Paul Novell – Meet The Quantitative Investor That Retired At 41 by Tim du Toit, Quant Investing
When I first started following Paul’s blog I could hardly believe what he achieved.
He quit his high paying job at age 38 in 2006 and retired in 2010 and since then has been living only from his investment portfolio.
Corsair Capital was down by about 3.5% net for the third quarter, bringing its year-to-date return to 13.3% net. Corsair Select lost 9.1% net, bringing its year-to-date performance to 15.3% net. The HFRI – EHI was down 0.5% for the third quarter but is up 11.5% year to date, while the S&P 500 returned 0.6% Read More
As I learned a lot from Paul Novell’s research (especially the idea of a safe withdrawal rate) over the past few years I thought it would also be something you would be interested in.
Luckily Paul agreed to the following interview.
Q&A with Paul Novell
How did you get started in investing?
Paul Novell: I began to get interested investing at around 17. This was the mid-80s.
My grandmother worked for a railroad company in southeast Florida and I remember my grandfather ‘clipping coupons’ from railroad bonds.
He taught me a bit about bonds and stocks, the importance of savings and investing, and that was pretty much the start.
I just had a natural interest in it.
At university, I started to learn more about investing, reading many of the investment classics at the time. For example, I remember reading all the Peter Lynch stuff I could.
Over the next 10 years, I read and read and read as much as I could about investing, in particular value investing and it became my primary side-line hobby.
Describe how you were able to retire at 41 with investing as your main source of income?
Paul Novell: The main reason I was able to retire at 41 was by saving and investing all the money I could and living way below our means.
My wife and I always just had one car, bought less house than we could afford, and for many years saved more than 50% of our take home pay.
A big portion of those savings went towards buying a house.
The rest of those savings were put mainly into investments, mainly buy and hold with a value stock/fund tilt.
There was no magic investment strategy. I wasn’t an active investor at the time apart from a small percentage of my portfolio invested in individual value stocks and bonds.
Fast forward to the end of 2005 and I realized that it was possible to do something different, call it retirement if you want – I like the term financially independent – by living off our investment income, even if only partially, and living a simpler life.
So, at the end of 2005, early 2006, (I was 38 at the time) my wife and I left our high paying tech jobs to do something different.
We didn’t know what that was yet…
During this time I started to learn about a different side of investing, living off your assets, as opposed to building assets, and how that is very different, in particular the importance of risk management.
I discovered the concept of safe withdrawal rates and asset allocation in retirement.
[Safe Withdrawal Rate (SWR) is a method that retirees use to determine how much they can withdraw from their accounts each year without running out of money before reaching the end of their lives.]
I wasn’t sure if we could live just off our investment income for the long term but I was reasonably sure that through a combination of investment income, part time work, and frugal living we could make things work.
From 2006 to 2009 we explored various living arrangements, I went back to work a couple of times, went back to school to get an investment management degree, my wife started a few businesses while trying to figure out what would work best for us.
In early, 2010 we moved into a recreational vehicle (RV) and have been living on the road, traveling the US, for the last 6 years. Our main source of income is our investments but we do make some money from my wife’s RV blog.
Was it scary at first? If so how did you get over the fears or manage them?
Paul Novell: Yes. I was terrified at first.
That was the reason for all the different experiments from 2006 to 2009. I was scared back into the workforce twice. Part of it was the market downturn of 2008 although I managed to avoid most of the damage.
But psychologically there was a lot of pessimism at the time. But most of the fear and apprehension I experienced was self-imposed. And only a portion of it was financial.
A lot of it was more self-worth, sense of purpose type questions. “What am I doing?”, “Shouldn’t I be working?”
But whenever I went back to a ‘regular job’ I hated it even more. I finally decided that the fear of getting stuck in a job/career that I really didn’t enjoy, simply to feel safer and pay the bills was a lot worse than my fear of doing something different.
That was the final trigger.
What is your current safe withdrawal rate and what rate are you aiming for or will feel really comfortable with?
Paul Novell: My current withdrawal rate is about 3% at the beginning of 2016.
I started portfolio withdrawals 10 years ago now, 2006 through 2015.
The first four years I limited portfolio withdrawals through work, but the last 6 years have been pretty much all withdrawals to fund our living expenses.
I’m very pleased with my withdrawal rate after 10 years. The first 10 years of portfolio withdrawals are the most critical for any portfolio in withdrawal mode.
I don’t see a need to increase it, although, all the models say I could increase it quite a bit. We have enough to cover our current lifestyle expenses.
Describe your personal investment approach and how it developed over time?
Paul Novell: I would call myself primarily a systematic/quant investor.
I started out as a value focused buy and hold investor and invested that way for many years.
As I learned more about behavioural finance and the reasons most investors fail at investing I became more of a proponent of rules based automatic investment styles.
