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Lewis Braham: How To Sidestep Common Investment Mistakes
The referenced article by Lewis Braham is very nice. It is well researched and deals with protecting a portfolio against bad investment decisions. Financial gurus often remark that the best long term investor returns come not from making good decisions, but from avoiding bad investment decisions.
I was able to initially access the Link that Ted provided, but I am currently experiencing difficulties as I try to more carefully read the article. As a substitute, here is a Link to another article that places the same emphasis on not losing decisions rather than winning investment decisions:
In this instance, the behavioral missteps are distilled down to 5 dominating factors. All these articles focus on mistakes which have the greatest potential impact on end wealth. Although each differ somewhat, they all are fairly similar in their individual assessments of investor's major shortcomings. We're all somewhat imperfect in our decision making, and allow emotional aspects into our investment decision process. That does harm. No great surprise!
@MJG The only problem is this isn't what the story was really about. It was about how mutual funds like Undiscovered Managers Behavioral Value UBVAX and Fuller & Thaler Behavioral Small-Cap Equity FTHNX use behavioral finance techniques to try to beat the market, not about how individual investors can avoid errors.
You are making a distinction without much of a meaningful difference.
Above a rather modest threshold IQ score, higher IQs only contribute minor advantages to market investors. Those advantages center more on diversification and willingness to invest factors than ito specific stock selections. Stock selection is hazardous duty independent of IQ. The essential difference is Emotional Intelligence, and not IQ.
As Warren Bufferr observed: " You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ." In some other quote, he noted that an IQ well below 100 was sufficient for successful investing.
Regardless of who is making the investment decision, be it a professional group like a mutual fund management team or an individual investor, the key to achieving superior returns is mostly dependent on Emotional Intelligence, not raw IQ. Emotional Intelligence and control are what your article mostly describes, and that is exactly what my additional references also highlight.
Emotional Intelligence considerations, as applied to the firms you discussed, are what permitted these outfits to separate themselves from the less successful pack of hungry wolves (mutual funds).. That's why I provided informative references that focus on that emerging discipline.
I hope MFO regulars benefit from these Links. I'm sure you are intimately familiar with that subject; some MFOers might not be.
By the way, I still can not access your article a second time without sacrificing some personal data that I'm not prepared to give away.
@MJG So basically, you didn't read the article and are passing judgement on it. Makes sense. And it is hardly a "distinction without a difference" on a site devoted to undiscovered funds, that there is a tiny fund--Fuller and Thaler's FTHNX--knocking the ball out of the park lately with low fees described in the story. There's a difference between being rational and rationalizing your behavior.
Initially I did get access to your submittal and did fully read it. As I said in my original post on this topic, I thought it "is very nice. It is well researched...". And I meant it.
Based on your response to my post, I tried unsuccessfully to reread your article. For reasons unknown to me, the requirements to again gain access have increased.
I simply suggested that the examples that you referenced at least partially owe their success to correct application of Emptional Intelligence rules. Therefore, I provided some "nice" references to that developing field. I thought they might interest some MFOers.
I could be wrong. It surely would not be the first time. But I fail to understand the source of your apparent irritation with my initial post here. You are a hugely successful financial writer. I enjoy your stuff including your opening post on this matter. No criticism was intended!
Nice article. I was somewhat familiar with the Undiscovered Managers fund UBVAX, but had never heard of FTHNX. Thanks for the pointer.
I find that it's not hard on occasion to spot a stock that has been unfairly beaten down on some news. But should I buy, I wouldn't have a clue when to get out, so I leave trading to fund managers. The FTHNX prospectus says it buys securities when investors overreact to bad news or underreact to good news, and it sells when the opposite occurs, which I guess is either investors overreacting to good news or underreacting to bad news.
Identifying overreaction to bad news IMHO isn't that hard if one is familiar with the industry involved and has a good sense of long term prospects. An industry may be sound, but someone says the sky is falling. (Think of the muni bond market after Meridith Whitney's 2010 prediction of 50-100 defaults.)
But how do you know that good news is good, but not quite as good as people think? That's more subtle. Or that bad news is actually worse than people think. Kudos to managers who can do this well. Not to mention doing it frequently. The individual investor need only react when he spots something, as opposed to having a day job of actively seeking these over/under reactions.
I agree with the quote in the article: "But over long periods of time, it’s difficult to say markets under- or overreact." That would seem to call for higher turnover. Individual security behavioral anomalies don't persist (though as I said, I've no clue when they're ended, i.e. when to exit). Which makes me wonder how some of these funds can operate with such low turnover, e.g. LSVEX (15% turnover).
