Investing Desk picks #4

What works on wall street lecture

November 6, 2020

Snir's investing desk is a newsletter focused on intelligent, value investing for the individual investor. The subjects are evergreen and deals with the essence of investing, mental models, and concepts.

Things I watch & Read

Jim O'Shaughnessy talk at google & accompanied article

Jim O'Shaughnessy is a renowned investor, author of the best-seller "What works on wall street". He's a super-smart guy, and his book is a great read too.

In 2017 he gave a lecture at google condensed with his massive amounts of knowledge and experience in what I can only describe as a calm, thoughtful retrospect of investing practices.

The content of this talk is also available as an article on his blog What Works on Wall Street.

Some insights I personally interpreted are:

There are many valid investing strategies

Investing in the S&P 500 is a simple strategy: buy the biggest 500 companies in the market. This strategy usually yields 6%~ per year over the long term.

But there are other solid strategies that consistently yield far higher returns. Simple strategies based on simple metrics anyone can follow.

The problem is, with these strategies, statistically you'll be substantially underperforming the market for 3 out of every 10 years. Which lead to:

The failure is not in the strategy, but in the emotions

People fail even with the S&P 500 because they sell out of fear. As many did in the 2008 financial crisis lows.

The same thing happens with other strategies. They are solid if followed, but people can't manage their emotions and they don't stick to the strategy through the hard times. And there always is a hard time.

Moreover, Jim says, index investors just have to stand through the market volatility. Active investors on the other hand have to deal with comparing their specific performance with the benchmark.

Usually, as Jim shows, you'll underperform the benchmark 3 years out of 10. And it is essential to stick with it through the hard years to reap the benefits later.

There are many fallacies that makes it hard to stick to a strategy. Some of the fallacies presented are:

  • The recency fallacy - creating a narrative based on the last thing one hears.

  • Following the winners - this is a very bad idea. Usually, the outperformance is a temporary event followed by regression to the mean, an effect I talked about in the last issue.

  • Fight or flight mechanism through millions of years of evolution trained us to flee when things are scary.

  • Some more, detailed in the talk.

If I need to summarize my one key takeaway from him, it's this:

Pick a winning, proven strategy. Then, no matter what, even if the financial world seems to end as it did in 2008, stick to the strategy. 10 years at least. Then you'll outperform.

Easier said than done, but I've got hopes.

What I tweet

I use twitter to push out investing lessons I go through in a concise way. Putting the ideas into a single concise tweet makes me think and realize the essence of each idea. Here are some from the last week.

That's it for this week.

Have a great weekend everyone!