Investing Strategies

Investing strategies and corresponding model portfolios are dime a dozen. A quick look at websites like shows at least five different ways one could model their portfolio. Some of the more prominent ones include - "Buffett-Munger portfolio", "Undervalued Predictable", "Low P/S" and "Low P/B" among few others. Similar look at another website, reveals more than a dozen such portfolios. Gurufocus and Validea are just two example I happened to pick out of plethora of websites offering similar services. The question is, are such offerings worth a closer look? Are they earning their keep?

Unfortunately, most of them would not give away the proven secret to getting rich and opportunity to join the likes of Buffett for free. Fortunately though, they are generous enough to share the secret for a few dollars a month (yes, I am being sarcastic). 

These strategies are godsend since almost all them seem to have beaten the benchmark index hands down by a wide margin. If this sounds too good to be true, it is. Or as yankees put it - there ain't no such thing as a free lunch. There exists several caveats. While they reveal the performance figures, they obscure the methodology behind the calculation of performance figures. Most likely, the performance figures also do not take into consideration the trading cost, re-balancing cost  or the monthly subscription fees. But the issues don't end here. Let's put aside the possibility of quantitative skewing and shadowing for now and move on to the qualitative and logical issues.

On a closer inspection, we find that there is one thread which is common across all of these portfolios. They are all modeled after the investing strategies of highly successful investors like Warren Buffet/Charlie Munger (Buffett-Munger portfolio, Morningstar wide moat portfolio), Ben Graham (Net-Net portfolio), Kenneth Fisher (Low P/S), David Dreman (Low PER) or Peter Lynch (Growth or PEG) investor. 

In other words, the sophisticated investing strategies of these legendary investors have been reduced to a few lines of computer code and, in some cases, even worse to a set of simple spreadsheet formula. If this is indeed the case, why are the likes of Warren Buffet/Charlie Munger not out of business yet? Or shouldn't Warren Buffet invest in acquiring code monkeys instead of  wasting  8-10 hours of his day reading & learning about businesses?

Surely, one cannot expect the computer model to identify stocks that fit the criteria of legendary investors with 100% accuracy. Would a rather large margin of error, say, 10% be suffice for our purposes of achieving alpha? Would it be fair to expect at a minimum 90% overlap in the holdings? These are question that every investor needs to ask before accepting such strategies at face value. 

Other times some of the strategies happen to outperform the market in a given period purely due to chance. Academics call the mistaken impression that a random streak is due to extraordinary performance the hot-land fallacy. I encourage anyone interested in exploring this further to read more about hedge fund manager Bill Miller and his CAN SLIM investing strategy.  

Investing strategies, like fashion trends,  seem to go in and out of style. What differentiates a well thought investment strategy is the philosophy and logical reasoning  behind it. I have listed below the investment strategies that I believe are based on logical reasoning and sound investment principles.

My aim is to track the long term annual performance of these strategies after transaction cost and taxes (@ a rate of 35%).

Magic formula aims to systematically apply a formula to seek out good business when they are available at bargain price. See wiki or the book 'The Little Book That Still Beats the market' for additional information.

As of 21st March 2014, the following is the list of 30 companies with a minimum market cap of 50 million recommended by the magic formula.

TickerPrice (Buy)

Dividend growth investing
This investment strategy aims of buy shares in companies that have raised dividends for at least ten years in a row. I will be tracking this using VIG ETF. If you want to read more or have greater control at dividend growth stocks, I suggest you visit Dividend Mantra or Dividend Growth investor.

TickerPrice (Buy)

Harry Brown portfolio
This portfolio is based on the behaviour of stocks, cash, gold and bonds during the times of economic prosperity, recession, inflation and deflation. Harry Brown advocated 25% allocation in each of the asset classes and rebalancing once a year. The logic behind it is as follows:
  • Stocks - VTI (25%):  During times of economic prosperity, stocks tend to perform better. 
  • Gold - GLD (25%): During times of inflation, gold tends to perform better.
  • Bonds - TLT (25%): During times of deflation, bonds tend to perform better.
  • Cash - SHY (25%): Cash performs well during the times of recession.
To learn more I recommend the books - 'Fail Safe Investing' and 'The Permanent Portfolio'. In addition, is an excellent resource for historical performance figures.

TickerPrice (Buy)

Plain old vanilla total market index funds
I have written about the reasoning behind this strategy several times (part-1, part-2 and part-3). Almost, all of my savings including superannuation are invested in VTI ETF.

TickerPrice (Buy)

Harry brown portfolio on steroids
This portfolio is exactly what it sounds like, Harry Brown portfolio but using call LEAP options with the following asset allocation.
  • Stocks - LEAP SPY (16.67%)
  • Gold - LEAP GLD (16.67%)
  • Bond - LEAP TLT (16.67%)
  • Cash - SHY (50%)
TickerStrike pricePrice (Buy)Expiry

Warning: Please bear in mind though, this is a speculative portfolio. I came up with this strategy and do not have any historical performance figures either to prove or disprove it. I have invested a very small portion of my saving into this portfolio. 

Next year, I will update the performance of these portfolios. 

Would love to hear from all of my readers.

Full Disclaimer: I am not a financial planner. The views expressed in this post are all mine and they may or may not suit your needs. Please do you own due diligence. I do not make money on any of the products suggested in this post.

No comments :

Post a Comment

Related Posts Plugin for WordPress, Blogger...