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Professor Robert Webb: “Where’s Alpha?”


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robert webb

Given the improvement in technology and the speed of information dissemination in our present era, investors may wonder if there is any alpha left out there in the financial markets. It is a valid and crucial question that any active investor has to consider.

In July 2014, Professor Robert Webb of the McIntire School of Commerce at the University of Virginia was in Singapore at the Singapore Management University (SMU) to talk to members of CFA Society about what academia has found from its studies about alpha in the market place – mis-pricings are more likely to arise in turbulent than tranquil markets, when there are limits to arbitrage.

Published in the CFA Singapore Quarterly Newsletter (Issue #15) in October 2014, Professor Webb revealed a variety of avenues in which alpha could possibly still be found and extracted. However, they tend to be characterized by volatility and turbulence. BillionaireInvestor will share just three interesting points in this commentary:

(I) Forced Alpha – The Amaranth Case

The infamous case of the hedge fund Amaranth Advisors LLC (a multi-strategy hedge fund) that imploded was brought up by Professor Webb as a case of ‘forced alpha’.
“Amaranth was long and wrong on the March 2007 – April 2007 natural gas spread. The spread which was at a premium of USD 2.14 per MMBtu, collapsed in two weeks to 75 cents by 18 September when Amaranth threw in the towel. Most of the USD 1.39 decline in the spread (and hence trading loss incurred by Amaranth) came after Amaranth was identified as a trader in trouble. Amaranth initially reported it had lost USD 1-2 billion. The ultimate loss a few days later was USD 6 billion. Some of the largest changes in speculative prices often have little to do with the arrival of new fundamental information or noise trading.

(II) Politics & Alpha – The 2012/2013 Japanese Resurgence

Another point that Dr Webb brought up was the idea that alpha could be derived from anticipation of political events or developments. While seemingly speculative in nature, investors who understand significant political events and their likely influence on the business and finance environment could actually benefit if positioned properly. “Sometimes the biggest source of alpha is in anticipating a political action. For instance, arguably the largest source of profit for many global macro hedge funds in 2012/2013 was betting on a lower yen and higher Japanese equity prices following the election of Shinzo Abe as prime minister. The incoming Japanese government telegraphed in advance its intentions to reduce the value of the yen. This was a political event with significant consequences for the yen and Japanese stock prices.”

(III) Law & Alpha – Argentina

Dr Webb also suggested that understanding the law and the regulatory environment is crucial when it comes to investing. In our present age where global investing has gone mainstream due to the need of diversification, this is a vital point to consider when constructing a portfolio. “Sometimes alpha is earned from understanding law or how regulations might be administered better than others. The recent decision by the US Supreme Court not to hear the appeal by Argentina to a lower court ruling against it by holdout bond owners is a good example of how alpha may arise from a better understanding of law and politics. The Argentine bonds that some vulture funds bought were under-priced due to a misunderstanding of law and/or politics. Understanding both law and politics was important in this case.”

Professor Webb also shared about how renowned investor Warren Buffett earns alpha over the years in managing Berkshire Hathaway, and concluded with 8 different points by which investors may capture alpha from the markets. For the diligent and the most persevering, alpha may not be just a dream!

The full issue published by CFA Society Singapore may be found here. For more information on Professor Robert Webb and his work, readers may visit the University of Virginia’s website here.

Billionaire Investor Profile: Stanley Druckenmiller

Stanley Druckenmiller

Described as the “greatest moneymaking machine in history” by investor Scott Bessent (who is currently the Chief Investment Officer of Soros Fund Management), Stanley Druckenmiller (above) stands above and towering among the many legendary and colourful investors that Wall Street has ever produced.

For many in the investment community, Stanley Druckenmiller – George Soros’ partnership is akin to Charlie Munger and Warren Buffett’s partnership.

Inside Steven Drobny’s book Inside the House of Money, Scott Bessent has this to say about Stanley Druckenmiller:

“Stan may be the greatest moneymaking machine in history. He has Jim Roger’s analytical ability, George Soros’s trading ability, and the stomach of a riverboat gambler when it comes to placing his bets. His lack of volatility is unbelievable. I think he’s had something like five down quarters in 25 years and never a down year. The Quantum record from 1989 to 2000 is really his. The assets grew from $1 billion to $20 billion over that time and the performance never suffered. Soros’s record was made on a smaller amount of money at a time when there were fewer hedge funds to compete against.”

