Simple Strategies to Help Focus

In today’s always-on, information-overloaded world, it can be hard to stay focused throughout the day. How often do you find yourself distracted by inner chatter during meetings? Or how often do you find that emails are pulling you away from more important work? We’ve surveyed and assessed more than 35,000 leaders from thousands of companies across more than 100 countries, and found that 73% of leaders feel distracted from their current task either “some” or “most” of the time.

simple strategies

We also found that 67% of leaders describe their minds as cluttered, which means they have a lot of thoughts and a lack of clear priorities. As a result, 65% of respondents fail to complete their tasks. The biggest sources of distraction are: demands of other people (26%); competing priorities (25%); general distractions (13%); and too big of a workload (12%). Not surprisingly, 96% of leaders we surveyed said that “enhanced focus” would be valuable or extremely valuable.

While those numbers are alarming, they also represent a massive potential for improved performance and effectiveness. If there is one secret to effectiveness, said leadership pioneer Peter Drucker, it’s concentration. In our age of information overload, this is truer now than ever before.

The ability to apply a calm, clear focus to the right tasks — at the right time, in the right way — is the key to exceptional results. Even one second of misplaced focus can mean wasted time or worse missing a key opportunity like a facial cue from a client during a tough negotiation.

One of the CEOs we interviewed, Jean-Francois van Boxmeer of Heineken, put it this way: “My role does not allow for a lack of focus. I can’t afford to be distracted. I must be on point. I have trained my focus while at work for 15 years, moment-to-moment. I feel the brain is like a muscle, and I exercise it all the time.”

In fact, in our ten years of experience, we have observed a direct correlation between a person’s focus level and their career advancement. Of the thousands of leaders with whom we’ve worked, the vast majority possess an above average ability to focus. This is not to say that exceptional focus is a sure way to the top. But certainly, without focus, career success will be much more difficult to attain. For aspiring leaders, focus should be a daily mantra.

Much has been written about how you can better maintain your focus, and mindfulness practice is obviously the foundation of enhancing focus. But in our research, we looked at some new areas that enable you to manage your focus. Here’s how to do it.

Understand Your Daily Focus Pattern

We looked at how well leaders are able to focus during the day, and found a very clear pattern.

Read the rest of the interesting article here

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How Frustration Causes More Harm Than Losing Money While Trading

Frustration is the antithesis of confidence and euphoria. It can cripple you and distract you from your sense of persistence and determination. Unlike other teachers, I don’t put a negative connotation on euphoria – as long as you don’t abandon your trading rules, have at it. You can avoid frustration in the first place by “not” having expectations of the outcomes of anything (or any trades). This is not the same thing as Expected Value, but an emotional expectation about the result of something you’re endeavoring – such as trading.

trading

One sure-fire way to decrease frustration in your trading is to make sure that you’re protective stop is not placed inside the 20-day ATR of the instrument that you’re trading. For example, say you’re trading an instrument that has a 20-day ATR of 15 points. If you’re long and the current market value is 535 and you’ve placed your stop at 530 because you have set 5 points as your max loss point, you are more than likely to get stopped given that you’re stop is well within the ATR. Many times, traders with smaller accounts do just this because they don’t want bigger losses. This is respectable and totally understandable.

In the above example, you can trade a smaller position and give your smaller position a greater latitude by placing your protective stop at 520 (535-15). You can test this strategy. You might find that you are not getting knocked out of as many such trades and, if you are trading in strong trends, take the risk home overnight and let the market forces, time, and leverage work for you.

In our coaching and teaching, we’ve found that traders disregard the daily vol of the instrument their trading as if it was going to change because the trader put a trade on. This leads us to believe that the feeling of frustration is going to be an integral part of a particular trader’s emotional system until they change their trading behavior.

We can’t change the nature of things. The instrument that you’re trading isn’t going to change how it behaves just because you’re in the trade. Chart readers put faith in patterns without knowing the expected values of the trades, but put the trades on anyway. In order to avoid the frustration that you get from having blind faith, you can always backtest your rules or stop trading pattern altogether.

