Ten Investment beliefs

Investments have a higher expected return than savings. Risk-taking is often rewarded in the long term. Investments have market risk (also known as systemic or non-diversifiable risk or beta) and specific risk (not systematic or diversifiable risk). For the first risk investors should be in the long run compensated for in the returns (the higher the risk, the higher the return), that is not the case for specific risk. The compensation above the risk-free rate is a compensation for the sensitivity of the assets to macroeconomic factors such as interest rates, economic growth, inflation and unemployment, and thus for the uncertain development of these assets. This fee is called risk premium. There is no risk premium for taking specific risks, as these risks can be 'eliminated' by diversification.

Literature:

• Cantillon, R., 1730,  Essai sur la Nature du Commerce in Général.
• Smith, A., 1776, An Inquiry into the Nature and Causes of the Wealth of Nations. Methuen & Co
• Menger, C., 1871. Principles of Economics. Duke University
• Böhm-Bawerk, E., 1889. The Positive theory of Capital. G.E. Stechert & Co
• Keynes, J.M., 1936. The General Theory of Employment, Interest and Money. Cambridge University Press
• Hayek, F., 1939. Profits, Interest and Investment. George Routledge & Sons
• Graham, B., 1949. The Intelligent Investor. HarperCollins
• Hayek, F., 1945. The use of knowledge in society, Economic Review September 1945, 519-30
• Markowitz. H.M., 1952. Portfolio Selection. Journal of Finance, 7, 77-91
• Treynor, J., 1961. Market Value, Time, and Risk. # 95-209
• Sharpe, W.,1970. Portfolio Theory and Capital Markets, McGraw-Hill
• Tobin, J. 1982. Asset accumulation and economic activity: Reflections on Contemporary Macroeconomic Theory. University of Chicago Press
• Fama, E., French, K., 1989. Business conditions and expected returns. Journal of Financial Economics 25, 23-49
• Graham, J., Campbell, H., 2005. The long-run equity risk premium, Finance Research Letters 2, 185-194
• Beinhocker, E., 2006. The Origin of Wealth, Evolution, Complexity and the radical Remaking of Economics. Harvard Business School Press
• Akerlof, G., Shiller, R., 2009. Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism. Princeton University Press
• Kaletsky, A., 2010. Capitalism 4.0, the birth of a new economy in the aftermath of crisis. The Perseus Books Group
• De Grauwe, Paul, 2017, The Limits of the Market, Oxford University Press

Most beta decisions have more impact on returns than alpha decisions (pure alpha is only possible through timing). Investors can better focus on the strategic policy instead of tactical allocation. Estimating future returns, risks and correlations is difficult and you have to recognize the limitations of your assumptions. Correlations between asset classes are also unstable and not always discounted efficiently in market prices. This can be partially compensated by diversifying over different strategies that distinguish themselves qualitatively and are dependent on different economic factors. Investing is also a matter of patience. Man's natural tendency is to act, but people often underestimate the costs involved and trade on irrational convictions. Do not underestimate the power of compound returns (Einstein: compound interest is the eighth wonder of the world). It is not about 'timing' the market, but about 'time' in the market.

Literature:

• Modigliani, F., Miller, M., 1958, The cost of capital, corporation finance and the theory of investment. The American Economic Review, Vol 48 261-297
• Henriksson, R., 1984. Market Timing and Mutual Fund Performance: an empirical investigation. The Journal of Business, vol 57, 73-96
• Perold, A., 1988. The implementation shortfall: paper versus reality. Journal of Portfolio Management. Vol 14, 4-9
• Carhart, M., 1997. On persistence of mutual fund performance, Journal of Finance 52, 57-82
• Barber, B., Odean, T., 2000. Trading is Hazardous to Your Wealth. Journal of Finance, Vol 55 773-806
• Berkshire Hathaway, Shareholder Letters, Warren Buffett
• French, K., 2008. The Cost of Active Investing, Journal of Finance Vol 63, 1537-1573
• Ang, A., Kjaer, K., 2011. Investing for the long run, Calpers
• Marcus, A., Bodie, Z., Kane, A., 2013, Investments, McGraw-Hill
• Gave, C., Gave, L., 2019, Clash of Empires, Currencies and Power in a Multipolar World, Gavekalbooks

Speech French: https://www.youtube.com/watch?v=RsXxCq5kdMk

There are five main risk sources of return over the risk-free return: a premium for taking equity risk, credit risk, liquidity risk, manager risk and insurance risk. Other important sources of risk such as duration, inflation and currencies do not offer consistent returns. The term structure for liquidity premiums is generally steep, allowing long-term investors to achieve higher returns than investors with a shorter horizon. Risk premiums vary over time. Sometimes certain asset classes are cheap based on realistic valuation measures and therefore offer an above-average expected return and sometimes certain investment categories are expensive and offer below-average expected returns. The current valuation is an important starting point for forecasting returns in the medium term.