It is well known among the investment community that George Soros’s famous bet against the British Pound and the Bank of England in 1992 was originally Druckenmiller’s idea. As Bessent states: “What is most interesting to me about the breaking of the pound was the combination of Stan Druckenmiller’s gamesmanship – Stan really understand risk and reward – and George’s ability to size trades. Make no mistake about it, shorting the pound was Stan Druckenmiller’s idea. Soros contribution was pushing him to take a gigantic position.”

Stanley Druckenmiller belongs to the swashbuckling school of discretionary global macro traders of Wall Street, with names like Bruce Kovner, Andrew Law, Paul Tudor Jones, Alan Howard, Louis Bacon all popping into mind when one hears that term.

So what are the key takeaways or lessons that Druckenmiller can offer us when it comes to investing?

(I) Approach the markets with a global, top-down perspective:

Understand that financial markets are intertwined – they are not a machine but a bio-system. Know the interconnections of asset classes and how market participants perceive their behaviours.

To Druckenmiller, a good investor must be willing to invest and trade across all asset classes for investment opportunities. As he mentioned in an interview (see video below); if he sees no opportunity in equities, he is perfectly comfortable in owning no equities at all. Not many investors and even professional money managers are willing to have 0% of their portfolios with no equities even when they see a lack of viable investment opportunities within equities.

(II) Be willing to accept mistakes and cut losses

Druckenmiller is well known for being quick to react when he realise that he is wrong on a position or when his portfolio is positioned wrongly. As a trader, his recovery skills are legendary, being able to recuperate losses quickly and never posting a year of negative returns. The ability to recognise that one is wrong and to react decisively and quickly to it is a hallmark of a great trader. Here is a paragraph from Bessent’s interview about Druckenmiller’s ability to accept his mistakes:

Druckenmiller flipped the portfolio from short to long, a reversal that saved Quantum in 1999, but then hurt it a few months later in 2000. Druckenmiller finished 2000 up for the year. He went from down 12% in March to up 15% for the year in his own portfolio. If you remember, the Nasdaq dumped in March 2000 but then it almost made a marginal new high in September at which point he changed his mind again, went from net long to net short, and caught the whole move down from September to December 2000.

(III) Concentrate your bets, go for the jugular

In the interview (see video below), Druckenmiller brings up a point about how in most investors’ portfolios, 70-80% of the returns in a certain year are from 2 or 3 ideas even if the portfolio has 30 – 40 different things or positions. His concept was to put and concentrate into those 2 or 3 ideas that he has the greatest conviction in. Druckenmiller’s main point is that money is made by having concentrated portfolios. This does not mean placing all of one’s eggs in one basket, but rather, to only take positions that one has great conviction about (based on one’s own research and analysis).

As Druckenmiller declares:

“I’ve learned many things from him (Soros), but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong. The few times that Soros has ever criticized me was when I was really right on a market and didn’t maximize the opportunity.

Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage. As far as Soros is concerned, when you’re right on something, you can’t own enough.”

Readers have to take note that the above pointers come with an obvious caveat: they are from the perspective of a trader with a discretionary macro investing style. Investors are reminded that they always have to do their own due diligence and proper research.

Here is a recent interview of Druckenmiller which covers his investment career and recent philanthropy efforts:

Readers can also find out more about this legendary macro trader in Jack Schwager’s ‘The New Market Wizards‘.

The graphic image above in this post is taken from Slim Beleggen

Insights From “Street Smarts – Adventures on the Road & in the Markets”


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Street Smarts - Jim Rogersautographed

“There are almost no investment geniuses. The only ones I know of are Warren E. Buffett and John C. Bogle and JIM ROGERS” ~ Ben Stein, New York Times

Jim Rogers – understands the great trends of the world like none other” ~ Warren Buffett

Legendary investor Jim Rogers is back with his sixth book: “Street Smarts – Adventures on the Road and in the Markets”! Published in the spring of 2013, this book is a recollection and a self-styled memoir of Rogers’ own life, investment experiences and his observations from his many travels around the globe.

