to last me at least 60 years […].

As such I can’t accept the risk = reward paradigm.

In my situation, risk is the potential for irrecoverable losses and the reward is maintaining financial independence from an recurring cash stream.

This sums up a recent realization I had pretty well…

Rather we’re all in this world together even if half of us have yet to realize or accept it.

Everybody is responsible for doing something on their own as well as doing something with others.

This includes investing.

I like to think of investing as “guiding the future”.

Voting by market.

You put your monies to direct the future evolution in a certain way.

Not just for humans, but other species and the planet as such.

Insofar you have enough savings, consider giving up a few basis points for the future of the planet.

There’s only one as far as we know.

This answers a question I wanted to submit to the forum, but didn't, for fear of seeing it turn to a political discussion. I was thinking of a thread title like "Ethical investing", and the question going like this: To what degree are your investment decisions influenced by what you consider as "ethical", whatever that term might mean to you. If yes, how so? Great answer.

I also see this has also been discussed in the past, so I've got some reading to do:
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viewtopic.php?t=5294

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The ultimate anti-Jacob portfolio would be committing an irrecoverable amount of savings to an unguided “fire & forget”-portfolio that is justified by binary absolutes like “always”, “never”, “nobody”, and so on.

Things change slowly.

Course corrections are necessary.

This resonates too. The drive for simplicity/generalizations/simple solutions can become a blind spot. The 4% "rule" for instance. I have read this many times, but only now begin to grok the advantage of complexity over simplicity (see Decoupling and increasing complexity in the ERE book). This post is a great demonstration of this. How decisions are informed by a strong and broad understanding of and acting upon a complex, moving landscape.

[jacob]

This resonates too. The drive for simplicity/generalizations/simple solutions can become a blind spot. The 4% "rule" for instance. I have read this many times, but only now begin to grok the advantage of complexity over simplicity (see Decoupling and increasing complexity in the ERE book). This post is a great demonstration of this. How decisions are informed by a strong and broad understanding of and acting upon a complex, moving landscape.

You might find the Cynefin framework useful to describe different investor types AND the different investment environments. For example, when everything is trending up, it's pretty simple. When everything is trending down, it tends to be chaotic. And so forth. Just another mental model...

https://en.wikipedia.org/wiki/Cynefin_f ... _Stoop.jpg

[Cam]

Thanks for sharing Jacob. I'm still in the set and forget phase, but this was a good kick in the butt to actually do some serious learning.

[guitarplayer]

Yes! Thanks @jacob, I appreciate new (but the same in many ways I suspect) content again. Am away this weekend will read when I can.

[classical_Liberal]

Thanks for the article.

I am curious. Given your experience as a professional Quant, is there any (beyond the obvious and easily available) insight you learned that can help a non high velocity trader? IOW, did any of the Quant work provide you insight for the average mid-term, individual investor such as yourself (and me)? or is it only useful in the trading context we have no chance to compete with?

[prudentelo]

This is rare deep post that combines the philosophy with the pragmatics. Thank you.

[jacob]

I am curious. Given your experience as a professional Quant, is there any (beyond the obvious and easily available) insight you learned that can help a non high velocity trader? IOW, did any of the Quant work provide you insight for the average mid-term, individual investor such as yourself (and me)? or is it only useful in the trading context we have no chance to compete with?

* I learned who "they" are. And that inefficiences don't scale and trading/investing only happens when it is "economical". This has two consequences. First, the strategy has to make more than the salary of the professionals times three (the other thirds go to overhead and shareholders respectively). In practice, a strategy that "only" makes, say, $500/week is wasted effort as far as professionals are considered. Second, strategies are scaled up. One starts betting low (say with $100k) and sees how much profit this makes. If this goes well, bet size is increased. Plot profit over bet size. You'll find that this is not a straight line and that it bends down. Another way of saying this is that there is a market inefficiency of $50k and another one at $700k and yet another one at $3M. The $50k is ignored. The $7M is big enough to attract competition. Indeed the people creating the inefficiency (say Vanguard block traders or the Fed) will have an interest in hiring a team to eliminate it. There's a sweet spot for sole operators. (You can also call this the Buffett problem. It's a lot easier to get returns on a small portfolio than a large one.)

* It's vastly different to move 100 or 500shares compared to moving even 50000 shares.

* A good strategy will combine 5-7 ideas. Many more people are able to combine a few ideas and thus those inefficiences are already eaten up.