Literature:

• Shiller, R., 1981. Do Stock Prices Move too Much to be justified by Subsequent Changes in Dividends? American Economic Review 71, 421-36
• Shefrin, H., Statman, M. 1985. The disposition to sell winners too early and ride losers too long: theory and evidence. Journal of Finance 40, 777-790
• Fama, E., French, K., 1993. Common Risk Factors in the Returns on Stock and Bonds. Journal of Financial Economics 33. 3-56
• Carhart, M., 1997. On Persistence of Mutual Fund Performance. Journal of Finance 52, 57-82
• Blitz, D., Van Vliet, P,. 2007. The volatility effect: lower risk without lower return, Journal of Portfolio management 34, 102-113
• Bender, J., Briand, R. Nielsen, F., 2010. Portfolio of Risk Premia, a new approach to diversification. Journal of Portfolio Management, vol 36, no 2.
• Joyce, C., Mayer, K., 2012 Profits for the long run, affirming the case for quality. GMO White Paper

In the long run, the return of an asset category is determined by fundamental factors. In the short term, the return is determined by the forces of supply and demand (liquidity, momentum and speculation and other more psychologically determined behaviour of market participants). As a result, short-term returns are often volatile, more volatile than justified by changes to the fundamentals. The relationship between sentiment and return is often inverse. Long-term investors can benefit from this by not making extra costs for short-term trading, but by collecting these time-dependent premiums. The two best ways to beat the market are a long-term fundamental policy based on the over- or undervaluation of future cash flows, or a shorter-term approach based on psychological behaviour of market participants. Using benchmark indices in these policies often works counterproductively. Valuations fall back to the average over time.

Literature:

• Machlup, F, 1931, The Stock Market, Credit, And Capital Formation, William Hodge & Company.
• Graham, B., Dodd, D., 1934. Security Analysis, Whittlesey House (McGraw-Hill)
• Fisher, P., 1958. Common Stocks and Uncommon Profits, Wiley
• Henriksson, R.D. Merton, R.C., 1981. On market timing and investment performance. Journal of Business, 54, 4, 513-533
• Shiller, R., 2000. Irrational Exuberance, Princeton University Press
• Mayer, C, 2018, Prosperity: Better Business Makes the Greater Good, Oxford

It is difficult, but not impossible to recognize extreme valuations. Such periods can last longer than the patience of the investor or is allowed based on business risk. Short-term thinking is generally damaging due to the costs of excessive trading, but also by giving away the liquidity premium and by paying less attention to corporate governance. Innovative new markets are interesting because in the early stages they often do not work efficiently. Those who invest early can eventually benefit.

Literature:

• Machlup, F, 1931, The Stock Market, Credit, And Capital Formation, William Hodge & Company.
• Graham, B., Dodd, D., 1934. Security Analysis, Whittlesey House (McGraw-Hill)
• Fisher, P., 1958. Common Stocks and Uncommon Profits, Wiley
• Henriksson, R.D. Merton, R.C., 1981. On market timing and investment performance. Journal of Business, 54, 4, 513-533
• Shiller, R., 2000. Irrational Exuberance, Princeton University Press
• Mayer, C, 2018, Prosperity: Better Business Makes the Greater Good, Oxford

The behaviour of financial markets can be explained by the chaos theory combined with strong psychological elements that can strengthen decisions, nullify them or result in a completely contradictory outcome. This is a chaotic system of the second type. Chaos systems of the first type does not respond to predictions (for example the weather), chaos of the second type does respond to predictions and can therefore never be accurately predicted. Markets are generally - but not perfectly - efficient over a longer time horizon. Investors, however, make mistakes. In other words: the market is rational, humans are not. If these errors start to correlate (for example through legislation, supervision), this results in extreme market valuations and systemic risks. The final effect depends on the size of the market and the transaction costs. Scientific knowledge is particularly relevant for investors, especially when multiple disciplines are combined, such as in the area of ​​behavioural finance (economics, sociology and psychology) or in the field of narrative economics (in addition to behavioural finance, marketing, journalism and even theology). The economy is only a small part of society, also for investors.