While there were many book reviews done on Rogers’ latest book since it’s release, BillionaireInvestor would be drawing some takeaways and educational insights from the book itself (which is littered with investment wisdom):

Invest In What You Know Best

Rogers writes, “The way you become a successful investor is by investing only in what you yourself have a wealth of knowledge about. Everybody knows a lot about something. Cars, fashion, whatever it is. . . just take a look at your daily life. Concentrate on what you know. . . you will see a major change coming long before anybody on Wall Street will.”

The shrewd investor only invests in things that he understands. They want to know how the returns on their capital are generated, and only by understanding thoroughly and doing their due diligence can they know how their money is made. This remains an essential habit of all successful investors – making them known for an area of expertise (a niche) or what psychologists call a circle of competence. Sticking to what you know best will ensure that you operate in an area that you know you have an edge over others – and that is how money is made.

Additionally, operating within your own circle of competence takes a lot of discipline to wait for the right investment opportunities. As Rogers writes, “most successful investors do nothing most of the time. Do not confuse movement with action. Know when to sit and wait.”

Resist Diversification

True to his own contrarian investment philosophy, Rogers writes that the winning investor does not diversify. This does not mean that an investor should “put all eggs into one basket,” – it simply implies that great investors run concentrated portfolios. He writes, “if you want to make a lot of money, resist diversification. Brokers promote the motion that everybody should diversify. But that is mainly to protect themselves. The way to get rich is to find what is good, focus on it, and concentrate your resources there. But make very sure you are right.” In the early 1980s, Rogers, after doing his research on Europe, sensed that a great bull market is about to take off in West Germany, and he put a big portion of his net worth into German financial assets, and was rewarded greatly in the following few years when both German fixed income and equity markets took off in a secular bull market.

This could also be a follow-up point from the previous takeaway about investing in things you know best. The professional investment industry in recent times have touted diversification as a way or preserving investment portfolios – which isn’t a totally invalid idea. However, most investors these days are diversifying for purely diversification purposes and diversifying into things that they do not understand, which in the long run, could also be dangerous (because it implies an increase in risk exposures).

Look Where Others Don’t Want To

Being a contrarian investor, Rogers believes that opportunities are abundant in places or areas which most people ignore or overlook. In the investment world, places or areas where the majority of investors tend to overlook usually are markets or segments where they haven’t been performing, or aren’t exciting (usually because they have been under-performing) and dull in nature.

Throughout the mid 1980s to the late 1990s, commodity prices (represented via prices of commodity futures contracts) as a whole continued to fluctuate along with business cycles, but Rogers noticed that the overall trend for 18+ years was downwards. Not much new investments were made to improve capacity and not many businesses were going into the resources and materials industries, and Rogers’ research showed that the much of the known financial world do not have many investment vehicles that allow investors to gain direct exposures to commodities (indicating the lack of interest from the investment community). Sensing a great bottom in the commodities market, Rogers started his own commodity index in 1998 and started to heavily invest in the segment – and the rest is history, with the start of the recent commodity super-cycle that roared through the 2000s for a decade. This is a classic example of looking where others don’t want to or ignore, and checking if the crowd’s ignorance is unwarranted and wrong.

“Street Smarts – Adventures on the Road and in the Markets” is still sold in bookstores, and its a light read, with many readers feeling as if Rogers is talking to them about his own experiences and memories. It definitely is a worthy finance read for both finance and non-finance professionals that can easily be read in a cafe over the weekends or simply at the beach side.

Investment Lessons From Sovereign Wealth Funds (Part II)


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The amount of attention that sovereign wealth funds (SWFs) around the world get these days is something that any serious follower of financial news probably is very familiar with. While it could be interesting to scrutinise the particular investments that sovereign wealth funds have pursued over the years, it would be an even more worthwhile effort to gain investment insights as to how governments actually manage their reserves!

As BillionaireInvestor has pointed out in an earlier post (see Investment Lessons From A Sovereign Wealth Fund Part I), investors can learn a great deal by adopting the perspective of these billion dollar asset management entities and their manner of portfolio management.

Here are 3 key principles that sovereign wealth funds around the world have abided by:

Safety First – Preservation of Capital

The foremost rule in the investment world is preservation of capital. It is the utmost fundamental principle by which every investor have to abide by! However, many have forgotten this classic adage as pressures to generate returns rein on the minds of investors. Sovereign wealth funds know that they cannot even afford to risk a major portion of their capital as it consists of a nation’s wealth and comprises a big stake of a nation’s future. Thus, this principle of capital preservation has to run through their entire mandate, corporate governance and organisational philosophy.

