Shelby Davis, the visionary investor and creator of Davis Funds, has gained legendary status for his adherence to a value-driven investment strategy and commitment to a long-term investment philosophy. Noteworthy similarities exist between Shelby Davis’ investment strategy and the present market conditions.
At the age of 38, Shelby Davis initiated his investment journey with $50,000. Over time, he accumulated a wealth of $900 million, securing a position among the Forbes 400 wealthiest individuals before his passing at the age of 85 in 1994. Here are a few valuable investment insights that we can glean from his experience:
Emphasize value-based investing: Davis advocated for acquiring stocks priced below their intrinsic value. This involved a thorough examination of companies, seeking those with robust fundamentals like consistent earnings growth, a formidable competitive edge, and a stable balance sheet.
Exercise patience: Davis, as a proponent of long-term investing, upheld the practice of retaining stocks for extended periods, even if their values experienced short-term declines. Recognizing the cyclical nature of the stock market, he acknowledged that, over time, sound companies would ultimately witness their stock prices align with their genuine worth.
Manage your emotions: Recognizing the susceptibility to market emotions like fear and greed, Davis emphasized the importance of maintaining discipline. He counselled investors to adhere to their investment plans, especially during periods of market volatility.
Don’t fall for high-flying stocks: The strategy of “buying stocks at any price” is flawed and, in the long run, unsustainable. It is imperative to engage in investing with a more nuanced and disciplined approach. Paying above a company’s intrinsic value exposes you to potential losses if the price adjusts to align with actual worth. Concentrating solely on hype or short-term trends disregards essential factors such as the company’s financials, business model, and competitive landscape.
Make debt work for you: Leveraging debt has the potential to enhance returns. When employed judiciously, borrowing funds for investments can amplify gains, potentially expediting the accumulation of wealth. Davis achieved success by adeptly identifying undervalued stocks and generating returns that surpassed the interest on his borrowed capital.
Write regularly to think better: Contemplating thoughts in our minds can be nebulous and disorganized. Transcribing them onto paper compels us to express ideas, recognize connections, and arrange them coherently. This method fosters a more profound comprehension and unveils any potential gaps or inconsistencies in our thought process.
Invest in three steps: Getting entangled in the pursuit of quick “Earn” or “Return” is tempting, yet overlooking the foundational elements can result in challenges and overlooked opportunities in the future.
The importance of the learning phase is frequently underestimated, as individuals often hurry into the “Earn” stage without establishing a robust knowledge foundation. This hasty approach can result in suboptimal decisions, time squandering, and frustration. Achieving proficiency in intricate skills is a gradual process that demands time and unwavering dedication. It’s not a sprint; rather, it’s a marathon that necessitates persistent effort and patience.
Start investing early in life: Although initiating investments early is commonly perceived as beneficial, the case of George Davis investing later in life illustrates that substantial wealth can still be built, even with a delayed start. Despite commencing later, persistent and intelligent investing can leverage the power of compounding over time. If Davis managed to attain a notable average annual return, initiating investments at the age of 38 could have led to a substantial nest egg by the time of his demise.
Broaden your portfolio: Despite being a proponent of value investing, Davis underscored the significance of diversifying your portfolio across various asset classes and sectors. This strategy serves to mitigate risk and enhances the likelihood of realizing your long-term investment objectives.
Davis achieved success with his investment strategy, delivering substantial returns for his investors throughout his extensive career. Nevertheless, his approach comes with inherent risks. Value investing poses challenges, demanding a considerable amount of patience and discipline. Furthermore, the use of leverage can amplify both gains and losses, adding a layer of complexity to the strategy.
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How can studying flows in mutual funds and ETFs improve my investment strategy? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.
Answer by Jiacui Li, Assistant Professor of Finance at University of Utah, David Eccles School of Business, on Quora:
This is an important question because mutual funds and ETFs currently hold around 40% of all U.S. stocks.
