The Best Investment Writing Volume 3: Jack Vogel – Trust The Process

Episode Summary

Executive Summary: This episode argues that investing, like rebuilding a sports team, requires a clear goal, a logically defensible process, and the discipline to endure periods when the process looks wrong. Using examples from stocks, factor investing, and trend-following, the speaker shows that even reasonable strategies can underperform for years, making “trust the process” the hardest part of successful investing.

Main Topics: Trust the Process as a Framework (Priority: 5/5): The talk uses the Philadelphia 76ers’ rebuilding slogan as a metaphor for investment decision-making: define a goal, adopt a rational process, and then determine whether you can stay committed through volatility and underperformance. Why Superstar Talent Wins in Basketball (Priority: 4/5): The speaker explains that the 76ers’ tanking strategy was based on the belief that championships are mostly won by teams with superstar players, and that losing intentionally increased odds of drafting one. Stocks vs. Bonds vs. Cash (Priority: 5/5): A long-run historical comparison shows why stocks seem obvious in hindsight, but also why a difficult decade can shake conviction when stocks underperform safer assets. Factor Investing: Value and Momentum (Priority: 5/5): The speaker presents value and momentum as systematic ways to try to beat the benchmark, grounded in historical evidence and academic explanations such as risk premia and behavioral effects. Trend Following and Drawdown Reduction (Priority: 4/5): Trend-following is framed as an attempt to lower drawdowns while preserving stock-like returns. The speaker shows both its appeal in backtests and its weakness during whipsaw periods. Behavioral Discipline in Investing (Priority: 5/5): The central message is that the biggest challenge is not finding a plausible strategy, but staying with it when recent results are disappointing and the process is hardest to trust.

Key Arguments: A process should be judged by whether it matches the stated goal and logic, not by short-term outcomes alone. The 76ers’ rebuilding logic was coherent because championships are disproportionately won by teams with superstar players. Stocks have historically outperformed bonds and bills over the long run, which supports an equity risk premium, but that premium can disappear over meaningful stretches. Value and momentum have strong historical evidence, yet they can underperform the market for 10 years or more, creating real tracking error and behavioral stress. Trend following can reduce drawdowns materially in some periods, but it is not a free lunch and can underperform buy-and-hold when markets trend steadily upward. Investors often underestimate how hard it is to stick with a strategy once real money and long stretches of underperformance are involved.

