Miserable Money - 11/8/13

Miserable Money

My Dad has a saying, “Money might not buy happiness, but it sure makes misery a lot more fun.” 

Few would disagree that money is an important factor in our lives.  I’ve heard it described in many ways: a tool, a blessing, and a curse among them.  When it comes to my and clients’ savings, I consider money an employee.

I expect it to work toward producing value for the future.   So when it comes to “hiring” an investment portfolio, I look for characteristics that increase the probability of a successful investing experience.

I want money employees that will produce consistently and predictably in return for the fee I’m paying  – keeping in mind all employees will disappoint at times.

Another attribute is how well the candidate will fit in with the culture.  When hiring humans it is difficult to determine in advance if they will play well with others.

When it comes to hiring the players in our investments though, we have a leg up on this.  There are known and measurable characteristics in investing that tell us these things.

Early in my career I had the opportunity to study briefly under Dr. Eugene Fama, who was awarded the Nobel in Economics a few weeks ago. 

I’m not name dropping here.  If we passed each other at the mall he’d have no idea who I am.  But I would know who he was…and I’d stop him…and then probably embarrass myself.

Anyway, Dr. Fama introduced me to the world of academia as it relates to structuring market portfolios.  Decades ago his work led to the development of The Three Factor model.  It’s super simple:

     for more click here

Don’t freak out, chances are you already understand what this equation bears out. 

1) The Market Factor: Stocks make more than bonds.  Stocks are riskier than bonds.

2) The Size Factor: Small company stocks make more than large company stocks.  Small company stocks are riskier than large company stocks.

3) The Value Factor: Value company stocks (usually distressed companies) make more than growth company stocks (usually companies with strong financials and market positions).  Value companies are riskier than growth companies.*

Though the science of investing is in its infancy, these factors address the most important investor question: how many baskets do I need and how many eggs should go into each one?

Factor investing employs a methodology of predicting how our portfolio employees will perform on their own and with each other over time.  Money may belie misery, but if employing it is a guessing game, it may compound it.  Miserable money. 

As time has gone on other beneficial factors have been revealed.  I recently attended a lecture given by Mark Carver, a Director of Factor Strategy for Ishares.  His work entails identifying “statistically persistent anomalies” within asset classes.

Before you fall asleep, this is the same thing drug companies do when testing a new medicine.  If the drug kills a bunch of people (a persistent negative anomaly) it doesn’t go to market and vice versa (hopefully).

Cause and effect…simple.  Mark has helped identify other factors, such as quality, in a portfolio.

For a 2 minute explanation click here and play the video..

Wiser investors (portfolio bosses) always have an eye on increasing efficiency, and that is what the science of investing is all about.  I talked with Mr. Carver after his presentation and sent him a copy of my new book.

Should we ever pass in a mall, with any luck he’ll know who I am too.

I welcome your questions and comments,

Marc Becker
Accredited Investment Fiduciary
Managing Partner, Wiser Financial Coaching, LLC
Wiser Financial Coaching, LLC, is a Registered Investment Advisor Firm

*The Factors as summarized above consider the entire asset class of stocks vs. bonds, small stocks vs. large stocks, and value stocks vs. growth stocks.  These factors are neither applicable or predictive of individual securities performance nor are a recommendation for any investment in securities.   Each factor stated is in reference to the asset classes noted “as a whole.”