Any investor would do well to adopt this mindset, and basic fundamental queries like “How much can I afford to lose?” are good starting premises before any level of risk is undertaken and assumed when making investment decisions. As CEO of Employees Provident Fund (EPF) of Malaysia Datuk Shahril Ridza Ridzuan once mentioned, “Paramount in the way we structure our assets is basically capital preservation. We cannot afford even a low risk in the loss of capital.”

Betting On Secular Trends

While many SWFs are risk averse and tend to manage their portfolios conservatively, some of them orientate their management styles to investing in secular trends. While there is no clear definition of a secular trend, it is most characterised by a huge trend or shift or change that will alter the world across a period of time (probably 20 – 30 + years). Some examples of secular trends include the rise of American industrialism and economic might from the 1870s into the early 1900s and the rapid expansion and usage of the internet in our everyday lives (you definitely will know about this if you are reading this now). In the institutional investment world, secular trend investing is also known as thematic investing.

SWFs orientate towards secular trends because these trends tend to unfold over various market and economic cycles, which is practical for them as they normally have to adopt longer term horizons when managing investments – and not making knee-jerk reactions to short term developments. The Government of Singapore Investment Corporation (GIC) is well known for overlaying some of their active bets with secular themes.

Focusing on Strengths and Acquiring External Expertise

Managing a large portfolio and ensuring that good returns are generated might be a daunting task, many SWFs have tend to augment their strengths and focus on working within their circle of competence. A circle of competence is basically a playing field in which one is very confident about and is very competent in. However, due to their diversified mandates in managing their portfolios, SWFs have to occasionally venture beyond their circle of competence, whatever their circle of competence might be.

In order to address this issue, many of them partner managers with specialised capabilities in various asset classes, or even hire external fund managers to manage discretionary mandates for them. This allows them to focus on their strengths while still maintaining exposure to other asset classes and investments outside their core management expertise. One such example of a SWF that does so is China Investment Corporation (CIC). CIC does have an allocation to alternative asset classes like private equity, and they have done that via an investment in well-known U.S. private equity giant Blackstone Group.

But how does the individual investor “focus on strengths and acquire external expertise”? The ability to “hire” external, specialised assistance when investing one’s portfolio is actually not limited to large institutional investors like the SWFs. Buying a mutual fund that invests in equities in a geographic region that one is not familiar with is an example of acquiring external expertise when managing one’s investments.


SWFs have abided by these 3 key principles when managing their gigantic portfolios, and investors can actually learn from these entities as mentioned above.

More information on sovereign wealth funds can be found at the website of the SWF Institute. Happy Investing!

*Image taken from*

Anthony Bolton’s 3 Secrets of Successful Investing


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Anthony Bolton

Famous fund manager from well-known asset management firm Fidelity Investments, Anthony Bolton, has recently stepped down from active investment management after many decades of managing money.

Bolton is recognised for managing the Fidelity Special Situations fund for 28 years which ended in 2007, where he achieved an annualised returns of nearly 19.5% per annum, turning a £1,000 investment into around £147,000. He is also an accomplished writer and is a columnist in the Financial Times’ money section. Recently, he shared with The Telegraph 3 key principles of his investment philosophy.

They are as follows:

(I) It’s Easier to Spot Opportunities in Smaller Companies

The key to buying shares for less than their true value is spotting something that the rest of the market has missed. But large companies are scrutinised in great detail by a large number of people – analysts who work for stockbrokers or fund managers, the media and other private investors. It’s a different story for smaller firms.

While BP, for example, has 30 or so stockbrokers’ analysts looking at it all the time, some small quoted companies are covered by just a handful, or even none at all. It’s therefore much more likely that a significant fact – perhaps one that gives a company the edge – goes overlooked.

“With a small company I could go to a meeting with the management and come out knowing more about that firm than anyone else,” Mr Bolton said. “That’s not possible with a larger business.”

(II) Look for New Opportunities – But Don’t Forget About the Shares You Already Own

Mr Bolton said running a fund successfully was a team effort involving plenty of backup from his analysts.

