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A few weeks ago, I joined Cameron Howe on the Investipal Podcast to untangle the complexities of investing.
You can find the original audio and video versions of the episode on Investipal’s website, but below are some highlights from the conversation:
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Portfolio Construction Philosophy (00:59)
There is no perfect one-size-fits-all portfolio. The perfect portfolio is the one an individual can stick with through market ups and downs.
Building a portfolio must start with an investment philosophy, ideally one that’s rooted in peer-reviewed academic research.
Once you have your philosophy, the starting point for building a portfolio is the total market. When you take the average of all aggregate holdings of all investors in the world, you get the market portfolio. So it’s fair to say that the average investors holds the market portfolio.
Now ask yourself, how are you (or the investor you’re building a portfolio for) different than average? Things like liquidity needs, human capital, time horizon, risk tolerance, home country, temperament, and preferences are just a few things that might cause someone to deviate from the market portfolio.
Quantitative vs. Fundamental Approach (10:16)
- Hold across long periods of time and different economic regimes.
- Work across countries, regions, sectors, and even asset classes.
- Apply for various definitions (for example, there is a value premium whether it is measured by price-to-book, earnings, cash flow, or sales).
- Holds up not just on paper, but also after considering actual implementation issues, such as trading costs.
- Intuitive – There are logical risk-based or behavioral-based explanations for its premium and why it should continue to exist.
Plancorp takes a more quantitative approach, focusing on factors with explanatory power to portfolio returns and have delivered a premium (a fancy word for higher returns). Additionally, they seek factors that:
See – EP.22: To Add or Not to Add
Reducing Emotional Biases (28:45)
Clients, advisors, and portfolio managers all have inherent biases that must be accounted for.
I always enjoy talking about techniques that apply to investment committees to help reduce bias such as red team/blue team debates, blind voting, and size considerations.
But for all investors—individuals, professionals, investment committees, etc—it’s important to focus more on the process than the outcome.
Resources:
- Investipal and the video version of this interview
- EP.22: To Add or Not to Add
The Long Term Investor audio is edited by the team at The Podcast Consultant
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