Before I provide a few approaches, let’s set up the context. When people invest money into these funds (inflows), the funds need to use this money to buy more stocks. Conversely, when people withdraw their money (outflows), the funds have to sell stocks to give the money back. This pattern of buying and selling is largely predictable; you can expect funds to buy more when they get more money from investors and sell more when investors are taking their money out. When a lot of funds are either buying or selling in the same way at the same time because they are experiencing similar inflows or outflows, it can push stock prices up or down significantly. However, these price changes tend to go back to where they were over time. This means that the price increase due to many funds buying will eventually decrease, and the price decrease due to many funds selling will eventually rise again.
Now, how can quantitative investors take advantage of these flows to improve investment performance? There are three approaches.
1) Trade on long-term reversion.
After large flows have happened, trade against those flows and bet on price reversion. This applies to slow-moving strategies as reversions can take years.
As an example, this study finds that fund flows often fluctuate wildly between different size and value/growth styles, creating large style-level price pressures that revert subsequently. I would recommend taking into account such flow-based signals in your asset allocation strategies. For instance, during the 2000s dotcom bubble, investors poured hundreds of billions into large-cap growth funds, and this made large-cap growth stocks more overvalued. On average, such overvaluation leads to substantially lower returns in the subsequent 1-2 years.
2) Front-run near-term flows. You can also predict fund flows and front-run them. This applies to shorter-horizon strategies, ranging from one week to one quarter.
This is slightly more complicated as it requires a deeper understanding of what drives fund flows. As an example, we find that fund flows are heavily determined by Morningstar ratings: funds with high (low) ratings receive large inflows (outflows). Further, Morningstar ratings are computed using mechanical formulas and are somewhat predictable. In follow-up research, we find that a Morningstar methodology change in rating calculation caused large, predictable style-level price fluctuations in June 2002 and also made momentum-type strategies less profitable afterward. Because the methodology change was announced ahead of time, if you understood fund flows and Morningstar ratings, you would have been able to take advantage of it back then.
3) Improve diversification.
If you conduct mean-variance portfolio optimization, you can use fund flows to better estimate return covariance and improve diversification.
Traditionally, quant funds use either factor-based approaches (e.g. BARRA) or Ledoit-Wolf type shrinkage to construct their covariance matrices. For reasons I cannot fathom, most of them do not use information beyond historical returns to estimate covariance matrices. However, fund flows can improve covariance matrix estimates, such as shown in this paper. The idea is very simple: if two stocks tend to be co-held by an overlapping set of funds, they tend to be traded together, and this leads to higher covariance between them.
In ongoing work, I find that incorporating flow- and trading-related data can improve covariance matrices estimation and lead to better diversification and higher Sharpe ratios. This work is still at an early stage and not ready for public consumption. If you are interested, and if you work in quantitative finance as a professional (this is not a topic for retail investors), feel free to email me.
This question originally appeared on Quora – the place to gain and share knowledge, empowering people to learn from others and better understand the world.
There are, ultimately, two ways to invest. Most individuals are passive investors who, for good reason, shy away from risk and stick to their long-term plans regardless of what’s happening in the stock market or the greater economy. Then there are others who choose to be active investors, taking on a lot more risk for the chance at beating the market.
Active styles of investing are not typically recommended for the average person. But in recent weeks, finance behemoths like UBS Wealth Management and BlackRock have said that the coming year and beyond will be better suited for active investors than passive ones.
“When I think about the opportunity for alpha [beating index funds], that’s where I get really excited — the most excited I’ve been in 20 years actually,” Tony DeSpirito, BlackRock’s chief investment officer of fundamental equities, said in a December meeting.
Institutions are excited by the prospect of beating the market, and they’re confident enough to take on the risks of active investing to do it. But is this a feasible strategy for retail investors, and should you consider becoming more active with your investment portfolio in 2024?