Let the feeling of frustration become an “early warning system” for you to put a halt to whatever you’re doing, especially if it arises from your trading. Frustration can lead to “revenge trading” and most people who did so, didn’t want to burn through their trading capital because they were angry in retrospect. Most find this out too late.

Frustration stems from your behavior, not the instrument that you’re trading. If you’ve put faith or belief system in a chart pattern but you don’t know the expected value of the trade, you can eliminate the frustration by putting an “emotional stop” in place and not do the behavior in the first place. You can’t experience frustration from paper trading, but you can get a bumper crop of it from trying to day trade.

– MartinKronicle.com

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Croatia: Small Country With So Much To Offer

Croatia is no doubt a beautiful country with excellent attraction sites second to none. It is among the top Europe tourist destinations that tourists from various parts of the world flock to enjoy their holiday. Croatia has outstanding natural attraction sites as well as old cities and other spectacular historical ruins. A Croatia sailing trip cannot be compared to any other. Below are five of the top attractive places, you ought to visit.

krka national park

Krka National Park

It derives its name from the Krka River situated along it. Krka National Park is an exact definition of nature. Its beautiful and numerous gushing waterfalls are what every tourist looks forward to seeing once they arrive. The waterfalls form beautiful pools of clear water which you can never get tired of staring at. If you love swimming, then these pools are a perfect place too. With the freshness and calmness of the water, you can be sure to enjoy the experience. There are also walkways and boat excursions just for you to have a perfect view around the park.

Zadar

This a very old city on the coastline of Croatia which has been in existence for over three thousand years. A visit to this place gives you a chance to swim, sunbathe or just relax. Zadar is a tourist destination for the people who want to have a glimpse of the history of Croatia. Tourists do not overcrowd it like most of the other places, and this gives you an excellent chance to see many things at your own pace as well as engage yourself in numerous activities. While in Zadar, you can also tour its Old town which is filled with fantastic attractions like beautiful old churches and medieval architecture.

Dubrovnik Croatia

Dubrovnik

It defines the height of touring Croatia. It has numerous eye-catching sites like old defensive walls, splendid palaces among other breathtaking sceneries. Dubrovnik is an ancient city that was started in the 7th century. Dubrovnik is located towards the south of Croatia. Its closeness to the well known Banje and Lapad beaches gives you an extra opportunity to visit more beaches. Dubrovnik is also near Lokrum island. Korcula

Korcula

This is an island off the Adriatic coast of Croatia. Its amazing green forests, sandy beaches, historic sites, charming villages are just but a few of the wonderful attractions in the area. Korcula is alleged to be the place of birth for Marco Polo, the famous merchant traveler. Visiting this site gives you an opportunity to experience and enjoy different views within the same area. Its beauty creates a memory that will linger around for many years to come.

plitvice national park

Plitvice National Park.

The most outstanding features of the Plitvice National Park are its numerous lakes, waterfalls in addition to the vast forest. The view of the park is impressive and spectacular. These features make the park unique and marvelous especially with the 16 lakes that interconnect. It’s a site to behold. It has wooden walkways which you can use to walk around. You can as well opt for a boat and enjoy the view.

Alex Dragas (Guest Writer)

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2017 – A Recap

1. I became a father to a baby girl on 23 November 2017 just 2 months after my brother became a father to a baby boy for the first time. Double celebration at home. That just about sums up the whole year.

2. All certifications and education came to a complete halt this whole year. Nothing moved on that front.

recap

3. Just read one book in the whole year. Though read tons of super-texts, research documents, company annual reports and investment documents.

4. Watched more than 100 movies. Across multiple languages. Not to mention a lot many TV series too. Hardly went to the theaters.

5. Traveling was also just about absent. Just one trip to Bangalore to see my nephew.

6. Exercising and going for walks/jogs didn’t happen. Instead i got a fitness band to at least clock 10000 steps per day. Except a few times, even that was a downer. But i consistently managed to clock more than 8000 steps on most days. Best thing was that my weight stayed constant throughout the year. The only positive.

7. For the 6th year running, the annualized returns of my equity portfolio beat the annualized returns of the BSE Sensex. I had my first ever 10 bagger in the form of Dabur. Its the oldest surviving stock in my portfolio. Took more than 10 years to hit the 10 bagger target.  The other best performers have been Bharat Forge, Mayur Uniquoters, Skipper, Titan, Wipro, M&M, Deepak Nitrite and L&T.

