Leseprobe Adriano Lucatelli: The Fine Art of Efficient Investing

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Bibliographic information published by the Deutsche Nationalbibliothek. The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available on the Internet at http://dnb.dnb.de. The work and all parts thereof are subject to copyright. All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without either the prior written permission of the publishers or a license permitting restricted copying. © 2015 Versus Verlag AG, Zurich, Switzerland More information on books published by Versus is at www.versus.ch. Cover and chapter illustrations: Thomas Woodtli · Witterswil, Switzerland Typesetting and production: Versus · Zurich, Switzerland Printing: Kösel · Krugzell, Germany Printed in Germany ISBN 978-3-03909-195-9


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To Christiane


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Table of Contents Preface

11

Foreword

13

1

Introduction

15

2

Economists Don’t Make Good Investors

19

3

Value the Key?

21

4

Is Stock Picking Monkey Business?

25

5

Is Indexing the Solution?

29

6

Smart Beta: A Smart Idea

33

7

Minimum Variance the Way Forward?

37

8

Good, But Still Not Good Enough

41

9

In a Nutshell

47

Bibliography

53

The Author

57

The Artist

59

Acknowledgments

61

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Preface Ultimately, the long-term success of any investment strategy hinges on smart governance that drives wealth. Chasing after returns and timing the market in an attempt to buy shares low and sell them high won’t earn you substantial returns, much less generate systematic outperformance. On closer examination, what looked to be attractive returns turn out to be optical illusions: they don’t adequately reflect the risks involved after all. In this manual, Adriano Lucatelli asks whether there are functioning investment strategies that enable investors to diversify their portfolios efficiently while keeping the risk low. He comes to the conclusion that the minimum variance approach, which involves focusing on low-risk equities, is the ideal solution. And he gives a convincing account of how a minimum variance strategy forces investors to be disciplined, which is precisely what makes it a robust foundation when the weather gets stormy. He also gives a short but pithy summary of the history of modern investing, plausibly describing its various phases of development.

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After reading this manual, you’ll be looking at the financial markets and stock exchange developments with fresh eyes, and thanks to the minimum variance strategy, you’ll also be sleeping better at night. —Pius Zgraggen, Founding Partner and CEO OLZ & Partners Asset and Liability Management AG Bern, Switzerland, and Vaduz, Liechtenstein

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Foreword For many years, I’ve been on the lookout for investment strategies that not only work when it’s plain sailing on the markets but also perform when things get stormy. The absolute-return strategy is a good example of a much-vaunted approach that has fallen short. Despite claims that it would yield positive returns in inclement conditions, that approach has singularly failed to deliver when the going gets tough. Even traditional index strategies that track indexes such as the S&P 500 or STOXX Europe 600 have repeatedly disappointed investors. It’s become clear that passive index strategies are inefficient and entail major cluster risks—and they run contrary to the notion of diversification associated with a broad portfolio. The only approach that has really convinced me is the minimum variance strategy, which has been more recently in use since the 2008 financial crisis. Both empirical studies and the performance of real-life minimum variance strategies have shown it’s possible to invest efficiently and risk-appropriately without sacrificing returns. The performances of portfolios based on minimum variance strategies have matched or even bettered returns on traditional

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equity portfolios over the business cycle—despite the lower risk. That anomaly has prompted me to look into the matter in more detail. You have my findings before you. —Adriano B. Lucatelli Kilchberg, Switzerland January 2015

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