Active investing vs. passive investing in 2024
Active investing is, on a basic level, just like it sounds. Active traders tend to check their portfolios frequently and are constantly assessing assets of their worth. They use their own benchmarks for evaluating stocks to hopefully identify investments that “beat the market,” or outperform standard index funds that track the S&P 500 or other major market indices.
More specifically, active investing is an approach that “really tries to take discretionary decisions,” according to Joy Yang, head of product management and marketing at MarketVector Indexes. “They use their [investment portfolio] to deliver an investment goal. This could be to outperform some kind of benchmark or deliver income or preserve capital,” she adds.
Passive investing, on the other hand, follows a “rule-based approach,” rather than a discretionary one, Yang explains. “Even pure broad market benchmarks like the S&P 500 or MSCI World are rule-based approaches, because somebody had to define the rules at the beginning — investability criteria or what the weighting scheme is.”
More specifically, passive investors tend to adhere to much safer “set it and forget it” approaches to investing. Identifying fundamentally strong, long-term plays, passive investors will hold their investments through any sort of short-term shift in the market. By removing the timing element and impulse of active investing, this is a strategy that retail investors are wise to utilize in order to minimize the risk to their money.
Over the last few years, passive investing became increasingly popular among not just individual investors but financial institutions as a whole. The economic crisis facing the entire world at the onset of the pandemic led to the Federal Reserve greatly lowering interest rates and easing its monetary policy significantly. “It was really a rising tide lifting all boats,” DeSpirito said.
However, BlackRock and others expect that active investors will be rewarded most handsomely in 2024 and the near future as the Fed prepares to cut interest rates and tries to prepare the economy for its goal of a soft landing. Already, there are good signs in some corners of the economy, like historically low unemployment. More still is expected on the horizon, with mortgage rates expected to become more favorable and inflation approaching the Fed’s target rate of 2%.
With macroeconomic factors shifting in this way, these institutions say that index funds may not deliver the gains they were in years prior, so they argue that it’s now more worth the risk to actively invest. In its January note, BlackRock advised investors to keep some index funds in their portfolios, but shed some in favor of actively-managed investments.
Is active investing right for you?
With all of this in mind, active trading is not a strategy often employed by retail investors. Doing this tends to fly in the face of many rules of thumb, like holding investments long-term and not trying to time the market.
Active investing is also quite difficult to pull off successfully. Even fund managers who have spent years developing active investing strategies and bespoke valuation systems rarely tend to do any better than passive strategies.
“Historically, active managers just have not beaten the market in aggregate,” Yang says. “There may be really skilled active managers,” she adds. But, given that only 7% of active funds beat the market over the last decade, according to S&P’s most recent Scorecard report, those successes are few and far between.
Of course, there are ways to actively invest without needing to do all of the hard work yourself. There are lots of actively managed investment funds out there, where investors give their money to fund managers to invest. However, the buy-ins for many actively managed funds are quite prohibitive to the average retail investor. There are steep requirements to participate in some of these funds, with $100,000 minimums, large fees and strict guidelines.
If you’re not rich, or if you understandably don’t feel confident enough to take on the significant risks of actively investing all by yourself, it may seem impossible to participate in what some might call the “year for active investing.” But Yang points to one investment that’s becoming increasingly popular: active exchange-traded funds. Active ETFs like BlackRock’s iShares represent a small but fast-growing portion of the ETF market. And, they don’t require the hefty buy-ins of other active funds, since ETFs have no minimums; you need only pay the cost of the shares you’d like.
“I think active managers have woken up to the fact that the ETF structure is so popular, and many of them want to wrap their strategies in an ETF,” Yang says.
Yet another disclaimer, though: Many active ETFs are simply mutual funds in a different “wrapper.” Though the cost of participation is much lower through these products, remember that active managers still don’t regularly beat the market. In other words, there’s no guaranteeing that active ETFs (or mutual funds) will perform any better than a basic index fund.
