Aaron Katsman 58.
I recently had the opportunity to interview Michael Dever, author of the very
successful book Jackass Investing: Don’t do it. Profit from it. The book
challenges conventional investing wisdom and has created a lot of buzz in the
Dever has been on the front line of investment
innovation and trading for more than 30 years. He founded Brandywine Asset
Management in 1982. For the past three decades, Dever and Brandywine have
managed the money of global banks, major corporations and high-net-worth
individuals who have been attracted to his innovative investment philosophy.
Here are some excerpts from the interview.
Why did you write this book?
The idea for the book was seeded in 1999. I was being inundated by clients and
other investors who were convinced that the sure path to financial independence
was to simply buy stocks and hold on for the long run, among numerous other
investment myths. I vehemently disagreed and resolved to write Jackass Investing
to systematically take on each of the major investment myths and present the
true facts.In your book you discuss a number of common investing myths.
Can you discus a few of them?
Sure. One prevalent myth is that stocks provide an
“intrinsic” return, as if it’s magic money. Instead of accepting that as a fact,
I present research that shows the relationship between corporate earnings
growth, the price/earnings ratio and stock prices. What may be shocking to many
investors is that for periods of less than 20 years, which most people would
consider to be a long-term hold, the P/E ratio dominates stock performance, not
earnings growth. But even more important than the result of that research is
that it presents to the readers the concept of “return drivers.” The primary
take-away of this myth, which is the first one I present in the book, is that an
investor must understand each investment’s underlying return drivers in order to
create a truly diversified portfolio.
In the final chapter of the book I
show that it is a myth that “there is no Free Lunch.” This means that it is not
possible to earn greater returns without taking on greater risk. That is only
true if a person limits their investment options to those preached by
“conventional” investment wisdom. I show specific diversified portfolios that
enable people to earn greater returns with less risk than portfolios that follow
the conventional wisdom.The cynics among us believe that conventional
investing wisdom does a disservice to investors. What’s your take on
That’s absolutely true. For a number of reasons – including conflicts of
interest, anchoring biases and other behavioral issues – most investment
professionals preach similar myths that prohibit investors from creating truly
diversified portfolios. How many times have you heard that you should “stay
invested so you don’t miss the best days,” or “commodities are risky”? Those are
myths I dispel... People who believe those myths and follow that advice create
“poor-folios,” rather than truly diversified portfolios. They take on
unnecessary risk, which is my definition of “Jackass Investing.”How do
you advise average investors to diversify their portfolio?
First, I present a
specific answer to this in the “Action Section” that comes with the book. I
present both a “Free Lunch” portfolio that requires some trading of stocks and
ETFs, and a “Simplified Free Lunch” portfolio that only requires investors to
put on positions in ETFs and mutual funds and rebalance them
But to answer that question here, I’ll say that a properly
diversified portfolio requires diversification across multiple return drivers.
This is a totally different way of looking at diversification. Conventional
wisdom has people focus on “asset classes.” As I state in the book, asset
classes are archaic “artifacts of our investing past.” They are intentionally
self-limiting. Portfolios based on asset classes will never be properly
In contrast, the Free Lunch portfolios I present in the book
are diversified across dozens of return drivers. Many of these returns drivers
produced profits during the financial crisis of 2008, helping to ease the losses
from long equity positions. The mutual funds and ETFs included in those Free
Lunch portfolios include diverse approaches that lead them to be categorized as
long-short, market neutral, managed futures, or currency arbitrage. This is in
addition to other funds focused on long-only positions in frontier and emerging
markets or international bonds, together with funds that attempt to capture
returns from insider behavior, dividend increases... the bottom line is that I
present a portfolio that is truly diversified across a wide range of independent
[uncorrelated] return drivers.
Katsman, a licensed financial adviser in Israel and the United States, helps
people with US investment accounts.
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