Diversions

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Smart investing is boring, plain-vanilla, milquetoast.

One need only invest in well diversified portfolio of low-cost, passive index stock funds, and just enough bonds to match their own risk tolerance. (And rebalance once every year or two.)

And yet here I am several hundred posts into my blog, still writing about investing.

And the reason for this is not complicated: Keeping it simple is anything but easy. (Which makes it interesting.)

Having spent a fair bit of time in Japan, I think of this paradox as a visual metaphor.

This is a garden at a Zen temple in Kyoto named Daitokuji.

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Daitokuji

The picture doesn’t really do it justice. But it is indescribably beautiful and still in person.

And what is it? A few big boulders carefully placed among thousands of small pebbles, the odd tree, and some careful raking.

There’s no topiary. There’s no ornate sculpture. There’s no careful selection of flowering bushes geometrically pruned to perfection. There’s no trellis work.

It evokes nature. And the only hint of man’s intervention is the careful raking of the pebbles, which brings to mind fleeting ripples in a pond. More nature.

It is simple.

But it is anything but easy.

Great care has been taken to include only that which is necessary and exclude all clutter and distraction. Constant vigilance was required to avoid the unnecessary. Which is why this garden is such a rare and beautiful thing.

In fact, if you try to replicate this inspiring beauty when you get back home to Topeka, you’re likely to end up with something like this.

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What my zen rock garden would look like…

Which is hardly inspiring.

And you get where I’m going with this don’t you? Daitokuji is passive investing a la John Bogle. Low-cost passive funds in proportion to the capital weighting of the whole economy and nothing else.

There’s no tilting. There’s no stockpicking. There’s no chasing dividends. There’s no momentum.

But you’re probably not as disciplined as John Bogle is, and neither am I.

So I find myself constantly tempted by the siren song of the next great angle. And my actual portfolio has a fair bit of tilting towards the value and size factors. I have even admitted guiltily to including a bit of tactical asset allocation in my investment plan.

But what can I say? I find this stuff incredibly interesting, and I just can’t stop myself from reading and thinking about it.

My desire to tinker is incompatible with my desire to keep my portfolio simple. So I’ve had to develop coping strategies.

Here’s a recent example.

Last week I came across this video of a Google talk given by Meb Faber on investing strategy. If you are an investing nerd like me, click on the hyperlink and watch it! It’s quite interesting. (If you’re not an investing nerd, don’t torture yourself, I’ll summarize some of the more salient points raised in it below.)

The high points of this talk for me were:

  • The importance of international diversification.
  • The perils of “home country bias.”
  • A strategy for using international CAPE ratios to tilt your portfolio towards undervalued international countries.
  • The foolishness of pursuing a dividend strategy in the current low interest rate environment (when they have never been more overvalued.)
  • A strategy for leveraging the expertise of hedge fund stock pickers (like Warren Buffett) to create “clone portfolios.”

The first thing I must acknowledge is that all of these points (with the possible exception of the last one) were immediately interesting to me because of the presence of my own confirmation bias.

In other words, the core message of Faber’s talk spoke to my previously held beliefs about international diversification and value investing. And the fact that his views on investing seemed to jibe so well with my own, made even the “clone portfolio” idea quite interesting to me.

Which is to say that watching this video was extremely dangerous to my stated goal of keeping my portfolio nice and simple.

But what was a poor sap like me to do in such a situation?

I thought were really two options.

1.  Exert an iron like will and do nothing.

Or

2.  Satisfy my curiosity by playing around with simulated portfolios.

And since I lack an “iron like will” I went with option B.

I changed exactly none of my positions in my actual portfolio. But I did create five new model portfolios on motifinvesting.com which I will follow prospectively, with interest, into the foreseeable future.

(These new portfolios include four “clone portfolios”, and a global value portfolio.)

And this is not the first time that I’ve done this. In fact I now have something like 18 motifs and this is what my homepage looks like at motifinvesting.com. Screenshot 2014-07-15 00.03.00

3 of my newer motifs…

And aside from The obvious entertainment value, I learn something from following these portfolios over time. I learn how these allocation approaches behave in different market conditions. I also learn which of my investing interests persist over time, and which of them are merely passing fancies.

Best of all this strategy is free. Both in terms of what it costs me to execute it, and in terms of what it costs me to avoid unwisely changing my investment strategy.

And I don’t actually believe that this strategy is completely futile.

I believe that by continually feeding my own curiosity I also gain actionable morsels of information over time.

Two pearls that I learned from this exercise that I may make use of in the future are

  • The existence of Faber’s GVAL ETF which focuses on investing in value companies in value countries. (This ETF may very well have a place in the international portion of my portfolio in the near future.)
  • The fact that I can use GVAL to see which 10 companies Faber believes the most undervalued in the current world economy based on quantitative measures of global International CAPE ratios and momentum.