Literature:

• Mackay, C., 1841, Extraordinary Popular Delusions and the Madness of Crowds, Richard Bentley
• Kahneman, D., Tversky, A., 1979. Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47, 263-291
• Jorgenson, D., 1963, Capital Theory and Investment Behavior, University of California, Berkeley
• Kahneman, D., Slovic, P., Tversky, A., 1982. Judgement Under Uncertainty: Heuristics and Biases. Cambridge University Press.
• Mandelbrot, B., Hudson, R., 1997. The (Mis)Behavior of Markets, Basic Books
• Shefrin H, 2000, Beyond Greed and Fear, Understanding Behavioral Finance and the Psychology of Investing, Oxford University Press
• Zweig, J., 2007. Your Money and Your Brain, Simon & Schuster
• Montier, J., 2010 The little book of Behavioral Investing, How Not to Be Your Own Worst Enemy. Wiley
• Kahneman, D., 2012. Thinking Fast and Slow, Farrar, Straus & Giroux
• Thaler, R., 2015. Misbehaving: The Making of Behavioral Economics. W.W. Norton & Company
• Harari, Y., 2015. Sapiens, A brief history of mankind, Harper
• Harari, Y., 2016. Homo Deus, A brief history of tomorrow. Vintage Publishing
• Harari, Y., 2018, 21 lessons for the 21th century, Spiegel & Grau, Jonathan Cape
• Shiller, R. 2017. Narrative Economics, Cowles Foundation Discussion Paper no. 2069
• Kwak, J., 2017, Economism: Bad Economics and the Rise of Inequality, Pantheon
• Lo, A., 2017, Adaptive Markets: Financial Evolution at the Speed of Thought, Princeton University Press
• Raworth, K, 2017, Doughnut Economies, Random House Business
• Rodrik, D, 2017, Straight Talk on Trade: Ideas for a Sane World Economy, Princeton University Press
• Fukuyama, F, 2014, Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy, Macmillan
• Alexandre, L, 2017, La Guerre Des Intelligences: Intelligence Artificielle Versus Intelligence Humaine, JC Lattes

For the market as a whole, alpha is negative after deduction of costs. Alpha is a competitive advantage. In a less competitive market or in a market with participants that are not motivated by profit, more alpha can be obtained. However, beware: markets can be controlled for a longer period of time by irrational factors. In efficient markets with a low dispersion, virtually no alpha can be achieved. Then the preference soon goes to a passive allocations in the portfolio. Passive means that there is no need to act in the interim, the portfolio weights move with the market. The search for alpha is sensitive to conflicts of interest. Managing this risk is an important task in selecting managers. Stay cost-conscious and look for added value. The majority of investors would achieve better results if less active managers were included in the portfolio. The high costs of many alternative investments (private equity, hedge funds) ensure that the vast majority of the alpha and even part of the beta is lost. Only investors with a competitive advantage in selecting active managers are compensated for this. Alpha is also cyclical in nature and is determined by changes in correlation, volatility and cash flows. The influence of diversification is considerable, particularly within alpha managers, which is why good diversification across fund managers is necessary. Given the aforementioned difficulties, a (partly) passive interpretation of the portfolio can be preferred.

Literature:

• Malkiel, B., 1973. A Random Walk down Wall Street. W.W. Norton & Company
• Haugen, R., Baker, R., 1991. The Efficient Market Inefficiency of Capitalization-Weighted Stock Portfolios. Journal of Portfolio Management 17, 35-40
• Sharpe, W., 1991. The arithmetic of active management. Financial Analyst Journal 47, 7-9
• Lynch, P., 1994. Beating the Street, Simon and Schuster
• Bogle, J., 1999. Common Sense on Mutual Funds, Wiley
• Lipner, S., Boyd, J., Alternative investments – looking under the hood, White paper
• King, S., 2017, Grave New World: The End of Globalization, the Return of History, Yale University Press
• Tepper, J, Hearn, D, 2018, The Myth of Capitalism: Monopolies and the Death of Competition, Wiley

Investments are made based on function, not on form. For each market a different instrument may be required or is suitable to approach that specific market. This can change over time. Implementation is as important as the investment idea. This involves finding the right balance between risk, return and / or costs. Transparency about costs is therefore essential. Higher costs can only be justified if this leads to a material contribution to lower risks and/or higher returns. Strive for asymmetrically favourable opportunity / risk distributions as much as possible. A good investor does not only look up, but also down. Risk management is an essential part of investing. Even the safest investments carry risks which can hurt quite badly.

Literature:

• Lefèvre, E., 1923. Reminiscence of a Stock Operator. Doran & Company
• Lintner, J. 1965. Portfolios and Capital Budgets, the review of economics and statistics, vol 47, 13-47
• Soros, G. 1987. The Alchemy of Finance. Wiley
• Lakonishok, J., Schleifer, A., Vishny, R., 1992. The structure and performance of the money management industry. Brookings Papers on Economic Activity, 3390391
• Jegadeesh, N., Titman, S., 1993. Returns to Buying Winners and Selling Losers: Implication for Stock Market Inefficiency. Journal of Finance 48. 65-91
• Stoll, H., 1993. Equity trading costs in-the-large, Journal of Portfolio management 19, 41.50
• Sorkin, A., 2010. Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System – and Themselves. Penguin
• Brooks, J, 2014, Business Adventures: Twelve Classic Tales from the World of Wall Street. Open Road Media
• Jakab, S, 2016. Heads I Win, Tails I Win: Why smart investors fail and how to tilt the odds in your favor, Penguin​
• Van Nunen, A., 2016, Fiduciair management, blauwdruk voor een goed bestuur van institutionele beleggers, Van Nunen en Partners