Many fund managers say the same and it’s tempting to put it down to modesty or toeing the corporate line, perhaps with an eye to reassuring investors that the fund can maintain its performance if the top man leaves.

But the reason Mr Bolton gave for needing a team was deeper than that – and carries a lesson for private investors.

“I use my analysts to watch the fund’s existing holdings while I look for new opportunities,” he said. “It’s important to do both when you’re running a fund.”

Individual shareholders can’t employ a team of analysts, of course. But they can make sure that they keep monitoring their existing holdings at the same time as looking out for new bargains.

(III) Fundamentals and Market Sentiment Are Both Important

Mr Bolton said two things were important when choosing which shares to buy: the fundamentals of the company and stock market sentiment. “Ideally you get both right,” he said. “I would avoid buying even a good company when sentiment is poor.”

But he added that timing the market was difficult, as his Fidelity China Special Situations fund showed. It lost about 30% of its value in its first 18 months, before recovering all its losses and more recently. “Markets always overreact,” Mr Bolton added.

“It has taken three years for the fund to come right.”


For anyone who is interested, the full article from The Telegraph can be found here.

Additionally, the veteran fund manager has also authored a book about his years of investing and money management. His book, Investing Against the Tide: Lessons from a Life Running Money, was published back in 2009.

More information about asset manager Fidelity can be found here.

Hugh Young’s 10 Golden Rules of Equity Investing


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Hugh Young

Hugh Young, star portfolio manager and now managing director of Aberdeen Asset Management Asia Ltd, has developed a set of “golden rules” over his years of experience in investing in equities.

Compiled by the renowned asset management firm with their aim of passing down Young’s well-earned wisdom to the rest of their team, it has been released with the following statement: ‘None of the investment tenets that follow should surprise you and they all share one very distinct trait: a belief in common sense.’

Here are Hugh Young’s 10 Golden Rules of Equity Investing:

(1) Treatment of Minority Shareholders

When considering a company, the first question you need answered is ‘who controls it?’ The second is ‘do you trust them?’ Minority shareholders are just one of many company stakeholders (others include employees, the government, suppliers, bankers and major shareholders such as a founding family). While you should not, as a minority shareholder, expect priority over the other stakeholders, you should expect to be treated fairly.

And this depends on whether you can trust whoever controls the company to act in a fair manner. The controlling party need not be a shareholder. In the case of electric utilities, the respective government can often exercise considerable control over tariffs. Electricity prices are a socially-sensitive issue which politicians may sometimes pander to at the expense of minority shareholders. But it is also true, more often than not, that the controlling party is a shareholder, usually the founding family or a conglomerate.

It requires a certain amount of faith, but the best way to judge whether the controlling party will act fairly in the future is to see whether it has acted fairly in the past. Those that have a good track record of equitable treatment of minorities should be held in high regard. Until they slip up that is, though in my experience past behaviour is a pretty accurate predictor of future behaviour.

(2) Remember that Companies are About People Not Assets

A company is essentially a group of people with a common goal, namely to create the best possible product at the best possible price. This is what I call ‘quality’. Sure, companies need fixed assets but they are worthless without people. Once one thinks in these terms, one can appreciate that predicting the long-term performance of a company is all about assessing the quality of its people.

(3) Balance Sheet Strength is Critical

Companies fail largely because their businesses are poorly financed. A strong balance sheet tells you many things. Most importantly, it tells you that the company is very unlikely to fail. But balance sheet strength is not just about the liabilities. It’s also important to look at the assets. What a company does with its cash is very instructive. Does it have too much? Is it gambling with it by investing it in exotic financial instruments? Cash generation is paramount but, once generated, a company must invest it wisely, keep it safe or pass it to shareholders. A balance sheet is like a backbone; it tells you about the character of a company.

(4) Understand What You’re Buying

You don’t have to understand how silicon chips work to buy a silicon chip make, but you do have to understand what they are used for, as well as some of the basics of manufacturing process such as the inputs and costs. On the other hand, simple products like mortgages can be wrapped in businesses that are hard to understand. If there is something about a business that doesn’t make sense, such as how an industry with low barriers to entry creates profits well in excess of the cost of capital, walk away. As the old adage goes, if something looks too good to be true, it probably is.

