• Sunil K Pai, CFA

5 Ways Boring, Yet Successful Investors Roll

Every month I scratch my head, probably lose a few more hairs and struggle to come up with something of interest to write about for you.


So, it occurred to me that maybe my choice to drive a new active "passive" form of investing may be the lead cause of my difficulties. I surmised that, between fits of fiduciary duty and altruism, somehow I was not going to waver from the depths of this despair (drama added for effect).


You know that those that want to play the grand guessing game of traditional active management lead a relatively exciting life of making macro calls, pouring over financial statements, forecasting the next great Fed move and, this year, guessing the stock market impact of a democratic vs republican president. And, investors eat this up, like dogs on a pile of sausages, thinking the crystal balls in use by these pros somehow is clearer than everyone else's. I must admit it makes for great entertainment nonetheless and, as suggested in other blog posts, a necessary component of a properly functioning price-setting function (the Black Hole).


Many don't know that I have made some predictions-- hey, I did earn the right to be a CFA charter holder. Here are a few memorable ones:


  1. In late 2000, told the Bank One (Jamie Dimon CEO, now JPM) guys I worked for that the $250M CDO portfolio would likely implode; we should hedge it out; by 2003, they took a $240M write off

  2. In 2001, an interviewee at Capital One was crowing about the stock market's prospects, I suggested that we could easily have a dead (flat) decade

  3. In early 2007, I sold everything to cash thinking that a financial implosion was imminent; wife wouldn't let me sell the house


Alright, so with this back-patting, ego puffing concluded, it was actually during 2008/2009 when I decided that I am not that smart and teamed up with a PhD in Astro Space Physics (Dr Xi Shao, Partner and Co-founder). It seemed to me that the guessing game on stocks is just silly and better left to others with chests bigger than mine to pump. Ironically or otherwise, I would note that this "revelation" is yet another prognostication! Oh well, that was the launch of this journey.


What sprang from this journey are my top five reasons why you should go down this relatively boring route:


  1. It's great not to have to worry about being wrong

  2. It's great not to have to justify a position

  3. It's great to see each stock position as a simple return stream vs trying to remember what each company actual does

  4. It's great having computers do the actual work; they don't require much hand holding

  5. It's great to have a strong chance at a sustained alpha stream independent of one's self


Some would argue that there are plenty of investment strategies that use price. I agree, let's cover some of them and how they use price:


  1. multiplying it by # of shares outstanding (read: market cap weighting)

  2. doing a rote volatility calculation and then investing in the low vol ones (read: low vol)

  3. calculate the highest/lowest returning stocks and invest in them (read: momentum/value)

  4. draw a chart with moving averages, relative strength, and Bollinger Bands, etc (read: technical analysis)


Let's face it, if there were great alpha in any of the above, why would anyone talk about them publicly? It gets better. A recent study of the impact of published research on alpha generation of newfangled investment ideas always led to either no alpha or degradation of returns altogether.


Moral of this story: boring and quiet may be more likely to lead to alpha generation than exciting and public.


So, as we close out yet another year and still struggle to have something interesting to write about, our relatively boring and quiet investment strategy soldiers on and is just fine!


Wishing all a very healthy and Happy Holidays and a prosperous New Year!


#AIBasedInvesting #BlackHoleInvesting #QuantitativeFunds #ActiveManagement #ProForza #ActiveRiskBasedinvesting #ActivePassiveInvesting #PassiveIsTheNewActive

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