In the long run, savings is in terms of purchasing power riskier than investing. In the long run, the purchasing power of assets on a savings account will erode due to inflation and taxes. The biggest risk with savings and investment is the permanent loss of capital (purchasing power). In case of investment decisions, use a safety margin and require sufficient compensation for risks to be taken. Assets and liabilities must be matched. Risks are difficult to estimate in advance, the snake you do not see always bites you. This again emphasizes the importance of a good diversification, de facto a protection against ignorance. The value of standard deviation (volatility) as a risk concept is seriously overestimated. Acting based on volatility is both a risk (namely permanent loss of capital) and an opportunity (timing and therefore alpha). Be very cautious with risk models. Often it is not much more than 'garbage in, garbage out', but it is presented as the new Holy Grail in the field of investing. In most models, the adaptability of man is also seriously underestimated. The broad acceptance of risk models (volatility, VaR etc) is a (systemic) risk in itself.

Literature:

• Wicksell, K., 1898. Interest and Prices, Sentry Press
• Jensen, M., 1969. Risk, the pricing of capital assets and evaluation of investment portfolios, Journal of Business 42, 167-247
• Siegel, J., 1994. Stocks for the long run. McGray-Hill
• Chopra, V., Ziemba, W., 1993. The Effect of Errors in Means, Variances, and Covariance’s on Optimal Portfolio Choice. Journal of Portfolio Management 19, 6-11
• Bernstein, P., 1998. Against the Gods, the remarkable story of risk. Wiley
• Lowenstein, R., 2001 When Genius Failed, the rise and fall of long-term capital management. Random House
• Taleb, N., 2005. Fooled by Randomness, Random House
• Arthur, W., 2009. The Nature of Technology: What it is and how it evolves. Free Press
• Taleb, N., 2010. The Black Swan, Random House
• Acemoglo, D., Robinson, J., 2012. Why Nations Fail, Crown Publishers
• Geithner, T., 2014, Stress Test, Broadway Books
• Ibn Khaldûn, 2015, The Muqaddimah, an introduction to history, Princeton University Press
• Bayoumi, T., 2017, Unfinished Business: The Unexplored Causes of the Financial Crisis and the Lessons Yet to be learned, Yale University Press
• Tirole, J, 2017, Economics for the Common Good. Princeton
• Ball, L., 2018, The Fed and Lehman Brothers, Cambridge University Press
• Dalio, R, 2018, Principles for Navigating Big Debt Crises, Bridgewater
• Ellison, G, 2018, Destined for War: Can America and China escape Thucydides Trap?, Houghton Mifflin Harcourt

Choose an independent approach, it is not about getting the approval of others. Keep asking questions. Try to avoid blind spots as much as possible. A good company is not a good stock. The relationship between sentiment and performance is often inverse. Good companies use the funds entrusted wisely to create more wealth. Ultimately, it is the return (ROE, ROI) on capital that counts. Never pay too much and think as a contrarian. Recognize that about 90% of the time nobody knows what financial markets will do, but be decisive when you do. Think off the beaten path, creativity and pro-activity is essential to recognize opportunities and risks at an early stage. Good governance and corporate social responsibility are important for every investor; The only return is a healthy financial return. Finally: keep it simple.. Make sure you always understand what is being invested in.

Literature:

• Smith, A., 1759. The Theory of Moral Sentiments. Liberty fund
• Williams, J., 1938. The Theory of Investment Value, Harvard University Press
• Black, Fisher. 1986. Noise. Journal of Finance vol 41 529-543
• Lynch, P., 1989, Up and Down Wall Street, Simon & Schuster
• Lo, A., 2004. The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective. Journal of Portfolio Management vol 30 15-29
• Statman, M., 2011. What Investors Really Want: Discover What Drives Investor Behavior and Make Smarter Financial Decisions. McGraw-Hill
• Haskel, J, Westlake, S., 2017, Capitalism without Capital, The Rise of the Intangible Economy, Princeton University Press
• Bacchus, J, 2018, The Willing World: Shaping and Sharing a Sustainable Global Prosperity, Cambridge University Press
• Gennaioli, N., Schleifer, A., 2018, A Crisis of Beliefs, Investor Psychology and Financial Fragility, Princeton
• Collier, P, 2018 ,The Future of Capitalism: Facing the New Anxieties, Allen Lane
• Bond, K, 2018, Myths of the transition: Renewables are too small to matter, Carbon Tracker