Sunday, January 11, 2015

The Investment Objective

At first glance, it might seem obvious one's portfolio goal is to maximize returns. In reality, the goal should be to maximize realized returns over the long-term. Realized returns are maximized by avoiding (or minimizing) taxes and fees. For this reason, most investors should favor index funds and trade infrequently. The long-term is defined as multiple market cycles (up and down markets). When it comes to maximizing long-term compounded growth, the key concept boils down to how one's portfolio manages bouts of volatility. This post will focus on the importance of minimizing volatility. Instead of discussing the academic versions of these ideas, let’s review a few hypothetical scenarios.

First, consider three portfolios A, B, and C from the above table. Each one alternates between a positive year and a negative year. In all three cases, the average return is a positive 2.5%, as the magnitude of the positive years is greater than the magnitude of the negative years. As an investor, which portfolio would you prefer? The average annual returns are the same, but the long-term realized returns are very different. As the nearby chart shows, the higher volatility of Portfolio C actually produces negative long-term results, because it takes more than a 35% gain to recover from a 30% loss. The moderate Portfolio B produces no gains for the same reason. The superiority of Portfolio A is not obvious in the annual data.  It only becomes obvious after several market cycles. Portfolio A does a much better job limiting downside volatility, which serves the long-term investor well.

Next, consider these two portfolios. Portfolio A alternates between rising 100% and earning 0% return. Portfolio B earns 50% consistently. Again, both have the same average annual return. Which would you prefer?

Here again, the correct answer is to pick the portfolio with the lower volatility. Portfolio B actually has (an unrealistic) zero volatility and is thus superior, as shown by the Growth of $1 chart.

Lastly, just to use a more realistic return stream, consider these two portfolios.

In this case, there is a difference in the average annual returns. Portfolio A has higher average returns. Portfolio B has similar returns but lower volatility, and that is key.

The point for investors is to focus on volatility, especially downside volatility of their portfolios, not annual returns. That can be more difficult than it sounds, and a topic for another day.

Sunday, December 21, 2014

Bang Your Drum

I've been thinking about the things that
Are stuck inside my head and I can't get them out
And I been waking at four in the morning
I don't why I can't get back to sleep again tonight

Keep banging on, banging on your drum
Keep banging on, and your day will come
Keep banging on, banging on your drum
And they will hear you

I am wishing that I was making
A list of all the good things I've ever done with my life
And everybody thinks I have wasted
Wasted every chance I ever had to be somebody

Keep banging on, banging on your drum
Keep banging on, and your day will come
Keep banging on, banging on your drum
And they will hear you

No one lives forever
Business here I've got to finish
You won't make your mind up
You won't make your mind up for me

No one lives forever
There's business here you've got to finish
You won't make your mind up
You won't make your mind up for me

Hang out off your window
Shout it down to the people below
Everyone will hear you
They are going to hear you

Keep banging on, banging on your drum
Keep banging on, and your day will come
Keep banging on, banging on your drum
And they will hear you

Keep banging on, banging on your drum
Keep banging on, and your day will come
Keep banging on, banging on your drum
And they will hear you

Keep banging on, banging on your drum
Keep banging on, and your day will come
Keep banging on, banging on your drum
And they will hear you

Wednesday, November 26, 2014

Review: The Thinking Poker Diaries, Volume 1

Many people learn to play poker around the kitchen table. They observe someone they know and trust, such as a family member or friend, playing the game and their interest is piqued. Around a friendly game or a casual conversation, new players learn the basic structure and infer key concepts. In order to improve, players often turn to books, training videos, discussions with other players, and coaching from advanced players or professionals. These various resources require significant money, time, and effort, and they are rarely entertaining. There is a better way.

Now, you can say you have a friend who is a professional. Andrew Brokos is a professional poker player, author, coach, and video instructor. He publishes the popular blog and he is co-host with Nate Meyvis on the Thinking Poker Podcast. His new e-book, is an enjoyable poker resource for novices and experienced players alike.

In The Thinking PokerDiaries, Vol. 1, Brokos shares an entertaining tale of how he went from financially insecure novice to independent professional poker player.  From college games to online tournaments, and ultimately to the main event of the World Series of Poker (WSOP), Brokos has played at every level. Here he shares the background sought by novices and casual fans, along with the complex strategies he employed to expand his game and become successful. Along the way, we sit at his side as he plays against some of the top professionals in the game.

This is a very good effort. Brokos writes as if the reader is a family member or high school friend. The book draws heavily from personal communications Brokos sent to friends and family explaining what the WSOP is and how he was performing in 2006. This makes for an enjoyably casual, yet technically sound depiction of dramatic, high level poker games. To keep the book relevant and current, he’s back-filled the story with plenty of hands he played in the actual event and the strategy involved at various stages in the tournament.  Even readers who have followed Brokos for years will learn something new, either about poker strategy or about his life, by reading this e-book.