8. For the first time ever kept a small budget to dabble in stocks that were running up frequently. Or as they are more commonly known as “momentum stocks”. Didn’t have any great returns, so i will reconsider this effort going forward.

9. Instead of waiting for that elusive stock market crash to happen, i stuck to my SIPs religiously. Moved to direct investing in Mutual Funds without going through ICICIDirect through whom i used to invest earlier.

Wishing and hoping that the new year brings in much happiness and success to everyone

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How Will the Bitcoin Mania End?

I’ve tried to remain pretty balanced in my view on Bitcoin and cryptocurrencies in general. Back in 2013 I said Bitcoin was definitely money and that the ideological hatred of it was irrational. This monetary view is consistent with the general view I have on cryptos as a part of someone’s portfolio – as I said yesterday, no one really knows how this will play out so you need to be extremely cautious and avoid taking recklessly ideological positions in either direction. As a monetary nerd I am much more interested in the application of cryptocurrencies than I am with the unpredictable value of the corresponding coins. I think of it as trying to decipher the utility of the internet circa 1995 as opposed to trying to figure out if Netscape is overpriced or not.

That’s a good segue into this post. So I’ll get this out of the way upfront – I have no idea how any of this is actually going to play out, but I have an opinion and I think that opinion might help some people better understand what’s going on and what could go on. So let me elaborate on all of this.

bitcoin mania

First, I think it’s helpful to hash some of this out by defining some of the terms we’re using:

Bitcoin is a peer to peer electronic cash system.

Blockchain is a type of distributed ledger created to trace the use of a decentralized application.

Mining is the process of creating new coins in exchange for validating the ledgers and verifying their accuracy.

Cryptocurrency refers to any of the coins being created to incentivize the mining for various blockchains and their corresponding applications.

There are two elements at work here. First, there is the actual utility via an application; and second, the coin that validates the ledger that traces that utility. So, for instance, in the case of Bitcoin and the Bitcoin blockchain the coin itself is a payment processing tool. The Bitcoin blockchain itself is validated by the miners who are incentivized to mine for Bitcoin. You might use Bitcoin to process a payment with a local business and that transaction will be verified via the mining process. So it’s a decentralized payment system that is self validating and secure. At present, Bitcoin is kind of the “central coin” in a crypto world with a whole bunch of coins. It’s kind of like the reserve currency of cryptos.

The real goal of a cryptocurrency is to create a decentralized system of peer-to-peer applications. For instance, if you had a crypto wallet that traced the title of your house in your name then you could theoretically give that title to a new home buyer in exchange for some amount of crypto. You cut out all the middlemen in the process and the title is secured on the blockchain as a valid transaction. Super secure, safe and inexpensive. You could take this general framework and apply it to millions of other applications.

There’s a couple of problems with this system and I’ve touched on them in the past:

The coins have no par price settlement. This is a colossal problem with any form of money. The reason we centralize money is mainly because we can create stability in its value relative to everything else. No, not the real value, the nominal value. Yes, governments sometimes do a piss poor job of this and create hyperinflation, but in general fiat currencies are extremely stable in nominal terms. You can almost always settle a payment at par even if you’re losing some marginal purchasing power over time. Cryptos currently have no par settling mechanism which makes them a pretty bad currency. I’ve described the current iterations as non-financial collective equity because they are more like commodities than currencies. Centralized money is very good at settling at par in nominal terms because the entities that achieve this do so through massive economies of scale and, in the case of the government, no need for profit. Many Bitcoin advocates claim that Bitcoin’s decentralized nature is its strongest point, but you could also argue that the lack of a centralized market maker settling at par, is also its greatest weakness since the utility of the coin collapses when its value collapses. This is not a small flaw in Bitcoin. It is arguably a fatal flaw. The historical graveyard of monetary units is comprised of instruments that could not maintain stability in either nominal or real terms.