(5) Be Wary of Over-ambition

It is often tempting for companies to expand capacity or even invest in areas outside their core area of expertise. One should be wary of such ambition, as it naturally means a reduction in focus on core capacity, let alone the implications for balance sheets. A focus on the top line tends to be great for stakeholders such as employees, suppliers and bankers, but rarely for minority shareholders.

(6) Think Long Term

Unless you need your money back soon, you should think long term and avoid getting caught up in the daily noise of markets. This is for two reasons. First, it makes sense to align your own investment time horizon with that of the companies in which you invest. You’ll find that all good companies – and even some bad ones – have a long term perspective. If a company builds a factory, for example, it expects to generate returns from it for at least ten years, as you should from its shares. The second reason is that short-term price movements are mostly inconsequential as they are largely about temporary loss (and gain) of capital. What you should be worried about is permanent loss of capital and this is all about assessing a company’s long-term business prospects.

(7) Benchmarks are Measuring Devices not Portfolio Construction Tools

The worst reason in the world to buy something is because somebody else did. This is essentially what you would be doing if you allowed your portfolio to mimic the benchmark index. A company’s weighting in the index tells you only what has happened in the past, not what will happen in the future. Furthermore, there is a lot of rubbish in most benchmarks that with a little hard work can be avoided. Successful investing requires thinking differently. This may at times feel uncomfortable but you should learn to embrace the feeling as a sign you’re on the right track. To put it in the simplest terms, to beat the benchmark you must deviate from it.

(8) Take Advantage of Irrational Behaviour

The efficient market hypothesis is nonsense. Markets are driven by humans, humans are irrational, thus markets are irrational. Occasionally, something happens and investors panic. You should take advantage of these instances, not join the stampede (or, if you are going to rush for the exit, be the first). Think of a 20% fall in a share price as you would a 20% sale at a department store, an opportunity to buy cheap.

(9) Do Your Own Research

In the case of the medical or engineering professions, for example, there is usually a precise standard for a given procedure. In the investment industry, while this may be true with respect to, say, ethics, when it comes to investment decisions, not following others is the key to success. Indeed, you want to be ahead of the herd, and this means doing your own research. Broker research has its uses, but it is no substitute for doing your own analysis and coming to your own conclusions. It’s about being accountable for your decisions as much as anything.

(10) Focus on Industries in Which it is Possible to have a Sustainable Competitive Advantage

Some industries produce more economic profit than others. How much economic profit a sector or industry tends to produce is often a function of how difficult it is to enter. High entry barriers can therefore provide a sustainable competitive advantage for incumbents. Take banking. Unlike retailing or steel manufacturing, there are all sorts of obstacles to starting a bank. Not only does one need licenses from one or more regulators, but one has to build up trust with depositors as well as a network of companies to lend to. As such, banks tend to produce excess returns on capital which can often be sustained over the long term. Assuming, that is, that they stick to the simple business of lending and deposit taking.

*Content published by Aberdeen Asset Management and strictly for information purposes only. The reader must make his/her own assessment of the relevance, accuracy and adequacy of the information contained in this document. No warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in the content. 

The Most Important Thing – A Book Review


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the most important thing

“When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something, and that goes double for his book” ~ Warren Buffett

Howard Marks, investor, co-founder and chairman of Oaktree Capital Management, has compiled his letters, notes and thoughts of investment management over the years into this succinct volume for anyone to pick up and ponder over.

Howard Marks

Known in the investment community as the “Oaktree Memos”, this compilation done by Marks is a summary of his thoughts about money management for the long term, his insights into the economy and investor psychology.

Written originally for his colleagues at Oaktree and his clients, Marks has organized all of his letters and notes into topical subjects, and each chapter in ‘The Most Important Thing’ contains his notes that he organized and categorized from his years of experience in the investment business.

The topics (chapters) that are covered in the book includes some of the following:

  • Philosophy of Value Investing
  • Market Efficiency
  • Nature of Risk
  • Risk Management
  • Market Cycles
  • Patience in Investing
  • Understanding Uncertainty
  • Contrarian Psychology
  • Defensive Investing

Readers must note that this book contains no models and formulas – unlike many investment books. It is entirely focused on investment philosophy and psychology and fundamental concepts. There are no ‘case studies’ whereby the author talks about his investment experience in certain situations – it is solely Marks’ thoughts about different scenarios whereby he was undergoing and examining at various points of time. For example, there are countless notes about his thoughts on the 2007-2008 Global Financial Crisis when he was experiencing its unfolding following the wake of the sub-prime meltdown.