I have no major gripes with the book. There are a very few errors, but they don’t impact the story. At times I thought the flow of the book was a bit jumpy, as Brokos takes us from a particular moment in the tournament to a strategy or background segment and then back to the action. However, the story line was not really impacted, it was really that I preferred to keep reading the action to see how far he would advance. The narrative is such that one almost wants to skip some of the strategy to see how things turn out. Considering the price level (and watch for a sale), this is easily one of the best values in the poker literature.

I won’t spoil the ending, but many already know Brokos has a very impressive record at multiple WSOP main events since 2006. That should provide ample material for subsequent volumes of the Thinking Poker Diaries.

Wednesday, November 12, 2014

We Had a Birthday

Rotary as a whole is almost 110 years old.

My little club is a mere 95. 

We've come a long way, despite having an idiot for a Club President last year.

As the video shows, we changed a lot.

Marietta Rotary's 95th Anniversary from Holly Enterprises on Vimeo.

Monday, November 10, 2014

The Hangover and the WSOP

The Main Event of the 2014 World Series of Poker wraps up this week. It is the biggest poker event of the year. Poker, probably like most endeavors, gets warped by television. Regardless of what you see if you watch the final table tonight and tomorrow, there are good things surrounding the game even when you aren't the lottery winner holding up the $10 million prize.

One such adventure, written by one of my friends, can be found here: The Hangover

It was one of the best nights I've ever had and I could not imagine a better group of guys with whom to share it. A black guy, two white guys, and an Asian guy, all ranging in age from early thirties to mid-sixties, is not exactly your stereotypical poker crew.
I am thankful for this poker game because it has allowed me to meet people whom I never would have met otherwise. I chuckle when I hear certain people talk about how poker ruins lives and hurts families. In fact, these guys have become my family and every interaction I have with them makes me a better person.

I won't spoil it, but I am one of the white guys.

Here's to real poker, not just what you see on TV.

Friday, November 7, 2014

Country Music

For a lifelong country music fan, these are sad times. There is nothing on country radio today worth my 3 minutes, or even my $3.  Every now and then I get nostalgic and I allow myself (usually at the request of my wife) to watch a country music awards show, as I did this week. It never fails to put me in a sour mood and lament for the loss of America's once great music genre. I won't belabor the point, but if you disagree just know that I can win any debate with the following phrase "Florida Georgia Line".

Then today, I found Sturgill Simpson. It was like a bucket of water was tossed on Tim McGraw and Kenny Chesney and all the rest, causing them to melt like the wicked witch of the west. Ding dong, the witch is dead and you can go home again.

Friday, September 5, 2014



Telling Blacks How to Think

I live in a Republican stronghold. Most of the elected officials are Republican and the local paper offers "Metro Atlanta's Only Conservative Voice". The local attempt at balance, is a weekly column by a liberal transplant who now lives in the area. (There's not really an independent, or libertarian columnist). The need for a Republican counter is real, but our columnist, Kevin Foley, is mostly just mean. His columns are often full name calling and insults of Republicans, with little policy or philosophy.

Last week, Foley chastised blacks in Ferguson for low voter turnout and suggested they were to blame for Michael Brown's death. 

I find it disgusting that Foley does not respect the choice of blacks not to vote. (Why do liberals shout for choice in health issues but not on other issues?) More sickening is that he tries to alter their choice by laying blame for the death of Michael Brown on those who did not vote. Foley can logically construct a counter-factual where blacks voted, and different leaders were elected, but it does not follow that there would have been a different outcome for Michael Brown. Are cities controlled by blacks, and Democrats, immune to police involved shootings of young blacks? (Of course not).

I know I risk being seen as defending the status quo in Ferguson or supporting Republicans. Neither is true, but it is worth the risk to address Foley's racism.

Dear Editor,
Friday's MDJ included a column by Kevin Foley in which he tells black people what is best for them and criticizes those who have chosen not to vote in the past. Why does Foley hate democracy? Or does he just hate black people?  The beauty of democracy is that it places the power of choice in the hands of each citizen. Those who support democracy by definition support the rights of citizens to make their own choices, including the right to chose not to vote. For Foley to criticize the blacks of Ferguson for low voter turnout is to show disrespect for democracy and for the capacity of black people to decide for themselves what actions (and votes) are appropriate. This is a prime example of what George Bush called "the soft bigotry of low expectations". For Foley to suggest that non-voting blacks are responsible for the death of Michael Brown is disgusting. Were that suggestion made by a Republican, that person would be labeled a racist. We should not let Foley get away with his assault on the authority of black people just because he is a white, male, liberal.
Russ Wood