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Invest Like a Guru – How to generate higher returns at reduced risk with value investing 2017(Charlie Tian)
https://bbs.pinggu.org/thread-6755810-1-1.html (Page 132-141)
Passive Portfolios, Cash Level, and Performance
阅读到的有价值的内容段落摘录
A cautious and survival-bias-free study by Sungarden Investment Research found that over ten-year periods, the S&P 500 index beat 60 percent of actively managed mutual funds. To achieve the best long-term results, you should avoid trying to time the market and should instead buy the index funds continuously, regardless of how the stock market is doing. You also need to be constantly fully invested. If so, over the long term, you will do very well. You can do even better if you invest in a basket of good companies at reasonable prices and take advantage of the benefits of long-term higher business returns of these good companies.
If we focus in our investing on the good companies that are consistently profitable and have high investment returns, we can lower the chance of losing money and achieve above-average overall returns. If we buy them at reasonable valuations, the returns should be even better. Those who do not have the time or interest to study the details of each company can instead simply buy a basket of these good companies, which should do better than index investing over time.
The high-quality passive-portfolio approach can also be applied to retirement investing. An investor can build a retirement portfolio of high-quality companies and live on the dividends paid by the companies in the portfolio, never having to touch the principals of the portfolio. For a retirement portfolio, it is extremely important that the companies in the portfolios have durable financial strength and consistent profitability so that the companies can survive the bad times, as well as continue their dividend payments. Furthermore, the companies should be able to increase their dividend payment over time so that the investors’ dividend income grows faster than inflation. The portfolio should be reasonably diversified across different industries to smooth out any industry downturn
In the dividend-investing portfolio, I set the minimum dividend yield as 2 percent. This is low relative to the historical level. The stock market is close to the all-time high and the dividend yield is at the all-time low. If one decides to require a higher dividend yield, there will not be a sufficiently diversified list of stocks to fill the dividend portfolio. Money has to be parked in cash to wait for better opportunities. This is also the dilemma that valuation-sensitive investors currently face. After the market has run up, the valuation of most of the stocks is full. There are not enough stocks meeting the requirements of the margin of safety. Relaxing margin-of-safety requirements means a large downside risk. Again, money has to be parked in cash to wait for better opportunities. Disciplined and experienced investors can choose to do so and may achieve better long-term results. But it is extremely hard to hold cash as the market continues to go up and up. Holding cash drags down the overall performance of the portfolio, especially at a time when cash is paying close to nothing and “cash is trash.” But when the market comes to down cycles, which it does once in a while and definitely will again in the future, holding cash protects your investments and allows you the opportunity to buy stocks at much lower prices.
When Buffett had more cash than investing ideas, he engaged in merger arbitrages to achieve higher returns than Treasury bills. This kept him from relaxing standards for long-term investments and “kept him out of bars,” in Charlie Munger’s words. He continued to do this until at least the mid-1990s. With merger arbitrage, if Company A is acquiring Company B, investors short the stocks of Company A and simultaneously long the stocks of Company B in an equivalent number of shares. If the merger goes through, the shares will cancel each other and the investor pockets the price spread that existed at the time of the trades. Sometimes mergers are cash deals. That is, Company B is acquired by Company A for cash. In this case, there is no need to short Company A stock. Investors just need to buy Company B stock at the discount from the announced deal price. The biggest risk with merger arbitrage is when the merger falls through. Usually, during mergers, Company A offers a large premium for the stocks of Company B. After the merger announcement, the price of Company B stocks immediately jumps and is now close to the offer price. If the merger falls through, Company B stock will fall right away to where it was or even lower. The investors who look for making perhaps just 2 percent on the price spread will see a loss of maybe 40 percent or higher. In this case, the investors have to sell the Company B shares at a deep loss to prevent a failed short-term investment from becoming a long-term burden. Therefore, if only one out of 20 merger arbitrages fails, the investor makes no money. Sometimes there are also pleasant surprises. After the merger announcement, another company may also want to buy Company B. They will need to offer a higher price. This bidding war can lift the stock of Company B even more. So, instead of just getting 2 to 3 percent, you may get 20 percent or higher returns in a very short time. This is a “lucky” moment with merger arbitrage.
阅读到的有价值信息的自我思考点评感想
Increasing the cash level in the portfolio when the valuation is high and reducing it when the valuation is low doesn’t necessarily generate higher long-term returns because it is impossible to know how long an overvalued market can stay overvalued. You may get into cash too early during a bull market and miss gains, and you may reduce the cash level too late and again miss gains. When it comes to looking at the performance of an investing strategy, the biggest mistake investors make is usually looking in the rear-view mirror. They make their decisions based on the strategy’s performance in the near past and tend to put their money into the investments that did well lately. This is also how most investors treat mutual funds and ETFs. At the end of the 1990s, many investors switched to the technology sector because the technology funds did far better in the preceding several years. The problem is that the technology sector outperformance lifted the valuation of the sector and positioned it for lower future returns. This is the case for all funds and strategies that concentrate their portfolios in certain sectors, regions, or asset classes. Investors should look at a fund or a strategy’s performances during at least one full market cycle to decide if it is working. This is true for sector funds and region funds. It is also true for funds or strategies that focus in any industry or asset class. If the market continues to go up, the funds which have chosen not to be fully invested all the time will underperform. But if the market goes down, these funds will outperform, as they may take advantage of the lower valuations during market corrections with the cash in hand. However, during the down-market cycles, the index beat only 34 percent and 38 percent of its actively managed counterparts. A full market cycle here means from peak to peak or trough to trough. The last two peak-to-peak full cycles are from the first quarter of 2000 to the third quarter of 2007, and until about now, the first quarter of 2017. The current bull market that started in March 2009 may still last, but it should currently be very close to its peak.
Even if you are not interested or don’t have the time to research companies, we can still benefit from the long-term prosperity of great businesses by investing in a basket of good companies. You do need to stick to a strategy and stay fully invested all the time and buy on a dollar-cost average basis. We will do considerably better over time with this strategy than with index funds. For those who enjoy researching businesses and companies, we can do even better by concentrating our investments on a handful of good companies. There is no secret. Once we are in the framework of buying good companies at fair prices, the only things we need to do are learn about the business and work hard.
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