So even though my actual portfolio changes very little over time, my urge to tinker is constantly satisfied, and my desire to learn more about investing theory is continually reinforced.

Which is kind of a “win/win” in my book.

What is your strategy for keeping it simple with your investments?  Share your comments below…

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10 Responses to “Diversions”

  1. LtRalph July 15, 2014 at 3:46 pm #

    I give myself a small percentage (1-5%) or my portfolio to just play around investing. I played around with covered calls on REIT stocks, then I played around with lendingclub, and now I’m playing around with Motif investing. Thats actually the money I used to start float the MS in my miles creation game.

    • Miles Dividend M.D. July 15, 2014 at 5:26 pm #

      I like it Ralph. The important thing is keeping a firewall between your play money and your retirement savings, I would think.

      Do you measure yourself against benchmarks?

      And does your play money ever effect your strategy for index fund investing?

      • LtRalph July 16, 2014 at 7:11 am #

        I keep track of the annual return, and a general record of how much time I spend on it. I was getting GREAT returns on the REIT covered calls (avg 10% per quarter vs 6% for the market), but it just took too much time for my current situation (school). The rest of them have been fun but terrible.

        It HAS changed my strategy on index fund investing by really chasing those low fee funds, and increasing my diversification (i added realestate and bonds). But mainly they have served as learning tools to educate myself about calls/puts, p2p lending, and how pointless it is to try and be a fund manager when you don’t have the time to make it your second job.

  2. G-dog July 16, 2014 at 5:46 pm #

    Being nearly a financial illiterate – index funds are doable. This is also where I am not sue what “a little knowledge is a dangerous thing” really means……

    • Miles Dividend M.D. July 18, 2014 at 8:27 am #

      Jaime,

      Sorry! This is a sad, sad, comment for me because I love the stuff. I feel I’ve lead you astray.

      To me it combines the richness of olive oil with the bracing freshness of lemon without any sourness. What were your impressions of the flavor?

      I’ve only had the italian brand so I don’t know if your disappointment is brand specific or taste specific.

      I guess the bright side is that this is one luxury item that will not bring you extra happiness. So more saving and more freedom?

      Thanks for reporting back,

      Alexi

    • Miles Dividend M.D. July 18, 2014 at 8:32 am #

      Index funds are great. From a performance stand point, evidence suggests that if you keep it simple and just buy and hold index funds you will beat 80% of the investors out there (including all of the so-called financial experts and the financial nerds (like me.)

      In fact the main reason to read some books and become more financially literate is to prepare yourself so you don’t pull out when the stocks get cheap, and because you happen to find the topic interesting (again, like me)

      Thanks for the comment G

      AZ

  3. Vivek July 21, 2014 at 1:08 pm #

    Very interesting article and video Alexi. On first glance the idea of buying ETFs in the cheapest countries makes sense. But when I look further into it, it seems very difficult to actually find up to date CAPE ratios for foreign countries. Have you found a reputable site that publishes these?

    Love the site btw.

    Vivek

    • Miles Dividend M.D. July 21, 2014 at 10:04 pm #

      Thanks Vivek,

      And that’s a good question. There is no free Shiller CAPE ratio for international countries that I have found.

      You can pay for Meb Faber’s data, but I’m too cheap for that (it goes against my value bias:) )

      The best substitute that I have found is to look at the countries invested in Faber’s GVAL ETF, which selects countries based on the 10 lowest international cape ratios. As a publicly traded ETF, this is public information.

      Here is a link with the current country breakdown at the bottom of the page:

      http://etfdb.com/etf/GVAL/#holdings

      Enjoy!

  4. Vivek July 23, 2014 at 5:19 pm #

    Great link, thanks! If these things are updated quarterly (which is what I believe Faber mentions in his video), then it sounds like you could essentially replicate his strategy by buying ETFs in the countries he’s invested in and following his portfolio each quarter. I imagine the premise of all this is to buy cheap countries and wait till they go up, which in of itself doesn’t seem like it would necessitate a ton of actual trading. At any rate, it would be a nice theory to test out with a small proportion of your portfolio.

    • Miles Dividend M.D. July 23, 2014 at 9:42 pm #

      Vivek,

      He actually only rebalances GVAL once per year which makes tracking it pretty easy. He even mentioned that the fund could be rebalanced once every 2 years without losing returns.

      I believe the once per quarter comment you are remembering pertains to his equal weighting of the top 10 stocks in hedge fund clone portfolios. By law, hedge funds must publish their holdings once per quarter, so this disclosure serves as an “index” of sorts for clone portfolios.

      I’m modeling clone portfolios of Appaloosa, valueact , blaupost and buffet , along with a global value clone on Motif.

      I also like Another of Faber’s funds FYLD as a substitute for DLS, in the international small cap value space. ( both are actually weighted as mid caps. )

      Alexi

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