Regarding the nuts and bolts of FTHNX - the prospectus ER of the fund is 1.07%, the 0.89% is what's reported in the latest annual report. The difference appears due to an a service fee of 0.20% that the fund is allowed to charge (prospectus) in order to pay brokerages for servicing the shareholders. That fee is not currently being charged.
Regardless, these number incorporate a fee waiver of about 2%, which is scheduled to be reduced by 0.20% next February. That is, you should count on the ER rising by 0.2% in 10 months. Still not too expensive for a small cap fund.
Also, while the fund is NTF at Schwab (and elsewhere), it is TF at Fidelity.
I've known about FTHNX for a while. I think it is public knowledge I make it my business to know about "single fund companies". The only reason I haven't taken a second look is because of assets under management. One bad year kills such funds. Unless manager is managing money similarly elsewhere and not totally reliant on ER from the fund to exist.
However, now that it has gotten publicity I will keep it on my radar
Manager ownership reasonable (I think). Trustee ownership ludicrous - Two people may collective have more than $2 in the fund (Stupid $1 - $10000).
Seems like bonds are used in lieu of "cash". Turnover of 194% - need to understand this in the context of how the cash position has changed over time. Especially important given the fund has not witnessed a bear market. Lot's of funds look very good after bear markets, until the next. Please don't fooled by M* "low" risk rating.
Finally, look at UBVAX chart in the last bear market.
A quick look at FTHNX, and I've never seen it before, suggests that the 194% turnover ratio and the out-sized distributions for 2014-2016 mean that this is no fund for a taxable account or for an investor looking for tax efficiency. George Putnam bombards me with ads for hisTurnaround Letter. He claims to be able to pick the winners out of the detritus of stocks that are, in the language of the day, "unfairly punished," as if there were a moral component to investing. If this business were "fair," the good guys would get wealthy and the bad guys would own all the value traps. Ain't gonna happen in my lifetime.
" High levels of portfolio turnover may indicate higher transaction costs and may result in higher taxes for you if your Fund shares are held in a taxable account."
Straight from the prospectus. It's got several more sentences about how turnover affects costs and how short term gains affect taxes. Can't say the fund isn't upfront about things. It even lists high turnover as an investment risk.
Hard to tell whether this high turnover is an anomaly or to be expected. The AUM have fluctuated wildly, though the correlation with turnover here isn't obvious:
Near the end of 2015, AllianzGI Behavioral Advantage Large Cap Fund was reorganized into this fund. So the earlier figures are substantially meaningless. Same management but different "principal investment strategies, as well as fees and expenses." (Again, quoting prospectus.) Without knowing more, I'm inclined to attribute the plummet in AUM to the reorganization of the fund.
Comments
The referenced article by Lewis Braham is very nice. It is well researched and deals with protecting a portfolio against bad investment decisions. Financial gurus often remark that the best long term investor returns come not from making good decisions, but from avoiding bad investment decisions.
I was able to initially access the Link that Ted provided, but I am currently experiencing difficulties as I try to more carefully read the article. As a substitute, here is a Link to another article that places the same emphasis on not losing decisions rather than winning investment decisions:
https://www.cfainstitute.org/learning/investor/documents/twenty_common_mistakes.pdf
Unlike most of these types of how-not-to articles, it more than doubles the recommendations by advocating 20 corrective rules.
Here's yet another Link that discusses the issues from a slightly different perspective:
http://economictimes.indiatimes.com/wealth/personal-finance-news/globally-investors-make-the-same-human-mistakes-carl-richards-certified-financial-planner/articleshow/57093397.cms
The investment mistakes that are commonly made are similar in a worldwide context.
If you have the endurance, here is one more thoughtful reference that lists investment mistakes:
http://www.bloomsburywealth.co.uk/mistakes-investors-make/
In this instance, the behavioral missteps are distilled down to 5 dominating factors. All these articles focus on mistakes which have the greatest potential impact on end wealth. Although each differ somewhat, they all are fairly similar in their individual assessments of investor's major shortcomings. We're all somewhat imperfect in our decision making, and allow emotional aspects into our investment decision process. That does harm. No great surprise!
Best Wishes
You are making a distinction without much of a meaningful difference.
Above a rather modest threshold IQ score, higher IQs only contribute minor advantages to market investors. Those advantages center more on diversification and willingness to invest factors than ito specific stock selections. Stock selection is hazardous duty independent of IQ. The essential difference is Emotional Intelligence, and not IQ.
As Warren Bufferr observed: " You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ." In some other quote, he noted that an IQ well below 100 was sufficient for successful investing.