Since the book is a compilation of his notes and memos, there maybe times when readers would feel that there might be a lack of transitions between some of the different paragraphs.

Marks, having spent time with Citibank and TWC Group before he co-founded Oaktree Capital, has garnered experience in equity research, high yield fixed income and distressed debt investing, is pretty much against the idea of short term trading. Readers must therefore take note that Marks is an investor, and not a trader. This book contains nothing on short term trading or speculation, and is very much against the idea of trading in the short term.

However, this succinct collection of notes would greatly delight and refresh the motivated value investor, and would probably be a great book for contrarian investors. With his background in distressed debt investing, his insights on market efficiency/inefficiency and as well as contrarian instincts are spilled all over his memos. Marks’ thoughts on the nature of risk and reward and handling uncertainty greatly reflects the thoughts of many investors who found the models from academia too irrelevant.

His thoughts about the hard work and effort needed to generate alpha and the importance of what he calls: ‘Second Level Thinking’ is interesting and brings to life what Benjamin Graham used to famously declare decades ago: “The art of investment has one characteristic that is not generally appreciated. A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability; but to improve this easily attainable standard requires much application and more than a trace of wisdom.”

Here is a link to a short interview with Howard Marks on his book and his advice:

Overall, a good book that is succinct and very readable – a great add-on to the serious investor’s library!


Investment Lessons From A Sovereign Wealth Fund (Part I)


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Singapore’s famous sovereign wealth fund, the Government of Singapore Investment Corporation (GIC Private Ltd) has been charged with the task of managing the island country’s foreign reserves. With its objective of preserving and enhancing the international purchasing power of the reserves, and the aim of achieving good long-term returns above global inflation over the investment time horizon of 20 years, the sovereign wealth fund is known for its well structured investing mandate and responsible management of the government’s money.

A sovereign wealth fund normally is restricted by a strict mandate that is laid down by the government, leading them to naturally become long term investing companies because every investment decision made has to undergo strict review processes by the government before they are implemented. Shrewd and disciplined long term investors can learn a few investment lessons when looking at how a sovereign wealth fund manages the government’s portfolio. Below are three prospective lessons that long term investors can learn from the insights shared by Singapore’s GIC:

(I) Harvesting Risk Premiums By Adopting A Long Term Investing Approach

In the realm of financial markets, riskier asset classes should deliver better returns in order to compensate investors for taking on more risk. Investors trade off uncertain pay-offs for potentially higher returns over time by investing in risky assets. This extra return earned by adopting higher level of risks when investing in risky assets is known as the asset’s risk premium. However, in order to harvest these risk premiums, patience and a long term horizon is required because these so called ‘extra returns’ accumulate slowly and unpredictably over the course of time. As stated by GIC: “Successful investing, especially for a large portfolio, requires a suitably long-term horizon because economic and corporate changes often unfold across market cycles and not within a market cycle.”

(II) Build A Diversified Portfolio of Various Asset Classes

GIC invests its assets across a wide spectrum of various asset classes, thereby essentially creating a diversified portfolio for the government of Singapore. As legendary investor Sir John Templeton advocates, “Diversify. In stocks and bonds, as in much else, there is safety in numbers.” Investors would do well to have their own investments diversified across asset classes such as fixed-income instruments, real estate and equities to create a diversified portfolio.

GIC portfolio

GIC manages the Singapore government’s portfolio based upon their mandated Policy Portfolio, which comprises of the below six different asset classes:

  • developed market equities
  • emerging market equities
  • nominal bonds and cash
  • inflation-linked bonds
  • private equity
  • real estate

Often, a well diversified portfolio is amongst one of the best means with which to capture global growth and ensuring any positive surprises are captured and unwanted surprises are avoided, preventing events that would lead to an investor’s portfolio being in tatters. More information on GIC’s investment framework can be found here:

(III) Be A Contrarian 

Throughout the course of financial markets history, boom and bust cycles have often led to prices of assets and securities wildly deviating from their justified fair value. The job of the shrewd, intelligent investor is to take advantage of this. As a long-term investor, GIC has the flexibility to take a contrarian stance, taking positions against the crowd when markets deviate significantly from their fair value. GIC basically buys assets when their prices are below intrinsic value and sells them when they become overvalued. However, this normally results in short term under-performance, and investors who adopt a contrarian and long term approach when managing their portfolios have to be patient and keep the bigger picture in mind. As GIC stated: “We can only enjoy the rewards of long-term investing if we are prepared to tolerate short-term losses or under-performance relative to market indices from time to time.”

