Matt Hall, is the author of the new memoir-manifesto, Odds On: The Making of an Evidence-Based Investor and President and Co-Founder of Hill Investment Group – he talks about why it’s a great time to be an investor. Below he discusses in simple terms how investors, novice and veteran alike, should not think about winning a few hands but rather how to own the whole casino.
Stacking the Odds: Why it’s an Exciting Time to be an Investor
By Matt Hall
What does value investing really mean? Q1 2021 hedge fund letters, conferences and more Some investors might argue value investing means buying stocks trading at a discount to net asset value or book value. This is the sort of value investing Benjamin Graham pioneered in the early 1920s and 1930s. Other investors might argue value Read More
Returning from the brink of disaster can have a funny effect on you In the space of a few years, I had fought a potentially fatal illness and run smack into the worst financial crisis since the Great Depression, all while trying to start a business And yet, when those challenges receded around the start of 2010, I didn’t feel battered or drained; I felt exhilarated!
Some of this excitement came from the fact that I now knew I had found my calling. Guiding clients through the emotional minefields of 2007 and 2008 had brought everything into focus. I finally had the sense of purpose that I’d been looking for since I had graduated from college and innocently plunged into the financial services business. I was equipped with an investment philosophy built on logic and science, and I understood what investors needed in order to manage their emotions. That one-two punch meant I could do what I had always hoped to do: Help people improve their lives via the evidence-based investing movement, which continues to find ways to stack the odds in investors’ favor.
To understand the success, let’s use a gambling metaphor. Investing the old-fashioned way is like walking into a casino and placing your chips on red at the roulette wheel, or sitting down at the blackjack table expecting to get 21. You’ll win sometimes. You might even win big on occasion. But in the end, slowly and painfully, the house wins. The odds are simply against the individual gambler. The free drinks, the cheering crowds at the craps table, the flashing lights of a slot machine paying out, the crisp-suited dealers and fabulous showgirls—they’re all there to distract you from the math, which doesn’t lie.
Market data doesn’t lie either. So a crucial decision needs to be made by investors–not to try to win a few hands—but rather to own the casino. Evidence-based, diversified investing strategy allows investors to capture the growth of global capitalism. Whether the ball lands on the red or the black, we make sure that we own the house, so to speak.
Casino owners look for ways to push games like roulette and keno, which offer some of the best odds for the house. In my firm, we do something similar with our investment portfolios. We tilt our holdings toward certain types of investments that have historically provided higher returns than others. How do we find them? Not through guesswork or instinct or so-called fundamental analysis.
We rely on the evidence from some of the most respected institutions and brilliant researchers, which shows how different classes of investments tend to perform over decades.
We’ve set a pretty high bar to make sure that we don’t chase some tantalizing new theory that doesn’t pan out—and you shouldn’t either. Our investment decisions are rooted in a crystal clear understanding that the premium we’re after truly exists—and can be captured cost effectively. My mantra goes like this: A premium must be persistent, pervasive, and liquid. If it doesn’t meet all three criteria, we ignore it.
Persistent means we need to see long-term evidence that it works. Ten or even 20 years of data aren’t enough to convince us that a premium exists. Anything more than 30 or 40 years starts to get interesting, but if we can see evidence going back 80 years, that’s reliable.
Pervasive means the premium has to exist across geographic regions or asset groups. It can’t be an isolated phenomenon in the US markets or in some other corner of the world. We have to see the same pattern repeated for very long periods of time across the global markets.
Liquid means that we can actually capture the premium by trading basic instruments like stocks and bonds. We want to be able to gain exposure to these premiums through simple trades that make it easy (and cheap) to get in and out of positions when we create and rebalance portfolios.
I’m confident in this current strategy, because I know that all the premiums we target meet our three criteria. I also know that we can probably do better in the future. Researchers in the evidence-based investment community continue to explore new frontiers and learn more about the financial markets—making today an incredibly exciting time to be an investor.
Sometimes, I get so excited about all this that I worry I’m coming on too strong, that people might confuse my passion for a sales pitch. When that feeling arises, I remind myself that my colleagues and I are not pretending to have it all figured out. We just follow the evidence to where it leads us. When we do that, the best way to invest becomes obvious. There’s nothing to sell.
This content is an excerpt from Chapter 16 of Odds On: The Making of an Evidence-Based Investor.