Are you being rewarded?
Proponents of the efficient markets hypothesis argue that the only way to achieve higher investment returns is to take more risk. Clearly, there’s some truth to this – very low risk asset classes (like cash) tend to deliver lower returns – on average – than higher risk asset classes (like shares). However, when you look within the shares asset class, the picture is rather more interesting.
Considerable academic evidence points to the conclusion that the highest risk shares – when measured by share price volatility – tend to deliver the worst long-run investment returns. It appears that when it comes to choosing individual shares to invest in, you may actually get punished for taking on higher risk.
Here at the Montgomery Labs, we have been crunching some numbers ourselves, and the results agree strongly with the academic studies: the best long-term equity returns tend to come from lower risk equities, and the performance differential is impressive.
In light of this it would seem to be a no-brainer that you should prefer stable, predictable businesses with low levels of gearing, over more exciting opportunities. Happily, The Montgomery Fund and The Montgomery [Private] Fund are both pointed squarely at this more boring part of the market.
As a result, our Funds might not deliver a lot of excitement, but we’re happy to forgo excitement if we can continue to report better returns at lower risk. Clearly, not everyone agrees.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Chris B
:
Some people try to buy penny mining stocks hoping they will double, so they double their money very quickly. But in the end, this is risky and this strategy doesn’t work. How many people do you know who have gotten rich from it? None.
Also, you wouldn’t put all your money in these stocks. So if you bought 10 of these penny stocks, 2 might double, 1 might triple, 2 might go bankrupt and the rest don’t go anywhere. Basically, it is a strategy where you won’t win. You might get lucky but you won’t win in the medium to long term.
With investment knowledge, you can change the high risk – high return tradeoff to low risk and high return. Buffett has proven this for 50 years.
All the great business people are very good at mitigating risk. Branson, Buffett, Gates, Jobs….
Roger Montgomery
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Good thoughts Chris.
LUCAS
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The modern portfolio – and modern finance itself, with asset allocations, historical returns being presented in ways that make it seem like it will go on forever. This stuff is relatively new. There’s so much that we don’t understand.
Like how can a government run consistent primary deficits, have a debt to GDP ratio above what the IMF says is sustainable in its Market Access Country specifications, borrow money to finance previous debt, and not be considered insolvent.
How can you have a book of 1.7 trillion dollars in mortgage securities in your books that you have bought off banks, and then hope and pray that these assets, which for profit commercial banks wanted off their balance sheet, are going to keep performing and eventually mature.
The number of clients that I see that make it big on penny shit is 0. Boring is the best way to make money in this instance.
People who think that buying speccy biotech companies is the way to have a rich future, probably think that 1 2 3 4 5 6 with Supps 7 and 8 in the lotto is less likely than 16 22 19 20 35 27 23 2…
Carolyn Martyn
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I have always admired your conservative, common sense approach to investing Roger. That is why I have followed you since you wrote for Eureka Report (for my own portfolio) and have also recently joined The Montgomery Fund.
Andrew Legget
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I always have told people that if you think sahre investing is exciting than you are probably doing it wrong.