The Best Investment Writing Volume 3: Selected Writing from Prominent Investors and Authors

Episode Summary

Executive Summary: This special episode compiles readings from top investment writers on process, factors, tactical allocation, bubbles, and wealth stewardship. Across the talks, the recurring message is that investing success depends less on prediction than on a disciplined, evidence-based process, broad diversification, and the ability to endure long periods of underperformance without abandoning sound strategies.

Main Topics: Trusting the Process in Investing (Priority: 5/5): Jack Vogel uses the 76ers' 'trust the process' rebuild to illustrate that investors need a clear goal, a logically justified process, and the behavioral discipline to stick with it through painful stretches. Factor Investing: Value, Momentum, and Trend (Priority: 5/5): Multiple speakers argue that factor premiums can persist, but only when investors control for size, costs, and long horizons; momentum is portrayed as especially resilient, while value is more mixed and size-dependent. Model Failure and Tactical Asset Allocation (Priority: 4/5): Paul Nivelle discusses how active models fail in practice, emphasizing that TAA systems can still be worthwhile if their mistakes are small, infrequent, and behaviorally tolerable. Diversification and Trend Following Across Markets (Priority: 5/5): Mike Philbrick argues that trend following works best when diversified across many markets and asset classes, not just a single equity index, because diversification creates a powerful risk-adjusted 'bonus.' Bubbles, Valuation, and Risk Management (Priority: 5/5): Rob Arnott, Todd Tressider, and others warn that market bubbles require defensive action, especially when valuations are extreme across multiple asset classes and speculative manias signal crowd irrationality. Investor Behavior, Career Risk, and Staying the Course (Priority: 4/5): Several readings focus on the human side of investing: loss aversion, career risk, confirmation bias, and the difficulty professionals and individuals face when their chosen process underperforms. Wealth, Legacy, and Communication (Priority: 3/5): Later segments shift from market strategy to family wealth, emphasizing communication, preparation, gratitude, and governance to preserve capital and family harmony across generations.

Key Arguments: A sound investment approach requires a stated objective, a logical process, and the emotional ability to persist when results lag. Stocks can outperform over long horizons, but starting points matter; a bad decade can make an otherwise rational strategy look wrong. Value and momentum are real but must be evaluated with size control and realistic expectations about underperformance. Trend following may reduce drawdowns, but it is not a free lunch; it can lag during trendless or whipsaw markets. Diversifying trend following across many liquid markets is more effective than timing one index, because the diversification bonus improves risk-adjusted returns. Model failures should be judged by their severity and persistence, not just by whether they occasionally miss signals. Asset bubbles are best met with risk management, diversification, and selective exposure to cheaper or less crowded assets rather than blind buy-and-hold optimism. Institutional positioning can provide predictive information, especially when aggregated across equities and related bond markets. Wealth transfer succeeds when families communicate early, align on values, and establish structures that help heirs grow into responsibility. Gratitude and appreciation are framed as active behaviors that improve personal well-being and decision-making discipline.

