There is more than one way to skin a cat, and there are multiple investment strategies you can apply to your savings. But how do you know which strategy can produce the best results for you?
Today’s guest, Yariv Haim, founder and CEO of Sparrows Capital, delves into two of his favorite investing strategies: evidence-based investing and contrarian investing. Yariv defines these strategies and explains why they are effective. Should you let the facts speak for themselves, or should you rely on your own intuition? How important is your mindset when looking for a good personal investment strategy?
Is it time to have a financial discussion with your parents?
One of the toughest financial issues people have is deciding when it’s time to relinquish their financial independence and ask for help with their finances. Download a seven-step checklist for adults who feel that their parents might need some help with managing their money. The list is called 7 Steps to Helping Your Parents Manage Their Money. If you need some guidance on having this important conversation, then Doug’s checklist should help.
Free Download: 7 Steps to Helping Your Parents Manage Their Money
If you’re not already receiving updates on new episodes, sign up now, and as a special bonus, receive Doug’s free ebook The Retirement Planning Book.
Watch Does Evidence-Based Investing Yield Positive Results? on YouTube.Read the Transcript
Interview with Yariv Haim
Yariv Haim, founder and CEO at Sparrows Capital, explains the difference between evidence-based investing and contrarian investing. He also gives his opinons about long-term investing.
Douglas Goldstein: I am very excited to have on The Goldstein on Gelt Show, Yariv Haim, who is the founder and CEO at Sparrows Capital. He’s originally from Israel, and now he’s based in London. He specializes in what’s called “evidence-based and contrarian investing.” Yariv, explain to us, what are these terms?
Defining Evidence-Based Investing
Yariv Haim: To keep it very simple, evidence-based investing is any type of strategy that is based upon empirical, robust evidence. This is somewhat new to the industry because normally, people would have been asked to simply trust their managers.
But today, there’s more and more evidence or emphasis, including academic evidence, suggesting that actually that’s not necessarily the only way to go forward with your investing.
Douglas Goldstein: Are you suggesting that clients should look for evidence outside of what their managers do? Or is this advice also for managers, that they should be investing based on some sort of empirical, robust evidence?
Yariv Haim: It’s both. Evidence-based investing can be implemented both on the investor’s side and the manager’s side. But the evidence for managers is not necessarily as supportive as many of us were led to believe.
Douglas Goldstein: What do you mean by that?
Yariv Haim: What I mean by that is, once you look at the evidence that the managers leave behind – their track-record – you find that many of them do not outperform market performance.
This has been identified not only by academia, but also by regulators now, in the UK, and by very prominent active managers, such as Warren Buffett, for example, who continuously argues that most investors should invest via index funds, rather than via actively managed funds.
Douglas Goldstein: Yariv, people talk about this a lot, and they often say that if you just invest in the S&P 500, your odds of doing better than the average manager are certainly in place, and you’ll likely do better.
One of the problems is that today, there are so many different indices that people can invest in, and the S&P 500 as a capitalization weighted index, which is a term we can touch on in a minute, certainly has its own risks.
How can someone decide which index to go into, or is that really not your suggestion? Are you leading somewhere else when you talk about evidence-based investing?
Yariv Haim: No, I think you’re absolutely right on both fronts. One, it is a matter of expertise, so I do not advocate that people should stop hiring managers or investment advisors.
What I simply suggest is that they don’t only trust their manager to deliver the illusive offer, but also focus on strategies that will be implemented by their advisors, to capture beta. This is exactly what we do at Sparrows Capital.
Defining “Alpha” and “Beta”
Douglas Goldstein: Let’s just define these terms for one second. You’ve said “alpha” and “beta”? Tell people what those are all about.
Yariv Haim: Beta is the performance of the market. If you buy the S&P 500, for example, as you’ve mentioned before, you will simply capture the U.S. total market return by holding to a simple index.
Alpha is basically the holy grail of investment management; alpha is the additional performance that cannot be explained by a systematic exposure to the market. So in other words, this is the skill that the manager adds to the performance of your portfolio.