Data Points: Championships won by listed superstar players since 1983: 32 of 36 - Used to argue that superstar talent drove nearly all NBA championships in the modern era. Share of championships accounted for by those superstar players: ~93% - The speaker’s summary of the concentration of titles among a small group of elite players. U.S. stocks annualized return, 1927-1999: 11% - Historical comparison versus bonds and bills in the long-run stock example. U.S. 10-year bonds annualized return, 1927-1999: ~5% - Shown as a lower-return alternative to stocks. U.S. Treasury bills annualized return, 1927-1999: ~3.75% - Shown as the lowest-return option in the long-run historical comparison. Growth of $100 in S&P 500, 1927-1999: $219,000 - Illustrates the power of compounding in equities over time. Growth of $100 in bonds, 1927-1999: $3,700 - Comparison point for stocks versus bonds. Growth of $100 in cash, 1927-1999: $1,500 - Comparison point for stocks versus cash. U.S. stocks CAGR, 2000-2009: -0.68% - Example of a decade when stocks badly lagged safer assets. U.S. bonds CAGR, 2000-2009: 8.21% - Outperformed stocks during the lost decade for equities. U.S. bills CAGR, 2000-2009: 2.77% - Outperformed stocks over the same period on a lower-volatility basis. U.S. stocks CAGR, 2010-2017: ~14% - Showed stocks rebounding strongly after the poor 2000s. U.S. bonds CAGR, 2010-2017: 3.67% - Lower return than stocks in the recovery period. Cash CAGR, 2010-2017: 0.20% - Near-zero return in the post-2009 period. U.S. stocks CAGR, 2000-2017: 5.58% - Full 18-year sample showing stocks still lagged bonds despite the later rebound. U.S. bonds CAGR, 2000-2017: 6.17% - Slightly higher than stocks over the full 18-year period. Market return, 1927-2017: 10% - Baseline for factor portfolio comparison. Value return, 1927-2017: 12% - Historical outperformance versus the market. Growth return, 1927-2017: 8.75% - Lagged value and the market over the long run. High momentum return, 1927-2017: 16.7% - Best-performing factor portfolio in the long-run example. Low momentum return, 1927-2017: -1.38% - Worst-performing factor portfolio, reinforcing the momentum premium. Market return, 2008-2017: 8.62% - Benchmark used to show recent factor underperformance. Value return, 2008-2017: 4.95% - Underperformed the market over the most recent decade shown. Momentum return, 2008-2017: 8.36% - Slightly lagged the market over the recent decade. S&P 500 with trend, 2000-2009: 5.64% annualized - Backtest showing trend-following helping in a difficult stock decade. S&P 500 buy-and-hold, 2000-2009: -6.8% annualized - Comparison for the same period without trend rules. Max drawdown, S&P 500 with trend, 2000-2009: 14% - Trend-following reduced drawdowns sharply in the backtest. Max drawdown, S&P 500 buy-and-hold, 2000-2009: 50% - Shows the severity of drawdowns without trend rules. International developed markets with trend, 2000-2009: 10.5% annualized - Trend-following backtest result outside the U.S. International developed markets buy-and-hold, 2000-2009: 1% annualized - Comparison for international equities without trend rules. Max drawdown, international with trend, 2000-2009: 14% - Trend-following backtest drawdown. Max drawdown, international buy-and-hold, 2000-2009: 57% - Severe drawdown for international buy-and-hold in the backtest. S&P 500 with trend, 2010-2017: ~9% - Trend-following underperformed after being adopted following the strong backtest. S&P 500 buy-and-hold, 2010-2017: 14% - Outperformed trend-following over the same period. International with trend, 2010-2017: 2.85% - Trend-following result in developed international equities. International buy-and-hold, 2010-2017: 6.25% - Outperformed trend-following internationally. U.S. stocks, 1973-2017 buy-and-hold vs trend: 10.5% vs 10.87% - Shows long-run similarity in return with lower drawdown under trend rules. U.S. stocks max drawdown, buy-and-hold vs trend: 50% vs 23% - Illustrates drawdown reduction from trend-following. International stocks buy-and-hold vs trend: 8.49% vs 9.85% - Long-run trend-following slightly improved return while reducing drawdown. International stocks max drawdown, buy-and-hold vs trend: 57% vs 21% - Large drawdown reduction under trend-following. Bonds buy-and-hold vs trend: 7.75% vs 7.67% - Trend-following had similar return to buy-and-hold in bonds. Bonds max drawdown, buy-and-hold vs trend: 21% vs 11% - Trend-following reduced bond drawdowns. REITs buy-and-hold vs trend: 11.94% vs 11.57% - Trend-following slightly lowered return but reduced drawdown heavily. REITs max drawdown, buy-and-hold vs trend: 68% vs 21% - Example of large drawdown reduction in real estate securities. Commodities buy-and-hold vs trend: 5.84% vs 8.12% - Trend-following improved return in commodities over the long run. Commodities max drawdown, buy-and-hold vs trend: 81% vs 57% - Trend-following reduced drawdowns, though still substantial.

Pivotal Quotes: "trust the process" — Jack Vocab: Core rallying cry borrowed from Philadelphia 76ers fans and used as the episode’s central metaphor. "So, the answer is probably not, but it's always a good time to learn." — Jack Vocab: Reflection on how investors often do not fully understand their process when they first commit capital. "Systematic factor investing can be simple, but definitely not easy." — Jack Vocab: Summary statement on the challenge of sticking with value and momentum through long underperformance.

Implications: Investors should define goals clearly, choose evidence-based processes, and expect long periods of discomfort. The hardest edge in investing is behavioral: surviving underperformance without abandoning a sound strategy.