Data Points: Championship concentration: 32 of the last 36 NBA championships - Jack Vogel uses this to support the claim that superstar players drive title outcomes. Championship share: ~93% - Those 32 of 36 championships were accounted for by the 11 superstar players Vogel listed. U.S. stocks CAGR, 1927-1999: 11% - Used in the trust-the-process example to show why stocks looked compelling historically. U.S. bonds CAGR, 1927-1999: ~5% - Compared with stocks in the early investing example. Cash CAGR, 1927-1999: ~3.75% - Compared with stocks and bonds in the same historical illustration. SP 500 growth of $100, 1927-1999: $219,000 - Illustrates compounding and why stocks seemed like the obvious process at the end of 1999. U.S. stocks CAGR, 2000-2009: -0.68% - Used to show a long period when the stock-first process failed. U.S. bonds CAGR, 2000-2009: 8.21% - Outperformed stocks during the 2000s decade. Bills CAGR, 2000-2009: 2.77% - Cash-like return benchmark for the same period. U.S. stocks CAGR, 2010-2017: ~14% - Shows the rebound period after stocks had underperformed. Value CAGR, 1927-2017: ~12% - Factor backtest used in the factor investing discussion. Market CAGR, 1927-2017: ~10% - Baseline benchmark in the value/momentum factor comparison. High momentum CAGR, 1927-2017: 16.7% - Momentum outperformed the market over the long sample. Low momentum CAGR, 1927-2017: -1.38% - Demonstrates the danger of buying losers. Value CAGR, 2008-2017: 4.95% - Value underperformed the market over the most recent 10-year stretch. Market CAGR, 2008-2017: 8.62% - Benchmark for the recent value/momentum comparison. Momentum CAGR, 2008-2017: 8.36% - Momentum was close to the market but below it in that period. SPYComp invested time: 68% risk-on / 32% risk-off - Paul Nivelle summarizes the tactical asset allocation system's historical stance. False positives: 31 outside recessions; 18 mistaken triggers outside drawdown periods - Measures model errors in the SPYComp system. False-negative recession catches: 0 missed recessions - SPYComp caught all six recessions in the study. Error rate: 3% - Share of incorrect triggers over the 46-year period discussed. GEM CAGR, 1950-2018: 15.8% - Gary Antonacci’s dual-momentum system versus a global asset allocation benchmark. GAA benchmark CAGR, 1950-2018: 10% - Comparison benchmark for GEM. GEM max month-end drawdown: -17.8% - Shows dual momentum reduced downside versus the benchmark. GAA max month-end drawdown: -41.2% - Benchmark drawdown for comparison. Small cap value vs small cap benchmark: 10% vs 8.5% - In Wes Gray’s size-controlled analysis, small value outperformed the small-cap benchmark. Small cap momentum vs small cap benchmark: 9.7% vs 8.5% - Momentum worked within small caps in the same framework. SP 500 CAGR, last five years in factor piece: ~14% - Used as the market benchmark in the 'factors dead?' discussion. Large value CAGR, last five years: ~10% - Value struggled in mega caps over the recent five-year window. Large growth CAGR, last five years: 18% - Growth beat value when controlling for size. Large momentum CAGR, last five years: ~16% - Momentum outperformed the market in large caps. 67-year median death time: 67 years - Median time for price-to-book to become statistically insignificant in the factor-fimblewinter simulation. SMI sample size: 1,150 weekly data points - Ray Michaletti’s smart money indicator study from 1992 to 2017. SMI timing spread: 27.2 percentage points annualized - Difference between long-only when SMI positive and long-only when SMI negative in the market timing example. SMI conditional returns in negative momentum: +30% vs -20% annualized - When time series momentum was negative, SMI positive regimes strongly outperformed SMI negative regimes. SMI/Bear market exposure: ~61% equity exposure vs 101% for trend - In the 2011-2017 comparison, SMI used less equity exposure than trend while outperforming it. Financial literacy decline: ~2% per year after age 60 - Bob Seawright cites this as a reason to plan ahead for aging and delegation. Value investing wealth benchmark: Over 100,000 copies/year - Demand for The Intelligent Investor remains strong, illustrating the lasting influence of Graham's ideas.

Pivotal Quotes: "Trust the process." — Jack Vogel: Core framing device linking sports rebuilding to disciplined long-term investing. "Systematic factor investing can be simple, but definitely not easy." — Jack Vogel: Summarizes the challenge of maintaining value/momentum discipline through underperformance. "The real cost is the impact on your behavior." — Paul Nivelle: Explains that model failure matters most when it causes investors to abandon a workable strategy.

Implications: Listeners are urged to favor evidence-based processes, diversify broadly, and prepare emotionally for long stretches when a good strategy looks wrong. The episode also suggests communication, humility, and risk management matter as much as raw returns.