Book Review - The Idle Investor

14th Aug '15 by Edward Croft

9 comments 21024 reads

A couple of months ago an excellent book, The Idle Investor, was published through Harriman House by a writer that Stockopedia subscribers will by now be very familiar with… the irrepressible Edmund Shing. Calling Edmund a writer does a huge dis-service to this man’s multi-faceted skill set. He’s an Artificial Intelligence PhD, equity quant, global hedge fund manager, TV broadcaster, prolific blogger and serious Paris-London air-mile collector. In fact it’s very difficult to get him to slow down or pause for breath as I found out over a proper full English fry up around Paddington Station a couple of years ago. So what can this extremely non-idle man tell us about winning in the markets without any work? It seems rather a lot…

The Lessons

The book is a slim tome of less than 150 pages that makes it easily read in a couple of hours. It’s packed full of market wisdom learned first hand from Edmund’s 20+ years of working in a diverse set of research, trading & investment roles at institutions as impressive as Goldman Sachs, Schroders, BNP Paribas, Barclays Capital to name just a few.

The lessons, maxims and axioms he expounds are essential market truths, practiced by seasoned investors, but which novice investors often learn only through experience and expensive mistakes. They include avoiding complexity, keeping costs low, switching off from news, improving risk adjusted returns through diversification & rebalancing and benefiting from the miracle of compounding.

As the title perhaps alludes to, the core of the book is focused on illustrating simple, low admin strategies that lean heavily on the use of collective investment vehicles like ETFs. It is certainly less a book for stock pickers, more a book for those who want to apply an active approach to boost the returns from passive investing. The strategies he expounds on include:

The Bone-Idle Strategy - 60/40 equities/bonds rebalanced annually for an 8.5% annual returns since 1990.
The Summer Hibernation Strategy - which “Sells in May and Goes Away” switching between 100% shares and 100% bonds through the year for a 15% annual return over the same time frame.
The Multi-Asset Trending Strategy - a certainly less-idle cross regional ETF strategy using 8 share and bond ETFs and moving average trend following to switch between them. The extra sweat apparently leads to a 27.6% annual return.…

Unlock with Email

Unlock with Google

Already have an account?
Login here

WarrantStar

18th Aug '15

Ed, Thanks for another thought provoking piece.
Shing says that low volatility shares beat high volatility shares. Is there sound academic evidence to back this up? If it's true, then I think more attention should be paid to it on here. Perhaps there should be a Volatility Rank? I don't find the screens on here much good for volatility. There is no beta for shares without 24 months history. I find the Chaikin Volatility rather hard to make much use of. Perhaps a better indication / screen for volatility could be introduced? I have developed my own spread sheet calculation for it, but it's not ideal. How can volatility data be made easier to use?

Edward Croft

Hi Warranstar, Yes indeed low volatility shares do (on average) beat high volatility shares. There's a huge amount of academic research into the topic, and in fact last night I ran some backtests to see just how much the low beta set of shares have dramatically outperformed the high beta shares over the last year. I will probably blog on it in the next 2 days so keep your eyes peeled.

There are some great texts on the subject. Probably the most famous recent paper is "Betting Against Beta" by the AQR research team. I suggest starting there. This anomaly goes against a fundamental tenet that academic finance believes in - that higher risk == higher reward. In fact there are dozens of asset classes which show a negative relationship between risk and reward - check out Eric Falkenstein's "The Missing Risk Premium - why low volatility investing works" if you really want to geek out on the subject.