* Market participating have different goals! For you and I, it may be a secure cash streams. For others it may be holding and waiting for the security to increase in price. For a investment fund it may be to place $50M into the market every payday; or deal with 2000 clients who think they're being smart when they all hit the "rebalance button" on the asset allocation on the same few days.

And from the article

Later working as a quant on “Wall Street” for a few years (bucket list, checkmark) finalized the point that successful investing is not so much about being right but about being slightly less wronger than wrong.

There are people trading on psychology alone. Their own. Their understanding of other people's psychology. The poker link in that regard is great. Level 0 is clueless (hot tops, gamestonks, etc.). The math-heads are Level 1, which is a huge step up, yet they still lose to Level 2 which play an entirely different game. So accepting the existence of Level 2 is helpful. Grokking this is especially hard for a STEM person.

As far as quantitative mathematical techniques, I use none. They don't capture complexity well enough for how I personally invest.

[classical_Liberal]

@jacob

Thanks for the response. Most of it has been stated in splintered form through other investing threads, I tend to agree. You would know that from the same threads.

As far as quantitative mathematical techniques, I use none. They don't capture complexity well enough for how I personally invest.

This was what I was curious about and probably articulated poorly.

I still think the above post is a well summarized post of your (and my) type of investing. Along with the original article, is a great gateway for the individual investor on ERE who wants to take personal control of their investments.

[suomalainen]

I once made the mistake of revealing my portfolio in a random blog comment. Many years later, someone dug it up and sent me a complete analysis of how it had performed over the years. I wrote them back to inform them that I had sold off many of the positions several years ago. Their well-intended analysis had made incorrect (buy&hold) presumptions about my strategy. I don’t believe it’s possible to separate an investor from their investments. They come as a pair. Knowing WHAT someone is holding is not the complete picture. You also need to know WHY, HOW, and WHEN they’re holding it and that is very personal. Woe to anyone who simplistically copies someone else’s portfolio without understanding why it is the way it is.

While I understand the sentiment, I also think it would be interesting to get a "peek under the hood", but not in the way mentioned in the quote or in the article, but to see the movement, the thought process, the adjustments and so on. So, for example, it would be interesting to read:

In 2014, such-and-such was happening in the world. I thought the market was thinking that the world would go this way, but I thought they were wrong and the world would go that way. The reason I thought this was [reason]. I also figured the world would catch up with me within [expected time horizon]. I implemented my thought process by buying [stocks] at [prices]. After the purchase, this happened and that happened, and I trimmed/expanded those positions thus. I unwound the position entirely when [trigger events]. And this trade was successful/unsuccessful because [post-mortem].

I've tried to ask this type of question before on this forum and have gotten shat on, so I don't really expect anyone to provide this type of narrative who has done it. I just think it would be interesting to see the thought process in action, even if it is filtered by time, hazy memory and other hindsight biases. Maybe it's ultimately a boring story, but I like stories, so [shrug].

[Stahlmann]

One sentence per line crew, welcome to

[steveo73]

That was a really good read.

A couple of things stand out to me. I love how environmentally/socially aware Jacob is and I love how his personality impacts his life and also his investing. If you change perspective from a right portfolio for everyone to a right portfolio for you that changes how you view portfolio creation. The same as for how you live your life. It's good seeing people living true to themselves and being a bit different. I think this is a key trait in relation to ER. You/we tend to be a little different.

I didn't get this point here though. Can you explain ?

Perhaps more generally I don’t believe there isn’t a group of “they” as in “they will think of something” whether it comes to ensuring that the market always has the best price, or inventing new technology to compensate for bad resource management, or fixing climate change, malnutrition, lack of exercise, or unhealthy behavioral choices.

Just to add I laughed at this line.

If modernist rationalism was the answer, “more education and books and apps” would have solved all these problems.

We are so advanced and so backwards at the same time.

[Riggerjack]

@jacob,

That was fun. Thanks. It explains a lot about how you think.

I remember back in spring, you were asking questions that made me want to get you to widen your search patterns. I wasn't at all successful, but I better understand why, now.

Maybe you could share your thoughts on how you see:

This corresponds to getting your feet wet and also to breaking out of the system of your formal training by getting new ideas. There’s a reason it’s called “martial arts” and not “martial science”. The point of learning the foundations of your field is to break out of them properly.

in relation to your thought on the metacrisis? Specifically, I perceive the metacrisis as confirmation of the failings of the foundation of our "known" fields.