I also became more aware of the importance of managing risk, not just looking for returns, in order to improve investment outcomes.
Describe your investment philosophy?
Paul Novell: Models over humans.
I can’t remember who said this but it pretty much describes my investment philosophy.
Rules based investment strategies give an investor the best chance of avoiding the many behavioural land mines in investing.
What are your ideas concerning portfolio composition and the value of individual holdings in relation to the portfolio?
Paul Novell: I think overall asset allocation, e.g. stocks vs bonds, is the most important decision and investor makes. It pretty much determines your risk reward trade-off.
I think individual holdings must be in the context of your overall portfolio allocation.
All my individual holdings are in the context of a portfolio. I don’t own anything because of a fundamental story or outlook for just one stock.
This is an outcome of a quant approach and is quite different from a fundamental stock picking approach.
How do you stop from filtering – interfering in the investments selected by the system?
Paul Novell: This is what I try to do with the systems/strategy/allocation I have chosen.
- I use multiple systems.
Every system will experience periods of underperformance, sometimes quite long. So, to avoid me trying to switch to the winning system at the time I use multiple systems.
For example, I use two systems in my trend following Exchange Traded Funds (ETF) portfolio, and I use two or three quant stock systems.
All have stop losses and risk off triggers that go to cash at certain times.
- But about 30% of my overall portfolio is still old school buy and hold bonds that provides most of my income needs.
With another 20% invested in a tactical asset allocation (TAA) bond portfolio. This is a great emotional buffer if and when the ‘systems’ underperform. Also, it reduces overall portfolio volatility quite a bit.
- The biggest thing I do is I try very hard not to ‘check in’ on the systems too often.
I try hard not to watch the market on a daily basis. I have set a goal, not succeeded yet, to check prices only once a week. But that is so hard these days.
It’s also one of the reasons I don’t blog too often. I find that when I do research for a blog post I need to check in too often on what the market is doing and that raises doubts on strategies, systems, etc…
I would like to write more to help people, and maybe make some money on the side, but I struggle with what this could do to my own investing outcomes.
Can you describe your top investing mistakes and what you’ve learned from them?
Paul Novell: My top investing mistakes have come from two sources.
My first big mistake was trying to succeed at an investment style that just didn’t suit my personality.
For a while I traded options. The day to day managing of positions and the stress associated with it did not suit either my time frame or personality. I found myself spending way more time in front of a computer screen than I wanted to. This taught me that it is crucial to find an investment approach that suits your personality. If you don’t, you won’t have a high probability of success.
The second big mistake, I use to make consistently, was not defining the scenario that invalidated my investment thesis. This was primarily when I was picking individual stocks based on fundamentals. This causes you to hold on to losers in the hope that you will be proven right.
It’s much more profitable to define when you’re wrong, and cut your losers as soon as possible.
A quantitative approach helps this because an inherent part of any system is the sell rules.
How concentrated is your portfolio?
Paul Novell: My top level allocation is 50% risk based strategies, 50% bond strategies.
The 50% risk strategies are currently approximately 30% tactical asset allocation strategies invested in Exchange Traded Funds (ETF), and 20% individual stock quantitative strategies.
In those individual stock quantitative strategies I run a couple of portfolios that each hold 15 stocks with no overlap.
So, basically, not very concentrated in regards to the overall portfolio.
Do you follow any key risk-management guidelines in managing your portfolio?
Paul Novell: Yes, risk management is my most important job. I have risk management for all of my strategies.
For example, in my individual stock quantitative strategies, I use trailing stop losses as well as an overall trend filter for risk management.
The ETF based Tactical Asset Allocation (TAA) strategies I use are trend strategies that have automatic risk management rules as well.
Risk management is important for all investors but more so for portfolios in withdrawal mode where drawdowns can decimate safe withdrawal rates.
What is your view on the use of stop-loss strategies?
Paul Novell: I use them in all my individual quant stock portfolios. They enhance risk adjusted returns in quantitative portfolios.
What do you think of short selling?
Paul Novell: I think its fine. I find it easier to be on the long side so I don’t do it much.
When I do want to short something, for just speculation, it is usually a macro theme I’m playing and I do it through futures. It’s much easier.
I don’t ever short individual stocks. But that’s just a personal preference. I don’t have a strong opinion about it.
What is your 80/20 investment strategy or principle?
(The most important 20% you must do to get 80% of the highest investment returns)
Paul Novell: The most important thing I must do as investor is to follow the rules of the systems I use and ignore the noise.
Success for me comes from spending the majority of time researching and/or developing systems and then following them.
It is not as easy as it sounds but it is the most critical part of being an investor even if your chosen system is buy and hold.
Paul thanks for your time.
Here is the link to Paul’s blog again: Investing for a living
Your interviewing analyst
Tim du Toit
PS: For a list of proven market beating quant strategies click here: proven quantitative investment strategies