Diversification and speculation are different.

I have mentioned TOBAM on this blog before, but as @firstactuarial had the good sense to invite its CEO Yves Choueifaty  to their conference yesterday and he and his assistant Lauren were kind enough to fly from Paris to Manchester and take a train across the Pennines to Leeds, I am going to say thanks to him on www.henrytapper.com by exhorting you to go and listen to him speak. Surprisingly there is no you tube video of the man (damn – I should have recorded and uploaded his talk yesterday). His website doesn’t say much and unless you are prepared to download some heavyweight maths that underlies the quantitative approach, you really are going to have to do your research properly by tracking this fellow down.

And it will be worth it.

Unlike the snake oil salesmen with fake crystal balls, Yves does not have opinions, he has formulae, mathematical models and a some very strong beliefs about the fundamentals of investment that drive returns over time. He believes in equities and his investment strategies are designed to milk the returns that equities can bring (what is known as the investment risk premium).

But this approach is not based on some macro view of politics, or global trends or a perception that one part of the stock market is undervalued against another. Yves rises above such temporary considerations with the flare of a true genius.

When you here him speak it is like listening to a Bach fugue, ideas are repeated with subtle variation but with rhythmic precision, word, like notes, follow each other in melodious certainty leading to inevitable conclusions based on logic. This mean speaks better English than I do and he is French.

But do not let the clarity of his diction or his rhetoric allow you to think that there is not a great passion and truth behind the brilliant facade. There is.

With equations that even a non-mathmatician like I can understand, Yves sets out the philosophy that underpins his central idea. That idea is that it is in genuine diversification, the obtaining of return from non-correlated sources, that value arises and that anything that increases bias reduces diversification and in the long-term decreases value.

He refers variously to the “anti-benchmark” approach and to “pure diversification” but my favourite characterisation he offers us is of his having an “opinion on nothing”!

This view is not a purely passive one. It does not accept the traditional cap-weighted indices as offering true diversification and he and his team set out to remodel the index to produce an portfolio of stocks that are so perfectly matched that they deliver undiluted the premium that organisation with the time horizons to invest in shares (pension funds mainly) have a right to.

As Yves pointed out yesterday. every view is speculative, speculation is of course a word derived from the Latin verb “to view”.

I have lost count of the number of false prophets who’s views I have listened to over the years. Some were right and might have had an hour or two’s advantage over a market but none maintained a consistent head start on the rest of the speculators to deliver long-term value.

Yves is not a prophet, he has no views and he therefore does not speculate. He seeks the holy grail of investment, the equity premium and like Lancelot or Gawain or any other grail-seeker, he is currently hacking through the forests of unreason to uncover what he is looking for!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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6 Responses to Diversification and speculation are different.

  1. Pingback: Without them we wouldn’t be free to read this | The Vision of the Pension Plowman

  2. George Kirrin says:

    The (TOBAM) approach is fully quantitative and does not use any predictions of expected return, neither for the assets nor for any underlying risk factors. (Taken from their translated website.)

    Sorry, Henry, but I prefer investors in the style of Graham, Keynes, Buffett and others who do use predictions of expected return to select, de-select or avoid securities. “Investing is an activity of forecasting the yield over the life of the asset; speculation is the activity of forecasting the psychology of the market.” (Taken from http://www.maynardkeynes.org/keynes-the-investor.html)

    • henry tapper says:

      Can’t see much difference between forecasting and speculation myself.

      Either way you’re taking a bet on a future outcome ; the more obvious the bet the more it looks like a forecast, the more outrageous the bet the more specualtion.

      Buffet is clearly someone who likes to take bets on things no-one else forecasts and he speculates to accumulate- that’s cool- it’s just not in my client’s risk budget to employ Buffet or to DIY with less skill.

      If non-opinionated diversification is the poor man’s alpha, I’m all for it!

  3. George Kirrin says:

    There are two teas in Buffett, Henry. Just as there are at least two ways of looking at that quote from Keynes.

    We live in uncertain times. Investing (or “enterprise” as Keynes preferred to call it) requires taking bets with margins of safety (Graham) and forecasting cash yields (not markets). “The considerations upon which expectations of prospective yields are based are partly existing facts which we can assume to be known more or less for certain, and partly future events which can only be forecasted with more or less confidence.” (Keynes, again, at the risk of me being called a bore, which I can be).

  4. Pingback: “Purity” in passive investment management | The Vision of the Pension Plowman

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