Tadas Viskanta (left) is the founder and editor of the indispensable investment blog, Abnormal Returns. Over its six-year life, Abnormal Returns has become a fixture in the financial blogosphere.
Over thousands of posts Tadas has brought the best of the financial blogosphere to readers. He is a private investor with over 20 years of experience in the financial markets.
In addition, he is the co-author of over a dozen investment-related papers that have appeared in publications like the Financial Analysts Journal and Journal of Portfolio Management, among others. Tadas is also the author of the terrific new book: Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere, which culls lessons learned from his time blogging.
Tadas (right) holds a MBA from the University of Chicago and a BA from Indiana University. He lives with his family in the heartland of America. He has graciously agreed to answer what I hope are Five Good Questions.
1. Your book – rightly I think – describes investing as the “last liberal art” since what is interesting in investing isn’t really captured by the data. How then do you suggest using the data we have and integrating it into the liberal art of investing?
We are awash in data. You could even say we are in a bull market for economic and financial indicators. It seems like every week there is a brand new indicator that will purportedly help us better understand the economic world around us. Despite all of this information I would argue that the vast majority of investors are not rigorous enough in their use of data.
Most investors rather than using a structured approach to stock selection and portfolio construction are really flying by the seat of their pants. This ad hoc approach leads to all manner of bad behaviors including overtrading and underdiversification. That is why client portfolios often look like a mish mash of stocks and funds than a consciously chosen strategy.
Unfortunately the data don’t often tell us the whole story. Every investor whether their approach be fundamental, technical or quantitative is going to have a period in which they underperform. The question is then asked: Is it different this time? Is my model/worldview broken? Most of the time with a well-constructed strategy it makes sense to stay the course.
However, sometimes the world really does change, oftentimes abruptly. If anything you could argue that these trend breaks are more likely now than ever before due to technology. Identifying these disruptive periods require a grounding not only in finance, accounting and economics but also in history, technology, politics and psychology to name but a few.
2. The book focuses on an investor’s need for humility since we can so easily go “off the rails.” What techniques or devices do you use to try to guard against errors?
Most investors would claim that their time horizons are in the decades if not years, let alone months, weeks or years. If that is the case then are they spending their time watching CNBC and trying to trade during the day?
Their time would be much better spent reading, doing analysis and thinking than worrying about the minute-to-minute gyrations of the market. There are very few people are able to make money in that time frame especially as high frequency trading now dominates intraday trading.
What matters often is not the news itself, but the market’s reaction to the news. That requires more perspective than you are going to get from the financial media. If there really is no good way to limit your consumption of the media then you really have to block it out entirely and focus on what matters. Your intraday decisions are more likely to hurt than help over the long run.
3. Following John Bogle and holding a portfolio of exceedingly broadly diversified index funds essentially forever would fit with your suggestion that investors avoid the active management game and keep things simple. Are you a total buyer of the concept?
Up to a point. I think for the vast majority of investors a broadly diversified portfolio of index funds, rebalanced regularly with an eye on taxes and expenses should be their default approach. Two things are important to note.