The last day of the 16th Forbes Cruise for Investors featured Gary Shilling, Vahan Janjigian and a newcomer, Jack Ablin. Jack is the chief investment officer of Harris Private Bank, which manages $60 billion for institutions and rich folks. Jack gave a masterful tour of the investment landscape.
What is your investing edge? That is the key question. Jacks says the overwhelming likelihood is that you have no edge. That's because you are competing against a multitrillion-dollar global industry that can devote DoD-size budgets for research and analysis. In his Forbes speech (and in his book, Reading Minds and Markets), Jack reminds us what the little guy is up against:
Boston-based Fidelity Investments, for instance, now handles $1 trillion in assets and can well-afford to pay six-digit salaries to each of their 180-so in-house research analysts in the hope that each of them will find at least one brilliant idea among the thousands of global businesses whose financial statements and filings they peruse 60 hours or more each week. Across the industry as a whole, there are about 91,000 money managers and investment analysts who have survived many years of study. … [They] are well-paid to do nothing but work away to find the next stock market winner.
And later in Jack's book:
Just how large is the advantage that the pros enjoy when it comes to picking stocks? Well, they have Bloomberg terminals sitting on their desks at a cost of anywhere from $17,000 to $21,000 per year. … And you need more than the Bloomberg. Your shopping list should include an annual subscription to Baseline or Factset to obtain other critical data (at a cost of $12,000 per year) and independent research from at least two firms (about $20,000 each). So before you have made a single investment decision, you have accumulated perhaps $70,000 in annual expenses. … And I haven't even mentioned the cost of subscribing to a real-time data service or the expenses of going to industry conferences in person to get access to the same insights the Fidelity team can obtain with a phone call. Daunted yet? Then let's also factor in the cost of human capital--all those skilled traders that firms like Fidelity hire to be sure the "buy" and the "sell" ideas are executed at just the right price, or the technology geeks who make sure your computer runs properly.
Jack's conclusion:
Your edge likes, ironically, in your willingness to acknowledge that as an individual investor you're at a big disadvantage unearthing not only the stock market's buried gems but even the most straightforward and solid investment strategy.
Hmmm. How can the little guy convert his "edge" to profitable investing? Jack Ablin's advice is to start by buying ETFs that mimic broad indexes. Then use 200-day moving averages and sector rotation shifts to balance and rebalance your portfolio as needed--not daily, but certainly a few times a year. This is what muscle-bound big firms can't do, for two reasons. One is that fund managers generally are paid to be long or short, not sitting in cash or Treasurys, even when a switch from stocks to cash or Treasurys might make sense according to moving-average momentum. Two is that big fund managers are trapped by their fund's category. A value-stock fund manager, for example, may spot a rotation to growth stocks or gold or junk bonds. But, trapped within the confines of his value-stock fund, he can't do anything about it. The little guy can.
Jack doesn't dismiss the old Ben Graham basics such as discounted cash flow models and valuation metrics for individual stocks. He just says that in today's volatiles landscape--a bull rally within a bear market--even Ben would need to consider market timing (based on moving day averages) and sector allocation. I think Jack is right, but his strategy is not easy to execute and thus not for the lazy.
Do you agree with Jack Ablin? Can the individual consistently beat the market and avoid disaster with a portfolio built around ETFs, market timing and nimble rotation? Post your comments below.
I agree this strategy can work and I have a friend who does just that in her investment group.
It works, but it’s boring and would leave me with nothing to complain about – not good!!
Jack Ablin’s strategy of rotation based on a 200-day SMA is well-known and will outperform in secular bear markets and will underperform in bull markets. Overall effect over the long-run (decades) will be to not beat the market but to reduce portfolio volatility. There is the risk of getting whipsawed though with a strict 200-day SMA policy. Look up Mebane Faber’s strategy @worldbeta for more.
This is actually (perhaps) easier to implement than Jack Ablin’s strategy, with the whipsawing and all (obviously better for a tax-protected account although your 401K probably won’t give you the flexibility) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461
At some point this will, if not already, have become too popular that it will start underperforming.
I think your speaker makes a good case, Rich. But the little guy skeptic in me has faith that we’ll find a better, more adaptable solution that us little guys can leverage to our advantage.
Given how wretched the banks, insurers, LBOs, private equity funds et al have done over the past couple years, I gotta believe the high-priced number crunchers are the equivalent of the mainframes — going against millions of PCs. Time will tell, I suppose.
Sounds like a fun conference!
For individual investors, the stock market is for fools.
If you have nothing better to do with your cash, paying Wall Street middle men anywhere from 1% to 5% per year to invest your money in stocks and bonds, whether through mutual funds, sector ETFs or private managers, might be your best bet. Over the last ten years such an approach would have gotten you maybe a 2% return in nominal, taxable dollars. That’s only slightly better than putting your greenbacks in your mattress. A big advantage of a mattress is that it’s a whole lot less stressful than opening your 401K statement.
Wall Street is simply unsuitable for individual investors. For example, why in the world would anyone in their right mind take a 0.00% return for their dollars in exchange for US government debt? That’s exactly what happened this morning for the new issue of 4 week t-bills which were oversubscribed by a factor of five. Such a market is either irrational or rigged (or both).
Thanks for your postings, Rich.
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