What happens is that we were constantly told, for many, many years, that we need to find managers who deliver alpha.
The discussion has now moved on to where we recognize, because of the evidence, that alpha is very hard to extract.
Therefore, we put a portion of our portfolio, say, your core portfolio, into passive strategies, trying to capture beta market performance while bearing market risks.
You can accompany that with satellite strategies, which do still try to capture alpha in more exotic or niche markets.
Douglas Goldstein: Yariv, I introduced you before as someone who deals in both evidence-based investing, as well as contrarian investing. Tell me a little bit about contrarian investing.
Yariv Haim: Contrarian investing is – the name implies that – to go against the market; against the trend.
The reason why contrarian investing exists in the first place is because when you look at behavioral biases, when you look at mistakes that investors tend to do, you find out more often than not that our behavioral biases are causing us to underperform, rather than to outperform.
Being contrarian, going against your instincts, sometimes, is a way to protect our investment portfolio from our own behavioral biases.
Douglas Goldstein: Is it going against your own instincts or going against the market?
Yariv Haim: Sometimes it’s both. Let me give you an example. If we go back to the global financial crisis in 2008 and 2009, many of us saw how markets collapsed, specifically the equity market.
Now, when we see this happening, and when we wake up in the morning and we read the papers and they’re all about Armageddon Day and the end of the equity era, our instinct is to protect our investment portfolio. Our instinct is to sell out over falling markets.
Now, fast-forward 10 years, we know that many of the investors who did that basically did not enjoy the swift recovery of the market that happened later in 2009.
Douglas Goldstein: It didn’t have to happen though; let’s remember a little bit more in-depth. At that time, when things were looking so bad and people were losing their jobs and their houses, they’d lost half or more of their retirement plan.
The top was literally that banks that were holding peoples’ savings wouldn’t be able to give them back the money, and the FDIC – the Federal Depository Insurance Corporation, or basically the U.S. government - didn’t even have enough money to bail out those banks.
So it was very, very scary. It was a dark time, and there were certainly many pundits who would say, “Well actually it was awful, could even get worse.”
How can someone decide at what point it’s so bad that now you should become contrarian, and say, “Oh look, you know they said the world is about to explode, but now I am going to buy.”?
Yariv Haim: That’s a great question, and the answer is it’s not a matter of timing. It’s a matter of mind-set.
What we know is that fear and greed drive markets, and what you are describing is in essence, fear.
We see that banks potentially can collapse, we see our savings that are at risk, so fear creeps in, and it takes over our decision-making process.
Being contrarian is not about trying to time when we feel fearful, or when we become greedy.
It is about constantly keeping a disciplined approach that overcomes these emotional biases.
Long-term Investment Strategies
Douglas Goldstein: So you need to have a specific strategy for investing. Let’s talk about one of the most common strategies, which is, “I am a long-term investor, and I am just going to ride through the market,” meaning, “I am in my 30s or 40s, and I don’t expect to need this money for another 20, 30, 40 years. Let me just put it into the market and close my eyes and simply not worry about the day-to-day operations.” Is that a legitimate strategy?
Yariv Haim: That is an excellent strategy. That is a strategy that I would argue most people need to adopt at an early stage of their life.
Many of us save for our pensions, but we unfortunately do not adopt such a strategy, which is a very efficient strategy.
Now let me be clear; that strategy is not necessarily a buy and hold strategy. It does not necessarily mean you need to buy one index, one market, and hold it without doing anything else for 20 or 30 years.
But there are strategies that are multi-asset, that re-balance in a timely fashion, and they use other accompanying strategies to support that long-term view you have on the market.
Douglas Goldstein: Alright, that’s a great idea and it’s also a great place for us to end because we’re just about out of time. Yariv, in the last few seconds, tell me, how can people follow you and follow your work?
How to Follow Yariv Haim
Douglas Goldstein: Yariv Haim, thanks so much for taking the time.
Yariv Haim: It was a pleasure. Thank you, Doug.