Some crypto activities aren’t consistent with public purpose. Again, this is arguably the greatest strength and weakness of cryptocurrencies. The decentralized peer-to-peer applications are going to be extremely useful and world changing because they cut out the middleman in many transactions and transfers. But they can also be used to evade taxes which creates a big problem for society as a whole. We have taxes for specific reasons. We need firefighters, public roads, police officers, military, etc. And we need revenue to pay those people so we need to be able to tax. One of the main reasons we centralize forms of money is so we can regulate it primarily so we can tax it and create a system whereby everyone chips-in to public purpose. Yeah, I hate taxes as much as the next guy and I think we all pay too much in taxes and that governments suck at spending our tax dollars, but I also realize there’s a logical need for some level of taxes. Therefore, a currency has to be consistent with implementing public purpose. It has to be taxable.

Now, when I think of the current state of cryptocurrencies I think we’re still way in the early stages. Just like Friendster gave way to MySpace which gave way to Facebook we will likely see many iterations of these coins over time as they evolve and become more consistent with solving practical real-world needs.

That brings me to my grand conclusion and how I think this might all play out over time. Bear in mind I am just spit balling, but I think this view kind of resolves the above issues and creates a parallel crypto world where these decentralized applications blossom.

– Read the rest of the interesting article here

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Why The Stock Market Needs Activist Investors

Rarely do proxy fights look as similar to a Rocky sequel than the mine continuing to play out between Nelson Peltz and Procter & Gamble. Weeks after P&G declared the effort by Peltz to gain a board seat a failure, he jumped off the mat to land a knockout punch after an independent tally discovered that Peltz’s hedge fund, Trian, had in fact won the fight.

While P&G continues to review the results, it appears that Peltz, with an unofficial winning margin of .0016% of outstanding shares, will have a spot on the board. It’s an unlikely victory in the most expensive activist battle to date, at the largest company yet to be targeted by an activist.

For P&G investors, though, it doesn’t mean immediate results will follow. Fortune and FactSet recently looked at how companies facing activist investor campaigns performed since 2012. The research found that two years following an activist win, companies had a median stock price loss of 2.4%, while companies that fend off such campaigns saw their shares rise 10.9%. There are many factors that could explain the results, not least that the companies that tend to attract activist campaigns often face problems that take longer than two years to solve. Still, it’s interesting that evidence of weak returns hasn’t kept the number of activist campaigns from growing (the number of campaigns in 2017 so far is 18% than the number in 2012), or dimmed other shareholders’ enthusiasm for them.

activist investors

Activists vs. passive investing

The explanation for activisms’ increase might lie in how we invest.

It’s no secret that investors have begun shifting their emphasis to passive investing in index funds or ETFs, and away from actively managed funds. Last year, passive funds saw $506 billion in net inflows, while $341 billion left active hands. And Moody’s Investors Service predicts that passive investing, which currently accounts for 29% of U.S. assets under investment management, will surpass active strategies no later than 2024. It’s a transition that’s bringing trillions of dollars under the umbrellas of the management companies that run the index funds and ETFs.

These funds, however, are typically bound by rigid rules when it comes to where you can invest. If you buy an S&P 500 index fund, your money will typically be invested in each of the companies within that index, regardless of whether certain names perform poorly—or are poorly run. Investments are doled out schematically, without a need to evaluate a company’s culture or strategies or plans. And some researchers argue that the growing dominance of that style of investing means that, at many companies, the biggest investors don’t have much of an incentive to dig deep into why a specific company is underperforming, and how they might fix it.

Because of the way index investing works, big management groups like Vanguard or BlackRock wind up taking gigantic stakes in sectors, not just an individual company. It’s sometimes called horizontal investing or common ownership, because the companies have nearly the same exposure to a number of names within one sector. In P&G’s case, three companies (or subsidiaries) – Vanguard, State Street and BlackRock – are among its five largest investors. The same three firms have similar status in P&G’s closest competitors, like Colgate-Palmolive or Kimberly-Clark.

This isn’t unique to P&G. Indeed, researchers have estimated that either Vanguard, State Street, or BlackRock is the largest shareholder in 40% of U.S. public companies.