Ultimately, in most cases it’s unwise to actively invest on your own. It’s hugely research intensive and requires a level of expertise unpossessed by most. If you’d like to engage in active investing, Yang says going through a trustworthy financial advisor is your best bet. Or, at the very least, you should acknowledge that by actively trading based on your own decision process, you’re taking on greater risk than by simply holding an index fund.
“For individuals, it’s still best to use an investment advisor,” she says. “[Advisors] can actively allocate based on your investment goals, your risk profile, and their understanding of some of the macro drivers going on in the market. That’s where I see more of the active management going: directly towards development allocation rather than bottom-up stock selection.”
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So you’ve realized a profit on your investments? Buckle up and get ready to report your transactions to the Internal Revenue Service (IRS) on Schedule D and see how much tax you owe.
But it’s not all bad news. If you lost money, this form helps you use those losses to offset any gains or a portion of your ordinary income, reducing the taxes you owe. And if you profited from your transactions, Schedule D helps ensure you don’t overpay Uncle Sam for your gains.
What is a Schedule D?
Schedule D is an IRS tax form that reports your realized gains and losses from capital assets, that is, investments and other business interests. It includes relevant information such as the total purchase price of assets, the total price those assets were sold for and whether those assets were held for the long term (more than a year) or short term (less than a year).
Who has to file a Schedule D?
You’ll have to file a Schedule D form if you realized any capital gains or losses from your investments in taxable accounts. That is, if you sold an asset in a taxable account, you’ll need to file. Investments include stocks, ETFs, mutual funds, bonds, options, real estate, futures, cryptocurrency and more. Those who have capital losses that they’re carrying over from previous tax years will want to file Schedule D so that they can take advantage of the tax benefit.
Others will need to file Schedule D as well. Those who have realized capital gains or losses from a partnership, estate, trust or S corporation will need to report those to the IRS on this form. Those with gains or losses not reported on another form can report them on Schedule D, as can filers with nonbusiness bad debts. Those with like-kind exchanges and installment sales may need to answer questions about their transactions on Schedule D.
How you report a gain or loss and how you’re taxed
The two-page Schedule D, with all its sections, columns and special computations, looks daunting and it certainly can be.
To start you must report any transactions first on Form 8949 and then transfer the info to Schedule D. On Form 8949 you’ll note when you bought the asset and when you sold it, as well as what it cost and what you sold it for. Your purchase and sales dates are critical because how long you hold the property determines its tax rate.
If you owned the asset for a year or less, any gain would typically cost you more in taxes. These short-term sales are taxed at the same rate as your regular income, which could be as high as 37 percent on your 2023 tax return. Short-term sales are reported in Part 1 of the form.
However, if you held the property for more than a year, it’s considered a long-term asset and is eligible for a lower capital gains tax rate — 0 percent, 15 percent or 20 percent, depending upon your income level. Sales of long-term assets are reported in Part 2 of the form, which looks nearly identical to Part 1 above.
Detail your transactions
Once you determine whether your gain or loss is short-term or long-term, it’s time to enter the transaction specifics in the appropriate section of Form 8949. All transactions require the same information, entered in either Part 1 (short term) or Part 2 (long term), in the appropriate alphabetically designated column. For most transactions, you’ll complete:
(a) The name or description of the asset you sold
(b) When you acquired it
(c) When you sold it
(d) What price you sold it for
(e) The asset’s cost or other basis
(h) The gain or loss
Total your entries on Form 8949 and then transfer the information to the appropriate short-term or long-term sections of Schedule D. On that tax schedule you’ll subtract your basis from the sales price to arrive at your total capital gain or loss, as in the sample below.
Schedule D also asks for information on some specific transactions that do not apply to all taxpayers, such as installment sales, like-kind exchanges, commodity straddles, sales of business property and gains or losses reported to you on Schedule K-1.