(The information and chart above have been taken from an article that was sourced from the GIC Report on the Management of the Government’s Portfolio for the Year 2011/2012 released on July 30, 2012). More information about GIC can be found at their website:

Blessed New Year and Happy Investing in 2014!

Devising & Implementing A Search Strategy


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A search strategy is paramount to the active money manager, trader and investor. The financial markets have expanded much since the great secular bull market started in the US in the 1980s, and as the industry has grown phenomenally, so has the number of participants who are getting involved with it. Devising and implementing a search strategy that is coherent with one’s investment system is critical for successful investing, portfolio management and naturally, money making.

But what exactly is a Search Strategy? To put it simply, it is the process of finding potentially successful investments.

Anybody who manages money actively actually subconsciously and constantly employs their own search strategy to seek out ventures and places to put money in. However, there are no secret formulas for effective search strategies, because it is subjective and highly linked to one’s own investment system.

For example, quantitative portfolio managers and algorithmic traders employ sophisticated technologies to formulate and program their screening systems – to effectively optimize and automate their search strategies. Below are three key suggestions that could help in formulating and implementing a coherent search strategy.

(I) Consistent With Investment System

Search strategies have to be coherent and consistent with the methodology and philosophy of an investment system. An algorithmic trader has to rely on sophisticated computer technology for his search strategy as his methodology of making money in the markets essentially rely on those instruments and the technology that he employs. A long term, value investor might not necessarily need the devices that a high-frequency trader employs, and perhaps uses a different search strategy. Remember, a search strategy is subjective (no two successful investors have identical search strategies) and is an extension of an investor’s investment system and methodologies.

(II) Based On Strengths & Interests

The second point offered is essentially an extension of the investment system and methodology that an active investor employs. A person who enjoys looking at ratios, numbers and is competent in analyzing financial statements would make a great value investor, and in fact might have a search strategy that is based entirely on reading, absorbing and analyzing hundreds or even thousands of reports. Berkshire Hathaway’s Warren Buffett is a famous example of such a person. Operating in one’s area of competency and devising a search strategy from there that is coherent with one’s own investment system can go a long way for improving active investing performance.

(III) Uniquely Tailored To Produce An Edge

Peter Lynch

As mentioned earlier, no two successful traders or investors have identical search strategies, as it is an extension of an investor’s unique investment system. Star Manager of Fidelity Investments, Peter Lynch, is famous for his ‘hitting the streets’ approach when he was the portfolio manager of Fidelity’s Magellan fund back in the 1980s and 1990s. He likes to talk about the best stock investments being the ones that you can observe everyday on the streets. Lynch uses that as one of his search strategies – to find potentially good companies that are out of Wall Street’s radar. He constantly observes his surroundings and looks out for potential candidates that might fulfil his criteria and then decides whether to do more research and homework on them.

jim rogers adventure capitalist

Famed US investor and globetrotter Jim Rogers, is known for his two round-the-world travels first in a motorcycle and then in a car that landed him in the Guinness Book of Records. He always writes that studying history, reading philosophy and occasional travelling will help further insights and broaden perspectives when investing. True to his own investment philosophy and system, Rogers looks at long term historical trends, top down financial markets research and analyses and observations from his frequent travels to seek out potential investments. From his global travels he evaluates emerging and frontier markets from the ground up and over the years he has sharpened this habit into his own unique search strategy.

The above points suggested for devising and implementing search strategies are not exhaustive. In fact they are not entirely mutually exclusive either. Additionally, search strategies also adapt and change from time to time depending on the philosophy of an investor. All successful active investors and traders have a coherent and unique search strategy – and that goes a long way on one’s quest for alpha as it helps one to navigate the complex maze of our financial markets.