Some researchers think that this cross-ownership makes companies in the same industry less likely to compete strenuously with each other. Studies have found that horizontal or cross ownership of airlines has been correlated with consistent price increases and a shrinking likelihood that one carrier will undercut the other’s profits with aggressive discounts. Research has found that the same goes for banking fees. “The omission to explicitly demand or incentivize tougher competition between portfolio firms may allow managers to enjoy a ‘quiet life,’ and thus cause an equilibrium with reduced competition and sustained high margins,” write researchers Jose Azar, Martin C. Schmalz, and Isabel Tec in their recent findings on the anti-competitive impact of common ownership. The sector may benefit, but individual companies don’t look to maximize their own value or seek market share gains.

Breaking from the pack

Activist investors, in contrast, are more likely to dig into a specific company and determine “how to improve it,” says Ali Dibadj, a Bernstein analyst. They tend to make concentrated bets in an individual company, then become the vociferous voice telling management that changes must occur. (For an example of a company that’s been particularly successful in doing so, see Fortune‘s new story about Elliott Management.)

Activists see a real threat in too much passive ownership. “The Japanese system of cross corporate ownership, the keiretsu, has been blamed for decades of Japanese corporate underperformance and economic malaise,” activist Bill Ackman, the founder of Pershing Square hedge fund, wrote in 2015. “Large passive ownership of Corporate America by index funds risks a similar outcome without the counterbalancing force of large active investors.”

Index funds, of course, can benefit if an activist campaign boosts performance at a company they own. And these firms sometimes vote in activists’ favor: In fact, BlackRock and State Street reportedly sided with Peltz in the P&G fight. But the P&G case does highlight some reasons why individual investors may embrace an activist. Peltz, after all, isn’t a top shareholder in any of P&G’s competitors, so he’ll focus on what P&G needs to improve itself, as opposed to how the overall sector performs.

Of course, if there aren’t more voices doing the same, that may be an unfortunate side effect of the value we find in index investing.

– Fortune

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How Big is the Hedge Fund Industry?

There is nothing that definitively marks hedge fund managers apart from other investment managers, however. Instead, all asset management firms sit on a spectrum, whether in terms of fees charged, strategies employed, or the types of vehicles offered to investors. The idea that hedge funds represent a clear, separate grouping has never been more dubious.

Depending on the definition of a hedge fund, the assets managed could range anywhere from $800bn to $3.6tn. Furthermore, we find that the $800bn figure accords more closely with the common perception of a hedge fund.

hedge fund

Finding a meaningful number is not only a definitional exercise but also a statistical one, subject to uncertainty. Flows into or out of what others define as the industry should therefore be viewed in the context of such error, which should be calculated and reported.

Introduction

How many assets are under the management of the hedge fund industry? This is a straightforward-sounding question, and it is common to see a straightforward-looking answer: $3.6tn according to the Securities and Exchange Commission (SEC) [1], say, or $3.1tn according to Hedge Fund Research Inc. (HFR), a data provider [2].

This masks the fact, however, that there is no unambiguous boundary between what could be considered a “hedge fund” and an active fund manager. No distinct “hedge fund industry” exists.

This matters on at least two counts. First, pension schemes and other big institutional investors usually have a discrete asset allocation bucket for hedge funds. Given the definitional mess that surrounds the relevant firms, it seems probable that sub-optimal investment decisions may be being taken as a result.

A second issue concerns how asset management firm performance is assessed. There are many different hedge fund indices against which firms are benchmarked. Many of these indices, however, face similar definitional problems and can as a result be poor yardsticks for the firms that use them as a reference.

For any given definition of a hedge fund, it is not possible to determine the assets managed by that group of firms at a given moment with arbitrary precision. It is, therefore, appropriate to report the statistical errors on the estimate. Reports of the magnitude of flows of capital into and out of different types of asset management firms should be viewed in the context of these errors.

What defines a hedge fund?

Those attempting to define hedge funds usually do so by referring to a collection of characteristics. Comments submitted for an SEC “Roundtable on Hedge Funds” in May 2003 set out a range of definitions, highlighting the ambiguity around the term [3].

Generally, “hedge funds” are seen as:

1) Flexible in the strategies they use, with their managers employing leverage and short-selling in order to exploit situations in which they consider themselves to have an edge, while hedging exposure to other risks.