Check out the complete list and if any of these apply to your tax situation, it probably would be wise to turn Schedule D and the rest of your tax paperwork over to a professional. These are complicated matters, and it can be easy to make a mistake even with the best intentions.
Schedule D also requires information on any capital loss carry-over you have from earlier tax years on line 14, as well as the amount of capital gains distributions you earned on your investments.
You may be able to avoid filing Schedule D, if one of the two situations below applies to your return:
- If distributions, line 13, are your only investment items to report, you don’t have to fill out Schedule D; they go directly on your 1040 or 1040A return.
- You also can escape Schedule D if your only capital gain is from the sale of your residence. As long as you meet some basic residency requirements and your home-sale profit is $250,000 or less ($500,000 for married-filing-jointly home sellers), it’s not taxable and you don’t have to tell the IRS about it here or on any other form.
Total your transactions
Once you’ve filled in all the short-term and long-term transaction information in Parts 1 and 2, it’s time to turn over Schedule D and combine your asset-sale details in Part 3. This section essentially consolidates the work you did earlier, but it’s not as easy as simply transferring numbers from the front of the schedule to the back.
Lines 16 through 22 direct you to other lines and forms depending on whether your calculations result in an overall gain or loss. A couple of lines in Part 3 also deal with special rates for collectibles and depreciated real estate. Again, in these situations, expert tax advice might be warranted.
Use Schedule D to total up your gains and losses. If you total up a net capital loss, it’s not good investing news, but it is good tax news. Your loss can offset your regular income, reducing the taxes you owe – up to a net $3,000 loss limit.
If you reported a net loss greater than the annual limit, it can be carried forward to use against gains in future tax years until it’s exhausted.
As a bonus, your capital loss means you’re through with Schedule D. You simply transfer your loss amount to your 1040 and continue your filing work there.
Figure the tax on your gains
When you come up with a gain, the tax paperwork continues. And this is where the math really begins, especially if you’re doing your taxes by hand instead of using software.
Depending on your answers to the various Schedule D questions, you’re directed to the separate Qualified Dividends and Capital Gain Tax worksheet or the Schedule D Tax worksheet, which are found in the Form 1040 instructions booklet. These worksheets take you through calculations of your various types of income and figure the appropriate taxation level for each.
Before you begin either of these worksheets, be sure you’ve completed your Form 1040 through line 11 (that’s your taxable income amount), because that’s the starting point of both worksheets. From there you’ll have lots of addition, subtraction, multiplication and transferring of numbers from various forms.
But if you sold stock or other property, don’t be tempted to ignore Form 8949, Schedule D, the associated tax worksheets and all the extra calculations. Remember, the IRS received a copy of any tax statement your broker sent you, so the agency is expecting you to detail the sale, and gain or loss, with your tax filing.
Bottom line
The extra work needed in figuring your capital gains taxes is generally to your advantage. Regular income tax rates can be more than twice what’s levied on some long-term capital gains. So when you’re finally through with the calculations, your tax bill should be lower than it would have been if you had simply used the standard tax table to find your tax due.
Note: Kay Bell contributed to a previous version of this story.
Take-up in the logistics and retail property sectors was also strong, while domestic capital is starting to play a more important role in the investment market, underpinned by regulatory and structural reforms. “India’s trajectory looks and feels very positive,” said Greg Hyland, head of capital markets, Asia-Pacific, at CBRE.
The country’s residential market is performing even more impressively, with the annual volume of units launched last year hitting a 10-year high and prices growing in all the major cities, according to Knight Frank data.
The combination of stronger demand, tighter supply, higher yields and better prospects for rental growth than in the office sector creates attractive investment opportunities. The results of a leasing sentiment survey published by CBRE last month revealed stronger appetite for expansion in retail.
Yet there are bright spots and sources of resilience in Asia’s real estate industry. This resilience can come at a price, as is the case in Australia’s housing market. However, it can also create significant opportunities.
Nicholas Spiro is a partner at Lauressa Advisory