We have just passed the one-year mark of our Five Questions interview series. When we first launched the series, I wasn’t sure how it would go. I didn’t know if we could get the types of interesting guests I was hoping for. I also wasn’t sure if I could ask the quality questions it would take to make the interviews interesting (I still am not sure about that).
Despite the apprehension going in, I have really been pleasantly surprised by the response. Almost everyone we have asked to do an interview has agreed. Even some of the people I look up to most in the investment industry like Jim O’Shaughnessy and Michael Mauboussin were generous enough to not only do the interviews, but also provide detailed, thoughtful answers to some very difficult questions.
Now that we have completed our first year, I thought it might be interesting to take a look back at our most popular interviews and some of the important lessons that I learned from them. Below are our five most read interviews from our first year and the key lesson I took from each of them.
There are so many risks we take when we invest our money. Some of them are obvious, but many others are not. This is one of many lessons I have learned from following Corey over the years. There is probably no better example of this than timing luck (which we discussed in more detail in the interview). Timing luck is the idea that when you rebalance your portfolio can have a significant impact on your returns. It is an uncompensated risk, so you get nothing for taking it. There are fairly straight forward steps you can take to minimize it, but most investors don’t even know it exists.
To use a simple example, consider a portfolio that is invested 60% in stocks and 40% in bonds. If that portfolio is rebalanced in September every year, it would have been rebalanced right before the market fell apart in 2008. It would have ridden out the decline in stocks during the bear market, and not brought its stock allocation back up until September 2009. This would have led to a well below target equity exposure during the huge 2009 rally in markets. A portfolio rebalanced in March every year would have had the opposite experience. It would have invested back in stocks near the 2009 bottom and its return would have been much higher because of it. This is just one of the examples we discuss in the interview. If you want to find out about more risks you may be missing, you can read the full interview via the link above.
Jim was kind enough to spend an hour and half on the phone with me and we published the interview in two parts. We talked about a variety of topics including factor investing, behavioral finance, and the arguments against value investing. What struck me most about Jim was his willingness to admit the things he didn’t know. Financial news is full of people who think they know all the answers. If you watch or read financial media, you will see plenty of people who think they know where the market is going in the next year or what the economy is going to do, or which individual stocks you should buy. But they don’t actually know any of that.
If you read my interview with Jim, you will see the exact opposite approach. If I asked Jim a question where the answer is unknowable, he said he didn’t know. If I asked him a question that might have an answer, but he hadn’t researched it himself, he said the same thing. Getting to a point where you accept the fact that what we don’t know in investing far exceeds what we do would make anyone a better investor. If someone with Jim’s resume is willing to admit the things he doesn’t know, we all should be willing to do the same thing.
My interview with Wes was the first one we published and it remains one of the most popular. When did the interview a little more than a year ago, value investing was struggling (that has mostly continued since then) and we talked about whether there was reason to question whether the value premium still exists. As he always does, Wes used data and research to show that both the risk and mispricing based cases for value still hold, which helps support the case that value is likely not dead. But he also said something that applies to all types of investing and I think is very important.
Since Wes can explain it better than me, here is the direct quote from the article:
Our overarching framework for “active” strategies (which includes “value”), is what we call the sustainable active framework. The basic idea is simple: you get paid to do things that are painful.
If you want to get the long-term premiums of a strategy like value, you have to be willing to endure the pain. And that pain can be much worse than you think and can test even the strongest investors. This isn’t just true of value investing. Whenever you follow any strategy that is different than the market, there are going to be times where those differences are going to hurt you. The ability to stay the course despite that pain is crucial to achieving the strategy’s potential. The interview with Wes reinforced that for me.
Michael is one of the best thinkers in the investing world. So I decided to ask him the most difficult questions I could come up with. I asked him whether passive investing distorts prices. I asked him about where the equilibrium between fees and alpha might occur. I asked him whether the gap between the expectations embedded in stock prices and reality that managers try to exploit is narrowing. He provided excellent answers to all of the questions and I highly recommend you read the interview if you haven’t, but what I learned most from the interview is the importance of having a thoughtful process and giving careful consideration to the many challenging problems we all face as investors. None of the questions I asked have a definitive answer, but inside each of Michael’s answers you will see a careful analysis of the facts and both sides of the issue. We all could learn a lot from that.
Ben is one of the best writers out there. He also tends to have opinions that challenge my own, which makes him a must read for me. I am a big believer in base rates. When I want to look at an issue like whether value stocks will come back in favor, I tend to look at history to find similar situations similar to what is occurring now and then look at what happened in those cases. If you believe that history repeats itself, using those odds in your investment process can be a very sound approach. But what if something has changed this time? What if the change in Fed policy since the financial crisis has rendered that historical evidence less reliable? It is a perfectly reasonable strategy to expect the past to repeat itself, but it is also dangerous to expect that it always will. Ben’s excellent article The Three Body Problem, and the insights he offered in this interview helped me to understand that.
I want to thank everyone who participated in our Five Questions series this year. I learned so much doing it and have been privileged to interview some of the smartest people in the investing world. I also want to thank everyone who took the time to read the interviews. I look forward to doing many more of them in 2020.
Originally Posted on January 8, 2020 – Lessons From Our Most Read Five Questions Interviews
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