The Compound and Friends - Aiming For A Benchmark (Tadas with Robert Seawright)

Episode Date: June 27, 2019

“The moral of this story is obvious. We all do better when we have something to aim at. That’s why proper benchmarking is so important. In the investment world, it means a standard or measure that can be used to analyze the allocation, risk, and return of a given portfolio.” Robert Seawright (@rpseawright) who blogs at Above the Market is a long-established figure in the investment blogosphere. Tadas got Bob on the phone to talk about a recent post of his entitled “How’s Your Aim?” where he writes about the importance of having well-structured benchmarks against which we can measure our investment performance. You can read more at Bob’s blog Above the Market: https://rpseawright.wordpress.com/2019/06/18/hows-your-aim/ 1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify   Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here: https://ritholtzwealth.com/   Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, Bob, how are you? I'm great, Tadis. Hey, I'm on the line with Robert Seawright, who is the Chief Investment Officer for Madison Avenue Securities, which is a boutique broker-dealer and investment advisory firm in San Diego, California. Bob also blogs at Above the Market, and I asked him on today to talk about a recent post of his entitled, How's Your Aim? So for Bob, this is a relatively lighthearted post, but gets to a very important issue, namely the significance of having well-established

benchmarks in place against which we can measure our investment performance. So that's a good place to start, Bob. Was there a specific incident that inspired you to write this post? Yeah, actually, it was a particularly disgusting incident in it at an in an airport bathroom that was uh so vile that that uh it made a an impression on me that i won't soon forget and then shortly thereafter uh i was i was in a really upscale winery restaurant and I saw a fly decal in the urinal to aim at and that that reminded me that I've I've been meaning to write this post for at least a couple of years and so I between those two things I decided to do it well it's funny because you know anybody who's blogged for any any amount of time knows that sometimes you just have ideas and they sort of sit sort of in your subconscious for a while and eventually they come out.

And so it was interesting to see this post in that regard. Well, I was initially going to write a longer one. Of course, it was me and I write longer stuff mostly. And of course, it was me and I write longer stuff mostly. And in fact, when your colleague Josh Brown retweeted it earlier today, he made a comment about how to choose your benchmark rather than the importance of having one. And the initial post I had ruminating was going to go in that direction and talk about, you know, having the right benchmark and arguments about which benchmark to use. But I decided to leave it short and direct rather than my usual circuitous and extensive. Well, you know, it's interesting because I think, you know,

when it comes to benchmarks, you know, there are as many benchmarks as there are, you know, it's interesting because I think, you know, when it comes to benchmarks, what's the best way to think about putting a benchmark that is, A, relevant, and B, not overly complicated? I tend to prefer multiple benchmarks for different purposes and not to get too wrapped up in how you're doing relative to the benchmark. up in how you're doing relative to the benchmark. When I first thought of this post, it related to a longer one I had done several years ago about whether the endowment investing phase was past it, whether the trade was crowded and we'd be best to look in other directions. And I looked at the data, which is still pretty accurate, showing that the world of college endowments

underperformed a standard 60-40 portfolio over pretty much every time span you want to look at, at least over the last 10 years or more. And when I had written that post, I had talked about that and I got criticized in the comments. Someone saying, yeah, but that's not the right benchmark. You should benchmark against what they actually own. And so if it was 20% American equities, you ought to set a benchmark that's 20% the S&P instead of a standard 60-40 benchmark. And strictly speaking, that's true if you're trying to measure how your investment choices have done relative to other investment choices in that category. But endowments and pensions used a standard 60-40 portfolio for decades. And it's also an appropriate benchmark to see, well, you've switched your investment style to go in all these private equity hedge fund directions, you ought to know if you'd kept it simple and straightforward the way you used to do

it, how you had done in comparison. And so that's two different ways to benchmark it. benchmark it. I'm old enough to remember when benchmarking was a pretty new thing. And mostly, it was a way to say, gee, this investment opportunity or history or whatever it is uh had performed x and you might want to know that you know standard equities or standard bonds had done y uh just as a rough comparison because of course uh every every strategy and approach uh underperforms sometimes And it's not necessarily a negative that your favored strategy is behind some benchmark at any given time. And I think in our current culture, we have raised the benchmarking standard a little too high so that now we're worried if we're behind it at any point in the market cycle. And I think that's too precise. Well, the other challenge that I see today, and which is kind of a pet peeve of mine, is that oftentimes in the media, everything is compared to the S&P 500, whether it be bonds, hedge funds,

equities, and art for everything in between. And the S&P 500 is kind of a very specific sort of benchmark. And it just happens to be the case that the S&P 500 or large cap equities has essentially outperformed every other asset class, essentially for the past decade. So comparing anything to the S&P 500 of late was going to show a detriment. You weren't going to be happy. Yeah, exactly. Exactly. So one of the things on your blog that you do a lot is you write a lot about behavioral finance. And I think issues of benchmarking aside, one of the things on your blog that you do a lot is you write a lot about behavioral finance. And I think, you know, issues of benchmarking aside, one of the things in your post that you talked about is this idea of nudges.

And so maybe can you, you know, maybe talk about how nudges come into play and, you know, especially when it comes to the issues that you raised in the post. especially when it comes to the issues that you raised in the post. Sure. The decal in the urinal is the Nobel laureate Richard Thaler's favorite nudge. that a choice that alters people's behavior in a predictive way, but it doesn't foreclose other options or really change their incentives. So the idea is, well, any guy knows and any parent of boys knows that they're always going to aim. And whether it's crossed swords in the snow or whatever it is that is just a fact of life and um a a dutch airport experimented with with in their case it wasn't decals they actually etched flies in the urinals and they found that that the cleanliness of the airport men's room was

dramatically better and so that was a really good straightforward nudge to help people do better because guys are going to see it and they're going to aim and there are they now you know have them with golf flags and my my personal favorite is the University of Louisville, in some of their locker rooms, have a decal of the University of Kentucky, their arch rival, so that the Louisville folks can aim at UK, which I think is pretty great. Well, let's hope we can find more sort of benign nudges out there that do as much as a simple etching in a urinal can do.

So, well, Bob, we're out of time, but I appreciate you coming on, and we'll talk to you again soon. I'm glad to. Thank you, Thomas. I appreciate being here. Thanks.