I have been working on a low volatility rank recently - at some point it will be released to the site (likely in 2016 as part of a big StockRanks upgrade). I do agree that we should make more of the low-volatility anomaly on the site.

pka

"The Bone-Idle Strategy - 60/40 equities/bonds rebalanced annually for an 8.5% annual returns since 1990. "

For the really bone idle, a very easy way to implement this strategy would be to buy and hold the Vanguard LifeStrategy 60% Equities fund, which continually rebalances its investment portfolio to 60% international equities and 40% fixed interest. There's more information about it here:

http://monevator.com/using-vanguard-lifestrategy-funds-life/

There's a couple of nice enhancements Edmund adds including using mid-cap funds and some seasonal trading. The problem of course with Vanguard is you're going to be generally highly overweight mega caps... Vanguard funds send me to sleep really. I will admit that boredom can be a very good investment strategy ;-)

Ed, you wrote: "The problem of course with Vanguard is you're going to be generally highly overweight mega caps..."

Overweight is a subjective term. I'm sure Vanguard would argue that our portfolios are highly underweight mega caps!

One of the original anomalies identified by Fama & French back in their highly influential paper "The Cross Section of Expected Stock Returns" was SMB (small minus big). This is the 'small cap effect'.... i.e. a general truth that small cap shares beat large cap shares over the long run.

As Edmund states in his book "From 1963 to 1980 in the US, investing in the 10% smallest market cap shares would have resulted in a cumulative return ten times than that for the largest shares!"

Most people on the Stockopedia site try to find their biggest winners amongst small caps - as Jim Slater used to say "Elephants don't gallop". The returns to good, cheap, improving (QVM) small caps has been really stellar. Over the last 2 years the top quintile of high ranking small caps has returned over 70% which you certainly can't say for the FTSE 100.

So whatever Vanguard would say - I'd have to disagree.

Where a lot of small cap stock pickers go wrong is fishing in the speculative parts of the market for small cap returns. Sadly the AIM market in general is filled with junk shares and hasn't performed at all well for a long, long time. The OTC market in the USA is even worse... so sticking to profitable, good value small caps is the way forwards. If investors can't abide the additional volatility in small caps, the FTSE 250 is an excellent hunting ground - it's massively outperformed the FTSE 100.

unwise2

19th Aug '15

over the last 2 years the top quintile of high ranking small caps has returned over 70%

Sadly the AIM market in general is filled with junk shares

Can you clarify what size Mcap you are refering to here and based on your comment about AIM are the companies you mention all fully listed?

Thanks

Hi unwise2, I should qualify the AIM Market comment... there are some really tremendous businesses on AIM, good quality, profitable, reasonably priced and often family run businesses. We often publish pieces highlighting them as they are very easy to screen for (e.g. here's a screen for 'economic moats on AIM'). Their performance has been fantastic.

You do though tend to find that the more speculative companies (pre-revenue, pre-profit) get all the discussion comment and investor attention on AIM. This is a real shame as on average these kinds of stocks are a losing proposition. I've often shown bubble chart analyses of the most discussed stocks on UK bulletin boards at investor shows and they are pretty jaw dropping - low quality, overpriced shares - exactly the opposite investment profile to those discussed above.

In my own investing I don't often consider whether a stock is fully listed or on AIM - the statistical profile is much more important. So for the New Year NAPS piece I wrote at New Year about half the stocks that qualified were on LSE and half on AIM (though I hadn't checked the breakdown before). From that perspective you could say that AIM is as good a hunting ground for these kinds of good, cheap, improving shares as the LSE.

We're not segmenting the StockRanks back-tester by LSE segment at the moment, so I can't give the stats on AIM vs non-AIM (great idea for a new post). But if you look at the hunting ground between £10m cap and £100m cap the 80+ ranked segment has blown the overall market away with 70% returns over about 28 months vs 8% for the All Share. (there's about 100 stocks in that bucket).

55d483d924058StockRanks_QVM_Performance_

Thanks for the reply Ed, your reply mentioned £10m to £100m Mcap but the attached chart had Mcap at >£350m was that intentional?

I have had a look at the stockrank backtester before, I can only see a way to enter a lower limit Mcap, it would probably be a useful feature to be able to set a upper limit Mcap as well.

Book Review - The Idle Investor

The Lessons

Unlock the rest of this article with a 14 day trial

About the Author

Edward Croft

9 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...