To extend your martial arts analogy, how would a Shoalin monk begin to look for the knowledge we could sum as "brazilian jui-jistu" when he already knows "all the ways force and misdirection can be applied directly" (from personal experience, and the cultural practice of centuries), and "how to resolve inner conflict with meditation practice"?

[Kriegsspiel]

I second suomalainen's motion for an example of a corporation that you bought (and sold?) and the context/reasoning.

[jacob]

I've tried to ask this type of question before on this forum and have gotten shat on, so I don't really expect anyone to provide this type of narrative who has done it. I just think it would be interesting to see the thought process in action, even if it is filtered by time, hazy memory and other hindsight biases. Maybe it's ultimately a boring story, but I like stories, so [shrug].

I second suomalainen's motion for an example of a corporation that you bought (and sold?) and the context/reasoning.

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[suomalainen]

@jacob, yeah I get it. I'm more interested in the story than in "learning" anything from it per se or "debating" it, and certainly no interest in The Secret, but I can understand how it would probably devolve, and my angle wouldn't perhaps be of widespread interest. I've made a few trades here and there that I've felt good about that had little narratives to them. The rest were just stupid gambles because I was hoping to hit the lottery and quit working overnight. I'm now mostly out of the market as I have neither the time, capital, energy or interest to devote to that part of life - kids, work and social (gf/friends) consume just about everything. I have a few trades in my 401k from time to time as I shift from stable value to high yield to stocks as I think certain asset classes may have temporary mispricings. That's enough for me for now.

[ertyu]

Then maybe that's a good idea for a trade. Share one trade you made in the past that worked out, your reasoning, execution, etc., and how it worked out. Also share one trade that didn't work out, your reasoning, execution, etc.

[steveo73]

To extend your martial arts analogy, how would a Shoalin monk begin to look for the knowledge we could sum as "brazilian jui-jistu" when he already knows "all the ways force and misdirection can be applied directly" (from personal experience, and the cultural practice of centuries)

My take is in this situation your premise is wrong. These are completely different sports with completely different body movements. I don't think there would be much if any transference of skills.

If he was a gun wrestler or Judoka the situation would be different. Even then it's tough. The reverse is also true.

I've been training for close to 20 years and I'm a black belt. I've trained with heaps of guys that come from other martial arts.

You can learn up to your potential but it's going to be hard work.

[ertyu]

My take is in this situation your premise is wrong. These are completely different sports with completely different body movements. I don't think there would be much if any transference of skills.

Transference of skills is not the point, tho. Being exposed to what thought processes are possible is the point. Or, putting a concrete example to a theoretical point could be the point. "Be a little less wrong" is an abstract, theoretical statement. Some people apply the theory intuitively, and telling them the general principles is enough. I assume @jacob is one of these people because of what the ERE book is like: it is a theoretical framework, and it is assumed that once presented with this framework, the reader would see or design applications. There is little, "for example if I am trying to make the decision of whether to keep my mountain bike or not, this is how I apply the theory and how I arrived at a decision" (it was a while ago but I believe it was @AxelHeyst?? who worked through this in his journal? -- correct me if I'm wrong). I don't own a mountain bike, I'm not into mountain biking, my web of goals and his are different, so I didn't need to "transfer the skill" of "how do I decide whether or not to keep my mountain bike." And yet it was useful to me to read through the steps of his thinking process was useful and interesting to me.

[steveo73]

Transference of skills is not the point, tho. Being exposed to what thought processes are possible is the point. Or, putting a concrete example to a theoretical point could be the point.

I think this is wrong in this instance. Can you explain how thought processes could improve performance in this instance ?

We have to keep this in sort of normal bounds. You could for instance state that they come in and because they are fit it's a good base. I'm talking about technical learning and even more importantly actually pulling off a technique against a resisting partner.

I don't see how you can come in and suddenly pick things up quickly via training in a completely different martial art especially a martial art that is (I'm not meaning to be disrespectful here) not proven in the MMA field.

I'd suggest the transference is as good or bad as playing soccer.

Some people apply the theory intuitively, and telling them the general principles is enough.

Context is very important. I'm pretty confident if someone had no training in Judo or wrestling or some grappling art and then they came in and I just explained principles to them they'd still get smashed. Someone's size and athletic ability can make a massive difference but not so much learning some other martial art dependent on the martial art.