Q&A With Charles Kirk, Part II

If you missed part I in my Q&A with Charles Kirk, from The Kirk Report, see here. Here’s part II:

CK:  What is your personal investment philosophy? 

BC: I wrote about this in a post recently. It was a longer form post but here are some highlights:

  • I believe an understanding of human psychology and the behavior of both myself and the actions of others is one of the most important aspects of a good investment process.
  • I believe an understanding of my personal time horizon and risk profile is necessary before making any investment decision.
  • I believe portfolio construction and risk management are far more important than trying to consistently identify profitable investment ideas.
  • I believe diversification by asset class, geography and strategy is a one of the best forms of risk management.
  • I believe that knowing what you’re doing also helps reduce risk.
  • I believe in creating a repeatable process that takes into account my lesser self to remove emotions from my decisions.
  • I believe in using empirical evidence when creating an investment strategy with the understanding that historical results give you a better sense of risk than future returns.
  • I believe the process of making good decisions is more important than the short-term outcomes they produce.
  • I believe in avoiding unnecessary complexity in my portfolio and process.
  • I believe less is more.
  • I believe in planning for a wide range of potential market outcomes.
  • I believe in doing nothing the majority of the time if that’s what my investment plan calls for.

CK:  How has your philosophy evolved and improved over the years?

BC: When I was an upstart investor I thought I had it all figured out. The 2007-09 crash was a great learning experience for me. It taught me the importance of intellectual honesty. I’ve definitely become more open over time to different approaches to portfolio and risk management. When I first started out I was sure I was going to be a stock-picker in the mold of Warren Buffett (me and everyone else with a brokerage account). I quickly learned that route wasn’t for me. I’ve become less interested in picking home run stocks over the years and most interested in the dynamics at play between different asset classes, strategies and portfolio combinations.

For me, portfolio construction and risk management are much more important than picking individual securities.

CK:  You’ve said that “less is more” is one of your guiding principles. In your opinion, what things must investors who desire to succeed stop doing right now and eliminate from their process?  

BC: I’ve found that making fewer decisions is one of the most important things you can do as an investor because the brain can get tired and overworked just like any other muscle in the body. Decision fatigue is a huge cause of unnecessary risk and avoidable mistakes in the market.

The first step, which many people skip altogether, is simply have a plan in place. I love this quote by former Alabama football coach Bear Bryant:

“Have a plan. Follow the plan, and you’ll be surprised how successful you can be. Most people don’t have a plan. That’s why it’s easy to beat most folks.”

It’s also important to understand what you own and why you own it at all times. Most of the time you should be looking for reasons not to invest in a new product, fund or security. I’m not saying people should never make changes to their portfolios, but there always has to be a good reason for it. And “because I’m scared or nervous” usually isn’t a good reason.

CK:  If we had an opportunity to look at your personal investment portfolio, what would likely surprise or shock us the most?  

BC: Probably the fact that I follow some momentum and trend-following rules with a portion of my portfolio for risk management purposes. Some investors can’t wrap their head around things like this, but I find they can be helpful if you understand how/why they work and implement them using a disciplined process. I like the idea of utilizing a diversified approach with different types of investment strategies because nothing works all the time.

CK:  Where do you see significant areas of increased risk?

BC: I actually think bonds are going to be one of the most interesting asset classes in the coming years because of today’s interest rate levels. Some people assume we’re in a bubble in bonds because rates are so low right now, but because of the way they’re structured (most with a set yield at a set maturity date), bonds don’t act like stocks in this sense. The biggest risk for bonds is really an uptick in inflation, so they don’t crash like stocks do in the traditional sense.

But we do know that bonds generally track their starting yields for long-term future returns. And we know that lower interest rates lead to higher volatility in bonds, so prices will fluctuate much more than they have in the past because there isn’t as big of a cushion from yield payments. These factors could all lead to more over-trading, guessing and risk in bonds from investors who don’t understand why they own bonds in the first place.

And in some respects, long-maturity bonds (such at TLT) have become something of a momentum trading vehicle. That can be a dangerous game with a 20-30 year security.

Bonds might not be as risky as stocks, but they’re going to test an investor’s patience in the coming years, which could lead to more mistakes in this once boring area of the markets.

CK:  Why do you think so many under perform the markets consistently?  

BC: Markets are hard. And we’re often our own worst enemies. Good investing is counterintuitive. Plus, most people are overconfident in their abilities. No one wants to admit that they’re not one of the best investors out there. The Dunning-Kruger Effect has shown that people generally have a difficult time recognizing areas of their life where they are incompetent or overconfident.

Plus, costs and taxes can be a huge hurdle for most investors to overcome. As I said in a recent post, index funds are nothing special. They’re low cost, disciplined, low turnover, systematic, transparent, occasionally rebalanced and low maintenance. Most investors can’t say the same thing about their own investment strategy, especially the disciplined part of the equation. I like to say one of the first questions every investor needs to ask themselves is not, “Can I beat the market?”, it’s “Do I need to beat the market?”

Creating a personal benchmark to evaluate your own portfolio isn’t easy, but investors have to measure their progress and performance. Progress towards your goals is the first one that comes to mind, but you have to understand that they will probably change over time. Some milestones, such as market value or actual vs. expected returns can help when it comes to judging the success of your portfolio. And it’s not only the actual goals that matter, but also how much stress is involved in achieving them. If you can’t sleep at night because you’re constantly worried about your investments, I don’t consider that a successful investment plan.

