Saturday, April 27, 2019

The Art of the Investment Duel

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When I was young, I've always wondered to myself why folks who disagree about investing would not simply take out $100,000 in cash, structure a portfolio, and then see who has a stronger investment idea.

More than a decade ago, fresh after my CFA exams, after I published Growing Your Tree of Prosperity and immediately started to offend Financial Advisors with my strident insistence of Buy Term and Invest the Rest.

One FA was so angry with me, he tried to challenge me to a financial duel. While my investment ideas were quite immature at that time, I thought I would scare the shit out of him in spite of my total lack of investment know-how. First I told him that he must challenge me with his name in public and his firm, we will do this on the newspapers. Then  I told him that the sample portfolio must take into account every single commissions paid for by his client. Also every position must be totally transparent and no hidden positions. Finally, I told that I will be allowed to use derivatives to fight his client's portfolio.

He finally backed off after I told him that I will take a punt on a random derivative and will start to mirror his moves once I get a comfortable lead. Then I asked him whether his firm can survive the reputation loss of losing to a lowly IT engineer who is in his 20s. Even with a 45% of me winning, his reputation loss was way bigger than mine. And while I lack a strong investment thesis at that time, I was a seasoned troll who was a specialist in humiliating my opponents.

Interestingly, I found myself in the opposite position recently.

I love Chaos.

My dream is to see an Independent FA and FA structure different portfolios for one client and see who makes more money for him as a year, all commissions taken into consideration.

But as a trainer, getting into duels have become dangerous. I admitted to Money Maverick that he is the most dangerous opponent not because he can structure a better portfolio, but because I stand to gain little if I win but I stand to lose a lot of  students if I lose. Even if Money Maverick has 2% chance of winning, it's not something I want to get into. This also explains why trainers who all preach different philosophies would not get into a duel against each other at a portfolio level.

Instead, sometimes you only see cherry picks of stocks that have done well.

Now suppose I have no choice. Perhaps the insurance industry and financial blogosphere is sick of my trolling and forced me to take on some folks in the industry by kidnapping my kids, what would I do to maximise my chances of winning ?

Let's assume that the rules are $100,000 of real money, all commissions and trading fees to be accounted for and quick trades will be confidential only for a week.

This is how I would play against each party :

a) Value Investor / Investment Moats

Kyith Ng of Investment Moats is one of the toughest opponents in the blogosphere having singlehandedly FI-ed on an engineer's paycheck. His brand of value investing goes really deep and I suspect that he's confident enough to hold perhaps 8-10 stocks in such a portfolio. His only weakness from what I can tell is not even a weakness - he may hold a warchest to balance out his concentrated positions.

To battle Kyith, I have to assume that he will succeed in picking a stock with a 4% advantage over my quantitative models - he puts in a lot of effort to pick superior stocks and he knows his stuff right down to the micro-level. But perhaps with his warchest, the advantage will narrow to 3%.

My best bet would be to structure REITs portfolio with 3x leverage. I will inject APTV and Lippo Mapletree to boost my yields. At 11% yields, Lippo will yield 11%x3 - 8% or 25% yields.

Maybe my beta will beat his alpha.

I will have to bet that the dividends payout in August and December will boost my winnings to offset his alpha within the shortest time possible and make sure we don't extend this contest for too long. If it drags for 2 years or more, I will end up self-destructing from a margin call and Kyith will win without lifting a finger.

He'll probably be nice about winning this contest, but my ego will take years to recover from this loss.

b) Dr Wealth / FBIC

Suppose my children's kidnappers are so sadistic, they instead force me to duel my business partner instead.

Alvin's style is highly quantitative, very similar to mine but I employ fewer factors than he does and he focuses on growth more than dividends. A duel with Alvin is unpredictable, I can get dividends payouts regularly and this has to be pit against Alvin's occasional stock picks what can grow 15-20% in a single day.

Alvin like a DPS that lands a lot of criticals in battle. I'm more like a tank.

My biggest fear of the FBIC strategy is that it invest in HKSE which allows Alvin to generate some kind of positive skew to his portfolio over time. Positive skew and HK presents a fairly large alpha over me.

I bet that whoever wins this duel will depend on how the market cycles change. I will leverage x1.5 and build in a few safer stocks to lower the volatility. Then I will hope that my algorithm will beat Alvin's.

My guess is that if the market cycles continue to contract, I have a good chance to win. If China and US end the trade war, Alvin will trounce the shit out of me.

Losing to a business buddy is definitely less humiliating. I am more than happy if Alvin wins this round.

c) Commissioned FAs/ Money Maverick

The rules of the game is already slanted in my favour. Commissioned FAs must account for sales fees and management expenses. This creates a negative alpha that any rookie or noob can exploit.

If I am forced to explore the possibility of losing to Money Maverick, I will first try to keep the fight to less than 6 months. If that is so, I will put everything into Astrea IV bonds without leverage because the commissions paid out will do most of the work for me and I get a YTM of 3%. It should be painful to redeem an ILP within such a short time.

If Luke wants to extend the fight to multiple years, I have to be more careful as he has a tendency to place bets on volatile emerging market bonds and equities funds. In such a case, I would tangle with him 1.5x equity multiplier on a portfolio of high-yielding REITs. In this scenario, the odds of me winning is not as high as I would expect as REITs are already overpriced and EM funds are coming from a low base. In this case, I will rely on high management fees on the other side to eke out a win.

In summary, beyond this attempt to imagine what happens if the financial blogosphere turns into a Wrestlemania event, we probably won't see an actual fight. The Straits Times actually ran such a competition many years ago and my Accounting professor Professor Sebastian Chong, handily won.

I leave some intellectual puzzles for my readers - There are bloggers that I cannot imagine crafting a winning strategy to win with skill, like Brian Halim, who combines investment and gambling skill so well, he only seemed to have may made one bad bet last year and it was on crypto-currencies.

I leave that to the many experts who like to comment on these mental exercises.


  1. Hi Chris,

    I am of view that there is no need to fight against one another. Respect is the way to go. If the other parties try to be hostile, let him/her be. Peace of mind is the way to go.

    My two cents worth of views.


  2. Hi Chris ,

    APTT's yield is now 6.45% with current share price of ~$0.186 , LMRT also cut its dividend. So these two would be tough choices to pick.

  3. Hmmm if we're comparing from the point of retail investors using the competing methodologies, then we should also include the training fees. No doubt it shld be one off but over a short timeframe it would be a non-trivial expense.

    Otherwise if it's directly between the sifus then the ifa will simply use zero sales fee ut's or even etfs in his own a/c, claiming that these are the tools he would use in a 0.5%-1.5% wrapper solution for clients. Of course heavy use of ut's will disadvantage the ifa over longer timeframe due to higher embedded expenses. But in a shorter timeframe of within 2 years the higher expense can be outweighed by correct calls in the right asset classes or regions or industries.

    Actually you may have pointed out the potential answer -- going beyond local shores. Not just Dr Wealth, but Inv Moats also rely heavily on HK for performance. If you can apply quant analysis on assets, industries & companies globally across major markets & regions (not just HK), you may be able to have multiple edges over (a) and (b) above. However likely will have to involve a bunch of other factors besides yield, valuation, share buybacks, gearing & volatility.

  4. Verseun,

    APTV has really rallied ! It's no longer the counter for yield pigs ! Maybe Starhub will take its place one day !


  5. Unknown,

    Adding course fees as a "commission" is a great idea. At least for my course, it will be a negligible handicap.

    If I can get Bloomberg access longer than 2 hours at a time, I'll go after the HK markets next because there is so much depth I can filter for 3-4 factors rather than just 1-2 for SG markets.