Your Investments: Top fund manager shares some tips

An interview with Michael Dever, author of the very successful book 'Jackass Investing: Don’t do it. Profit from it'.

By AARON KATSMAN
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 investing world.
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 this?
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 periodically.
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 diversified.
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.
aaron@lighthousecapital.co.il
Aaron Katsman, a licensed financial adviser in Israel and the United States, helps people with US investment accounts.