Regardless of who is making the investment decision, be it a professional group like a mutual fund management team or an individual investor, the key to achieving superior returns is mostly dependent on Emotional Intelligence, not raw IQ. Emotional Intelligence and control are what your article mostly describes, and that is exactly what my additional references also highlight.
Emotional Intelligence considerations, as applied to the firms you discussed, are what permitted these outfits to separate themselves from the less successful pack of hungry wolves (mutual funds).. That's why I provided informative references that focus on that emerging discipline.
I hope MFO regulars benefit from these Links. I'm sure you are intimately familiar with that subject; some MFOers might not be.
By the way, I still can not access your article a second time without sacrificing some personal data that I'm not prepared to give away.
Best Wishes
Initially I did get access to your submittal and did fully read it. As I said in my original post on this topic, I thought it "is very nice. It is well researched...". And I meant it.
Based on your response to my post, I tried unsuccessfully to reread your article. For reasons unknown to me, the requirements to again gain access have increased.
I simply suggested that the examples that you referenced at least partially owe their success to correct application of Emptional Intelligence rules. Therefore, I provided some "nice" references to that developing field. I thought they might interest some MFOers.
I could be wrong. It surely would not be the first time. But I fail to understand the source of your apparent irritation with my initial post here. You are a hugely successful financial writer. I enjoy your stuff including your opening post on this matter. No criticism was intended!
Best Wishes
I find that it's not hard on occasion to spot a stock that has been unfairly beaten down on some news. But should I buy, I wouldn't have a clue when to get out, so I leave trading to fund managers. The FTHNX prospectus says it buys securities when investors overreact to bad news or underreact to good news, and it sells when the opposite occurs, which I guess is either investors overreacting to good news or underreacting to bad news.
Identifying overreaction to bad news IMHO isn't that hard if one is familiar with the industry involved and has a good sense of long term prospects. An industry may be sound, but someone says the sky is falling. (Think of the muni bond market after Meridith Whitney's 2010 prediction of 50-100 defaults.)
But how do you know that good news is good, but not quite as good as people think? That's more subtle. Or that bad news is actually worse than people think. Kudos to managers who can do this well. Not to mention doing it frequently. The individual investor need only react when he spots something, as opposed to having a day job of actively seeking these over/under reactions.
I agree with the quote in the article: "But over long periods of time, it’s difficult to say markets under- or overreact." That would seem to call for higher turnover. Individual security behavioral anomalies don't persist (though as I said, I've no clue when they're ended, i.e. when to exit). Which makes me wonder how some of these funds can operate with such low turnover, e.g. LSVEX (15% turnover).
Regarding the nuts and bolts of FTHNX - the prospectus ER of the fund is 1.07%, the 0.89% is what's reported in the latest annual report. The difference appears due to an a service fee of 0.20% that the fund is allowed to charge (prospectus) in order to pay brokerages for servicing the shareholders. That fee is not currently being charged.
Regardless, these number incorporate a fee waiver of about 2%, which is scheduled to be reduced by 0.20% next February. That is, you should count on the ER rising by 0.2% in 10 months. Still not too expensive for a small cap fund.
Also, while the fund is NTF at Schwab (and elsewhere), it is TF at Fidelity.
However, now that it has gotten publicity I will keep it on my radar
Manager ownership reasonable (I think). Trustee ownership ludicrous - Two people may collective have more than $2 in the fund (Stupid $1 - $10000).
Seems like bonds are used in lieu of "cash". Turnover of 194% - need to understand this in the context of how the cash position has changed over time. Especially important given the fund has not witnessed a bear market. Lot's of funds look very good after bear markets, until the next. Please don't fooled by M* "low" risk rating.
Finally, look at UBVAX chart in the last bear market.
George Putnam bombards me with ads for hisTurnaround Letter. He claims to be able to pick the winners out of the detritus of stocks that are, in the language of the day, "unfairly punished," as if there were a moral component to investing. If this business were "fair," the good guys would get wealthy and the bad guys would own all the value traps. Ain't gonna happen in my lifetime.
Straight from the prospectus. It's got several more sentences about how turnover affects costs and how short term gains affect taxes. Can't say the fund isn't upfront about things. It even lists high turnover as an investment risk.
Hard to tell whether this high turnover is an anomaly or to be expected. The AUM have fluctuated wildly, though the correlation with turnover here isn't obvious:Near the end of 2015, AllianzGI Behavioral Advantage Large Cap Fund was reorganized into this fund. So the earlier figures are substantially meaningless. Same management but different "principal investment strategies, as well as fees and expenses." (Again, quoting prospectus.) Without knowing more, I'm inclined to attribute the plummet in AUM to the reorganization of the fund.