CK: What would you say to those who are just starting to learn about the markets and investing their own money?  What advice would you give to others who are just starting to learn about the markets?

BC: The first step involved in becoming a good investor is to become a good saver. It doesn’t matter if you can pick stocks like Warren Buffett if you’re not able to consistently save money over time to build up your nest egg. This is especially true when you’re young and time is your biggest asset.

Beyond reading more books, I would say refrain from trying to listen to everyone with an opinion on the markets. There’s a constant bull market in opinions these days and it can be hard to ignore the noise when we have mini-computers glued to our hands all day long with all the information we will ever need at our disposal. Confusing your risk profile and time horizon with someone else’s is an easy mistake to make early on.

I’m also a big fan of slowly increasing your level of risk as a newbie in the markets. It’s very easy to overestimate your appetite for risk when you’re just starting out. Fred Schwed, author of the classic book Where Are the Customers’ Yachts, once said, “Like all of life’s rich emotional experiences, the full flavor of losing important money cannot be conveyed by literature. There are certain things that cannot be adequately explained to a virgin by words or pictures.“

CK:  What is your opinion about the robo-advisor movement?  

BC: The robos are a hotly debated issue in the advisory business right now. Some want it to be an all or nothing proposition, but I think there’s plenty of market share available for everyone, assuming they’re creating value for their clients.

I think it’s a great service to an untapped segment of the market, namely those who are young or don’t have a big enough nest egg to meet the minimum assets under management levels for a traditional financial advisor. I don’t think that robo-advisors will un-seat traditional advisors, but hopefully they’ll continue to open things up to a group of people who have been overlooked by the industry for far too long. Automating good decisions is a very wise move with your finances, so if people are able to utilize these services the right way, I think they can offer a lot of value to those who need a simple, low cost solution to their portfolio needs.

CK:  At this point of your career who do you look up to for inspiration and guidance? Who are the people in this business that you admire the most? 

BC: I’ve looked up to Josh Brown and Barry Ritholtz for a number of years now, so getting the chance to work with them firsthand is going to be great for me in a number of different ways.

Jason Zweig of the Wall Street Journal is someone I’ve always admired in this business because he is constantly putting out work that makes me think and challenges conventional wisdom in a way that’s easy to understand.

I love what Carl Richards of Behavior Gap is doing to try to improve financial education for both advisors and individual investors. The simplicity and depth of the drawings he creates to explain complex topics has always impressed me.

Yale’s David Swensen is also someone I’ve looked up to since starting in the institutional business. Most people point to his unbelievable performance numbers over the years, but what I love is the fact that he’s done it the right way. He never compromised his principles and always put the client (Yale) first.

CK:  What are you learning about now to further improve?

BC: Many enter the investment industry assuming all they need to do is become the best investor they can and that’s all they need to focus on. The longer you’re in this business, the more you realize that there are far more variables that go into your success or failure than simply picking the right investment. It’s not something most want to hear but it’s true.

CK:  Your book continues to receive rave reviews and for good reason – it is of similar high quality as your blog. Who was the book written for and what do you wish for those who read it specifically learn?

BC: It’s funny; when I first set out a draft for the book they asked me the same question. Initially I told my publisher I wanted to write a book that was useful to a wide range of people — from individual investors to institutional investors to financial advisors to those who don’t know much about the markets. I was told it would be difficult to write a book that would be accessible to such a wide range of people, especially those who didn’t have much market knowledge, but that was my goal.

The whole point of the book is about finding ways to make better decisions through a combination of understanding market history, how markets generally work and how human nature works against us. I’ve never been a huge fan of talking people into investing a specific way, but my hope is investors of all shapes and sizes can use the book to help improve their decision-making process or at the very least reduce unforced errors.

CK:  What do you see yourself doing 10, 20, 30 years from now?

BC: I’ve gotten the writing bug ever since I started my blog, so I don’t see myself ever giving up on writing in some form or another. I really enjoy the process of learning and sharing my thoughts to hopefully help others better develop their own thought process. I also love the markets, so I would like to think I’ll still be helping others create investment plans and making better financial decisions.

CK:  Finally, as a final word of advice, what is one specific thing each of us can do to improve our returns for the rest of this year?

BC: Create checklists that you go through before making a big investment decision so you can make good decisions ahead of time instead of relying on your instincts and emotions to guide your actions.

I also think it can be helpful to write down the reasons for each investment you make (or decide against). It can be helpful to have a written record of your unbiased thoughts before you make a purchase, because once you own something it becomes much easier to have a biased opinion about that particular holding.

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  1. Grant commented on Nov 29

    Very interesting interview, Ben. I have one question about diversifying strategies. I understand the logic of doing this, especially potentially complementary strategies like passive indexing and momentum. But don’t you think that most investors are better off just picking one strategy that they are most comfortable with and sticking with it? In other words, keeping it simple.

    • Ben commented on Nov 29

      It all depends on the investor and what they’re comfortable with. As I’ve stated in the past, I think regret minimization is a huge part of investing and investors have to known themselves above all else.

  2. Minh Tu commented on Nov 29

    I agree with everything you said. When I first started I did learn about the
    various principles you talked about but it all went above my head.
    The hardest part is to control your own emotions. Everybody can learn
    to analyze fundamentals for a stock, it is the emotional part of us when
    dealing with money that results in bad decisions, which I have made
    plenty. I invest better now that I am somehow detached from the process
    of investing and can get rid of losing positions in a much more rational way.