Portfolios for long-term investors is an essay that extends a keynote talk I will give Thursday Jan 21 at the NBER "New Developments in Long-Term Asset Management" zoom conference. The link takes you to my webpage with pdf of the essay and the slides for the talk. I'll blog the next draft of the essay, as I want to do it once and I'm sure I'll get lots of comments.
The conference program is here. You can listen to the conference on YouTube here. I'm on Thursday 12:30 ET, but many of the other papers look a lot more interesting than mine!
Abstract:
How should long-term investors form portfolios in our time-varying, multifactor and friction-filled world? Two conceptual frameworks may help: looking directly at the stream of payments that a portfolio and payout policy can produce, and including a general equilibrium view of the markets’ economic purpose, and the nature of investors’ differences. These perspectives can rationalize some of investors’ behaviors, suggest substantial revisions to standard portfolio theory, and help us to apply portfolio theory in a way that is practically useful for investors.
"How should long-term investors form portfolios in our time-varying, multifactor and friction-filled world?"
ReplyDeleteHas it occurred to you that long term investors when purchasing equity shares should insist on buying voting shares instead of being passive investors?
You mention dividends vs. capital gains in your paper. Gosh, if the long term investors you are talking about really wanted dividends they should take a voting majority stake in the company and demand dividends.
It seems that what your "long term investors" are looking for doesn't exist - long term success with no input or culpability regarding the fortunes of the company itself (aka a free lunch).
In what world is supplying capital a free lunch? What do you think you're doing when you purchase stocks? They didn't give up equity for free when they issued public shares.
DeleteStephane,
Delete"In what world is supplying capital a free lunch?"
In a world of near zero interest rates and government bailouts. Any monkey can "supply" capital when there are no consequences for bad investment decisions.
That's the point. If "long term" investors want dividends, they should be either deploying their "precious" capital towards companies that pay dividends or they should be buying voting shares in companies and demanding dividend payments.
There is more to investing that just "supplying capital".
I presume that the "long term investors" that John is referring to are also "passive investors" - they purchase non-voting shares.
Null interest rates do not magically make capital grow on trees. Last time I checked, the money you spend on stocks cannot be spent on anything else. Crazy, right? That would be true even with negative rates.
Delete"Null interest rates do not magically make capital grow on trees. Last time I checked, the money you spend on stocks cannot be spent on anything else."
DeleteYou are presuming that capital is some precious good either because it is fixed in supply or has some cost associated with it (interest).
To answer your question, borrow money at 0% to buy stocks without regard to the returns on investment that company might generate and then borrow an additional amount of money at 0% to spend on something else - both borrowing with no intention of ever paying the money back and without regard to returns on investment that the underlying company might generate.
Again, see government bailouts and 0% interest rates.
Borrowing without intention of repaying is called theft and that isn't a free lunch either: the guy whose money you stole paid the price for what you get.
DeleteHow many times have Donald Trump's companies borrowed and never paid the money back - is he a thief or is he a "smart" businessman?
DeleteHow much federal debt is there? Do you see any plan (by either political party) to reduce that amount?
"...the guy whose money you stole paid the price for what you get..."
If I am the federal government and I "stole" the money from the Federal Reserve what price does either of us pay?
AGAIN, see government bailouts and 0% interest rates.
The admin on the youtube channel made the video private for some reason FYI.
ReplyDeleteI found this paper very useful even though my econ background is over 50 years old and I haven't followed the professional literature in this field much at all. I suppose other outfits do a similar thing, but Schwab now features current dividend projections on its sign-in page.
ReplyDeleteAny suggestions for how to find a "market" portfolio? That is what I want, but it's hard to find.
Thanks for another great paper and the thought-provoking NBER presentation!
ReplyDeleteI love the idea of the average investor theorem (since you wrote about it in 1999). I should compare myself to the average investor to determine how my portfolio should differ from the market portfolio.
Yet when I’ve tried to apply it in practice, I get stuck in many places:
1. Average investor: should be a wealth-weighted average, reflect A-L, etc. I really don't know how she/he looks like. Do you?
2. Market portfolio: Ditto. Easyish enough to say that global equities amount to $100trn, give or take, merely debating what to do with non-investable Chinese shares, Facebook shares, etc. Yet so much harder beyond listed equities. Is global FI in the same ballpark (ca. $100trn), twice that, or zero net wealth? Is real estate ca. $300trn, i.e. the largest asset class, or do we only count the "investable" real estate market, i.e. ten or hundred times smaller? Same for private equity, though sizes are smaller. Natural resources? And maybe the biggest of all, human capital?
3. Which differences between me and that elusive average investor matter? I might compare overall risk tolerance but I give up on our intertemporal hedging needs or our value tilts.
Again, I love the concept and hate the practical limitations above... Well, gotta keep trying.
Antti Ilmanen
From the Abstract: "How should long-term investors form portfolios in our time-varying, multifactor and friction-filled world? Two conceptual frameworks may help: looking directly at the stream of payments that a portfolio and payout policy can produce, and including a general equilibrium view of the markets’ economic purpose, and the nature of investors’ differences."
ReplyDelete"[L]ooking directly at the stream of payments that a portfolio and payout policy can produce,..." suggests that Richard Bellman's 'dynamic programming' approach would likely be appropriate for determining the investor's portfolio selections.
Your draft version dated February 2007 of the paper "Portfolio Theory" is a useful starting point [https://static1.squarespace.com/static/5e6033a4ea02d801f37e15bb/t/5eea90f450fe2217c06c7733/1592430837752/portfolio_text.pdf].
Great article! I have yet to digest a lot of thing but the big picture I think I got. The "normative lessons" is aligned with Merton's view of asset management - first state clearly what is the goal.
ReplyDeleteBut unfourtunately the link to the video of the presentation is not working...