Skin in the Game

They say you should put your money where your mouth is. With that in mind, I really liked the spirit of Meb Faber’s recent post about having “skin in the game,” and so here I copy his idea (and hope others follow suit).

To reiterate something Meb said, my situation is unique and my investment allocation isn’t relevant for other investors with different preferences, risk tolerances, and time horizons. None of this is investing advice.

I have 100% of my invested assets in quantitative, long only strategies. The vast majority (90%+) is invested in strategies run by O’Shaughnessy Asset Management (“OSAM”). The only reason that it is not 100% is that I cannot access OSAM’s emerging markets strategy in my retirement account, so I have to get my EM exposure through another option (DFA, in this case—although whenever the OSAM EM strategy becomes available I will switch 100% of my EM exposure to that strategy. I also have a small amount in Meb Faber’s Global Value strategy).

Some key points about my allocations.

  • I’m 29, have a high tolerance for equity volatility (in fact I’d welcome it for the chance to buy more at better prices), and have a very long time horizon.
  • I believe that automatic allocations are one of the keys to investing success because, like quant strategies, automatic allocations take most of the emotion out of investing. I contribute to my 401(k) automatically, and I also contribute automatically to other investment accounts.  

Some key points about the strategies I use to invest.

  • I believe investing should be completely rules-based/systematic/quantitative
  • Every strategy I use to invest is predicated on four key factors: valuation, yield (dividends, buybacks, debt paydown), quality, and momentum. I have a roughly equal exposure to these key factors.
  •  I use a number of different strategies and allocate across them using a contrarian approach. I add to strategies that have 1) better current valuations (i.e. lower expectations) and 2) negative recent results (absolute and relative).  For example, for the past year or so I’ve been adding mostly to our global, yield driven strategy because 1) international and emerging markets are cheaper than the U.S. market and 2) the strategy has underperformed. Like the strategies that I use themselves, my allocations across strategies are rules based.
  •  I have a very global portfolio, and am underweight the U.S. market. This is because 1) the U.S. is more expensive than almost all global markets and 2) my career and earnings are concentrated in U.S. dollars and U.S. markets, so I like the diversification.  
  • To give you a flavor for where these strategies are pointing right now, I own a lot of international energy and telecom companies, and “old world” tech stocks in the U.S.

Because of the nature of value investing, it’s usually easier to tell a scary story about many of the stocks that I own than a rosy, growth story. If I wasn’t comfortable with that, I’d just buy index funds.