2) Subject to less regulation than, for example, mutual funds, in exchange for limiting the categories of investors they can serve.

3) Charging high fees; famously being described as “a compensation scheme masquerading as an asset class”  because of their traditional fee structure, canonically a management fee of 2% of assets under management (AUM) per year, plus a performance fee of 20% of profits (“2&20”).

These eye-catching fee terms are often referred to alongside estimates of the aggregate AUM of hedge funds, which may be somewhat misleading. According to Preqin, a data provider, “only 17% of active single-manager hedge funds actually charge a strict 2% management and 20% performance fee structure” [6]. HFR also pointed out in March that as of the end of last year, the average management fee was 1.48%, while the average performance fee was 17.4%.

Meanwhile, many funds possessing some of the characteristics listed above prefer not to describe themselves as hedge funds, and a given asset management firm may manage a combination of externally-defined hedge fund and non-hedge fund assets.

Perhaps another way of thinking about what is supposed to constitute a hedge fund is to consider those vehicles that charge both a management fee and a performance fee. We consider this in more detail in our results.

We approached the problem by examining some of the range of possible definitions. The aim was to show how each affects the size of the resulting collection of funds, while attempting to make our assumptions explicit at each stage. We also estimate the error arising from the fact that we do not have complete or simultaneous AUM figures for each fund.

Read rest of the interesting article here

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Business Lessons from Alton Brown

I decided to write a blog post about Alton Brown (“AB”) not just because he is interesting, but because he is an entrepreneur who built a business without venture capital. AB has on several occasions talked about how he needed to get bank loans to grow his business. Since bank loans, together with personal savings, loans from friends/family and cash flow from operations are the way most entrepreneurs finance a business, his story is a great example for aspiring entrepreneurs to learn from. AB is also interesting in that he was forced to deal with gatekeepers (cable channels) to get distribution for the product his business creates since his career began before the rise of streaming. The YouTube option was not available to AB when he was trying to build his business.

AB is a story teller who taught himself to be an entrepreneur so he can tell his stories. AB’s back story can be told with a few quotes from him and two sentences from a Wikipedia entry:

alton brown

“I started off as a cameraman when I was still in college, and moved into shooting music videos in the ’80s, then became a full-time cinematographer and a director-cameraman for TV spots, which I did for about 10 years.”

“I shot commercials, many of which weren’t very good. I was unhappy and cooking made me feel better.”

“I remember I was watching food shows, and I was like, ‘God, these are boring. I’m not really learning anything.’ I got a recipe, OK, but I don’t know anything. I didn’t even learn a technique. To learn means to really understand. You never got those out of those shows. I remember writing down one day: ‘Julia Child / Mr. Wizard / Monty Python.’ That was the mission. I knew I had to quit my job and go to culinary school.”

“Two pilot episodes for Good Eats (“Steak Your Claim” and “This Spud’s For You”) aired on The Chicago PBS affiliate in 1998. The show was discovered by Food Network when an executive saw a clip of the show on the Kodak website.”

The usual quotes from the subject of this blog post (AB) are:

  1. “Because I was executive producer, writing the show, directing, all this stuff, I was so busy doing the work that I didn’t think about getting famous. There was no social media. So there was no feedback.” “When I did my first season of 13 episodes I didn’t know if people were even watching until we got renewed.” 

Feedback is fundamentally important in any healthy system, particularly if someone is trying to make it grow. What the internet and connected customers have done is enable businesses to create systems that harness feedback. These systems now overwhelmingly reside in the cloud and are more powerful interpreters of customer feedback than the world has ever seen before. The availability of cloud services enables businesses to create innovative products and services for a fraction of what it would have cost just ten years ago. By combining relatively inexpensive web services with modern data science it is now possible for businesses to run many thousands of experiments that utilize the scientific method. Most of these experiments will fail, but some will be spectacular successes. The people who can operate these cloud based systems (e.g., data scientists and artificial intelligence experts) have become the new high priests of the business world. The businesses that have the best systems which harness customer feedback and the most talented high priests are outperforming the business that don’t. It’s that simple. This phenomenon is just getting started and will become even more pronounced as the years pass.

