Saturday, October 21, 2023

#3 The Missing Billionaires - What is the expected performance of an investment trainer?


Encountering this batch of trolls from the Dividends Investing discussion has raised an interesting philosophical question. If someone teaches investing for a fee, should this person have an above-average investing performance?

This is a challenging question to answer. Some investors may have a higher return because of higher risk, but sometimes, they may have a lower performance after a market regime change. My ERM portfolios built over 31 batches of students are currently on negative gains because of two hot wars and rising interest rates but still yield a comfortable 6.5% today. My algorithmic All-Weather portfolio easily outperforms the 60/40 portfolio benchmark, but it's only been launched in August this year.

But performance is not the point.

Should CFA instructors and finance lecturers in public institutions be held to this standard? Many of them lack investment portfolios, and most CFA training programs charge more than my workshops.

Furthermore, like Roronoa Zoro's three swords, my net worth comes from residential property, a dividends investment portfolio, and CPF. I only need some assets to rise in value to win. 

Nevertheless, trolls always retreat when asked to clarify their benchmarks because I also have my own benchmark when it comes to clarifying thoughts. Especially when they find out the other reasons why I like Roronoa Zoro. 

Finance instructors are obligated to maintain and teach a body of knowledge. As I have a job translating theory into practice, knowledge needs to be actionable. It cannot be fluff that I spent half a day listening to today. 

Here is an example from The Missing Billionaires: one very reasonable estimate for future stock market returns is inverting a broad market index's cyclically adjusted PE ratio. Some empirical data suggests this is true for the US for returns over the following decade. 

At the end of September 2023, Singapore's was 13.34 or 7.4%. This is actually quite high, considering that when we look at the risk-free rate from Singapore Savings Bonds, it is around 3% and lower than our current inflation rate ( Yes, SSBs give a negative real rate of return! )

It is possible to create a kind of trading formula that will put 100% into Singapore equities when earnings yield is high relative to the real returns of savings bonds. This allocation should drop when the underlying volatility of Singapore equities goes up. When backtested in the US, folks found a significant 30% improvement over fixed asset allocation strategy in risk-adjusted returns.  

This is where the investment trainer can add value: The trainer can get students to execute one version of an investment strategy and walk them through the expected risks and returns. To do this, the trainer needs to internalise the knowledge and build the portfolio. To get their money's worth, students should take action to go through the same steps as the trainer after the course.  

At this stage, students know what a strategy looks like and can execute it to varying levels of success. 

Note that they or the trainer can definitely lose money from doing this.

However, the students/trainers can refine and improve the strategy to outperform the markets.

It could be a slight change of parameters. Use PE instead of CAPE.

Maybe they use a more sophisticated way of capturing future volatility ( GARCH comes to mind )

The bar for the trainer does not need to guarantee an alpha. No hedge fund manager can do this. The student just needs to have the potential to do well with the knowledge gained. But they need independent thought and action.

This is because the nature of investing is different from weather forecasting.

In weather forecasting, if everyone successfully predicts the weather, the weather occurs regardless. 

In investing, if everyone predicts the same weather, the weather changes. 

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