When AB started making television, the primary feedback system was the Nielsen ratings. Businesses today like Netflix know vastly more about what their customer’s  consume than businesses that rely on Nielsen as their primary source of feedback. One implication of the increased value of data is that providers are increasingly going direct to customers and cutting out distributors. For example, you see businesses like Disney deciding that they must directly stream their own content in order to capture the customer data. As I said above, control of the customer usage data is increasingly what gives businesses a competitive advantage. If a distributor sits between the creator and the end customer that data often can’t be captured.

Social media is obviously a big source of customer feedback. AB has mastered the transition to the social media era as well as anyone. One of the more interesting questions about this new “connected customer” era is whether AB would have been able to sell his show to a network today. How effectively would AB have been able to compete in today’s business world if he was just now starting out? There are so many people trying to get traction on streaming network would he ever have been able to get traction? The number of cooking shows YouTube is astounding. That number isn’t 24.5 million, but it is a lot. Even my neighbor’s dog has a cooking show on YouTube.

Read the rest of the interesting article here

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Two Most Important Investing Decisions

There are so many interesting things to debate in investing. The active vs. passive debate has been the subject of more articles than I can count. Although the conclusion that most people should invest passively is clear, there are many nuances to it that continue to be debated every day. And for those people that do decide to be active, there are a variety of decisions that come along with that. For example, whether to invest in value or growth, and which manager to pick within that style. For factor investors, which factor or factors to follow can be another significant decision.

The interest in these types of decisions is very high and so they are all widely covered in the financial press and on blogs like this. We write about many topics on our blog and have written over 3000 posts since 2009, but our article on whether the Price/Book factor is cheap two weeks ago was the most read post we have ever produced by a wide margin. It also generated more back and forth debate than any post we have ever done. Neither of these was due to my amazing writing (although I wish it was). It is more a sign of how much interest there is in these kind of topics.

investing decisions

But there is a problem with focusing on the more detailed decisions in investing: none of them are the decisions that will primarily determine your ultimate success.

Investing success comes down to two major decisions. If you get them right and have the correct expectations, you are likely to meet your goals. If you get them wrong, you are not.

The two decisions are very simple:

  • How will you allocate your money among asset classes?
  • Will you stay the course during tough times?

Let’s tackle them one at a time.

Decision #1 – What Assets Do You Invest In?

The most important choice you can make in investing is which asset classes you invest in and your allocation among them. This is true for a couple of major reasons. First, in aggregate, asset allocation determines essentially 100% of a portfolio’s return in the long-run, while selection of securities within each asset class has almost no impact. In individual cases, this can obviously not be true, but when all investors are summed up, it is.

To explain why, it is important to understand a basic investing theory. By definition, the total of all managers, both active and passive, will match the return of the asset class they invest in before accounting for fees. Active managers will underperform the passive managers on average by the difference in fees between the two. So on balance, investors will achieve the same return on their equity portfolios as the overall market and bond investors will do the same. As a result, the way to alter long-term returns is to change the allocation between the asset classes, not what you invest in within them.

Read the full article here

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Investing your money in a tracker fund

The rising popularity of “passive” investing has seen savers put hundreds of billions of pounds into cheap tracker funds. These funds allow you to invest in the FTSE 100, for example, for less than 0.1pc a year. There is a general assumption that, relative to stock picking, tracking an index is a simple task that can be run entirely by computers. But what exactly happens to your money when you put it into a tracker fund? Telegraph Money spent a day at the London offices of Vanguard, the world’s second largest asset manager – and a major proponent of passive investing – to find out. It’s not all computers – but there aren’t many people

Vanguard’s trading floor is not a row of computers. The desks are occupied by people, albeit just a small number of them managing an astronomical amount of money. The space is compact – and quiet. Vanguard’s equity index group, the people involved in actually running its stock index tracking funds, consists of 60 people: 35 portfolio managers, plus traders, analysts and those in leadership positions. Between them they run £1.9 trillion, spread across a few hundred portfolios. That equates to £32bn per person. There is no one set manager per portfolio, and responsibilities regularly rotate.

tracker fund

On the bond side, more people are required. In the fixed-income group there are 160 people managing £900bn. There are still only 45 portfolio managers, but more than 100 traders and research analysts are needed. These teams are spread across the company’s US, European and Australia-Pacific regions, surrounded by the thousands of other staff who make up the Vanguard machine. The end investor is discussed frequently, but handling incomprehensibly large amounts of money is part of the day-to-day. One member of the foreign exchange team said she put through more than £100bn in currency orders last month.

What actually happens to my cash?

A surprising amount of spadework is involved in following an index. Say you give Vanguard £1,000 to put into a fund that tracks an index of 100 stocks or 100 bonds. It’s easy to imagine a computer algorithm splitting up that £1,000 neatly and buying £10 worth of each stock or bond. Then, as the index changes, the algorithm makes the necessary updates. For a host of reasons, including transaction costs, access to certain markets and liquidity, that isn’t possible or efficient.

Instead, your money is pooled with all of the other money the firm takes in. Portfolio managers then work out – with the help of many digital tools – the most efficient way to invest that cash to keep a tracker fund in line with the index in terms of performance and risk, while keeping trading costs to a minimum. While active managers compete on performance, passive managers compete on “tracking error” – the accuracy with which their fund tracks the relevant index – and at Vanguard their pay is based on it too. A tracker fund can deviate from an index for a number of reasons, including trading costs and accounting technicalities.

In some cases, a tracker’s holdings may not actually match the index exactly. Its job is to deliver the same performance as the index without taking extra risk, which can be possible without exactly replicating it. Melissa Tuttle, a senior equity portfolio manager, said her team tended to use incoming cash to top up holdings that had ended up “underweight” compared with the index. Their aim is always to fully invest new cash. Events such as the FTSE 100’s quarterly review, when companies enter and leave the index, also have to be anticipated, and predictions made. Combining trades together keeps transaction costs down. If 11 different Vanguard trackers need to buy HSBC shares, there is little point in them doing so separately.

Portfolio managers put in orders, which are then carried out in whichever region the stock in question is listed in. If a manager in London needs to buy Apple stock, the order is sent to the US team and bundled with any other Apple orders. That said, Vanguard is clearly pushing to automate as much as possible. “It’s fair to say we’re growing systems now, rather than people,” said Dr Alla Kolganova, head of equities for Europe. With shares, 95pc of trading is carried out electronically, with a high degree of automation. There is still 5pc where a portfolio manager may have to go hunting for a broker, however – particularly in the more difficult-to-access markets such as the Middle East. In some cases, this could still mean picking up the phone.

On the bond side, things are different.

Paul Malloy, Vanguard’s head of fixed income in Europe, said only 5pc of bond trading had been significantly automated – largely for small trades in highly liquid government bonds. The other 95pc is still done “over the counter” – meaning between two parties away from a stock exchange. “Bigger trades, or trades in less liquid areas such as corporate bonds or emerging markets, still require picking up the phone or some sort of electronic auction. There’s still someone on the other side,” Mr Malloy said.

He added that, thanks to the sheer number of bonds being issued and the number that have relatively little trading activity, buying every single bond issued by every single company in an index would incur huge costs. Instead, his team buy samples that represent the index, balancing tracking error, risk and cost. “You need to own about half the bonds in an index, representing about 95pc of the companies. We don’t need to own every JP Morgan bond to track the index – I can pick the one I like best. It’s a lot like active management, but you’re controlling risk and cost to avoid losing value, rather than trying to add value,” he said.

Risk

Sitting between the equity managers and the bond managers – both passive and active – is the risk team. Brian Wimmer, head of risk management for Europe, said there is a slim initial tolerance for a fund being out of line with its benchmark index. If that figure is breached “a conversation starts” – and there is then an absolute maximum tolerance allowed. This team is also in charge of ensuring that no financial regulations are breached. Colour-coded systems are used to keep track. Today, everything is running smoothly for the firm’s LifeStrategy range of ready-made portfolios.

When something is out of line, analysis tools enable a risk manager to look at where that error is coming from, and action can be taken to push things back into line. One option at Vanguard’s disposal is to suggest changes to an index itself, through its relationships with index providers, when it thinks improvements can be made.

– Telegraph

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