*sarcasm*

1. The 50% drop is not real loss. It's only "paper" loss
2. A lot of investors have "holding power"
3. Stock always go up in the long run
4. No risk, no gain
5. Losing money is all part of the learning experience
6. If you are afraid to lose money then you can never make it big. See Elon Musk
7. Have you heard of dollar cost averaging?
8. After I lost all my money, I learn to appreciate the little things in life. In a way, I may have lost all my life savings, but in return, I gain peace in life

I wonder if a stronger statement AGAINST roboadvisors is warranted.

Firstly, roboadvisors offer no real added diversification. You can buy a single S&P 500 ETF and you are properly diversified. You don't need more than 500 stocks. If you wish you can also buy ETFs with 2000 stocks. Why pay a robo advisors to buy or rotate a bunch of ETFs?

Secondly, 1% mgmt fee is high relative to just buying S&P 500 ETF at 0.03% mgmt fee. That is 33x more. Compounded over 10 years, a 1% fee will cost you at least 10% of your asset. It is only worth paying if you can convince yourself that the roboadvisors can enhance your return above and beyond the 1% they charge you which leads me to the next point.

Thirdly, it is unclear and highly doubtful that the roboadvisors have the "algorithm" or the "formula" to beat just holding the S&P500. I have not seen a single robo advisor explain their algorithm properly and explain why it will justify their 1% fee. By the way, having an algo that will beat the S&P is a very big deal. To have an algo that beat S&P by 1% (that's the robo raison d'etre) is a big statement. The pension funds around the world will clamor for your algo.

All the robo has shown are fancy UI and basic financial planning. No real theory and definitely no real track record to back it up (which they should be happy to show and tell if they have an algo because it can be thoroughly backtested). And if they don't have an algo, then behind the digital facade is just humans doing dubious asset allocation and market timing. Where is the robo then?

Ben Graham said

“An investment operation is one which, on thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

Do the robos meet this requirement? Have they explained why by investing with them, you can do better than just holding S&P? Can you yourself, as an investor, explain why?

If I'm giving money to Buffett, I can say "he looks at company as a whole ownership of a biz not individual stock ticker. He believes each biz has an intrinsic value, some easy to calculate, some hard. He will buy those whose asking price is lower than the intrinsic value by a margin of safety just in case he make a mistake"

Can you say the same of the robo? Can you be sure their algo won't lose you money? Can you even explain their investment strategy? If their funds are down 40%, would you top up? If not, it's just a investment scam/speculation behind a digital facade

The equity component is quite unreliable, isn't it?

Example 1:
Maxis has total assets of 19.8bn and total equity of 7.1bn. But most of its "assets" is from 10.7bn of "spectrum rights", parked under Intangibles, which was capitalized and not amortized. If you knocked this out, the total assets drop to 3.6bn and the equity goes negative.

For comparison, Digi which also owns spectrum only capitalize 0.6bn. Digi revenue 6.5bn vs Maxis 9bn so size cannot account for such a big discrepancy in "assets". Also how can asset be capitalized in perpetuity especially for something like spectrum rights which is a national property and which is subject to bidding and reassignment to successful bidders.

This just highlights how unreliable the equity number is.

What is Maxis real equity? 3.6bn or negative?

(All numbers based on 2018 annual reports.)

Example 2:
BAT has ROE > 100% every year. Is this a quality company? IF you bought it in 2014 when the ROE was 172%, over the next 4 years, you would have witnessed the income dropped from 1.2bn to 0.6bn. And we are not talking about valuation here. This discussion holds even if there no stock market to trade.

My point is the equity number, being the single residual number in the accounting equation, is a summation of all the accounting shenanigans that management undertakes from spuriously capitalizing cost (without amortization to escape hit to P&L), hiding stuff in goodwill, share buybacks, etc.

All accounting shenanigans will always hit one line item. The equity.

Hi KC,

How to reconcile the academic vs value investing notion of risk? It seems that the common argument against the academic definition of risk is that it really defines volatility and not risk of losing money. I believe Buffett himself has wrote in his annual report in relation to this.

That being the case, would the diversification chart you presented above still apply? For if interpreting it from volatility perspective then the chart just says "after a certain number of stocks in your portfolio, you will manage to reduce to market volatility". Nothing about risk of the portfolio as defined by Buffett ("chance of losing money").

Furthermore, even if you are willing to accept the academic notion of volatility as risk, reducing the portfolio to "market risk" may not mean lower risk in absolute term. E.g. if the market at a certain point in time has 80% chance of losing money then a fully diversified portfolio still has 80% chance of losing money. That 80% is non-diversifiable.

Great share. Thanks KC!

Hi KC, won't disagree completely with focusing on the process but the market can reward a wrong process for a long period of time e.g. someone investing in gold (for whatever reason), would have done 10x from 1970-1980 only to lose 80% over the next 2 decades.

Also I'm not sure if value investing has been proven by academic research. After all, CAPM and not value investing is still the standard curriculum at university. Furthermore, I hardly think EPF or KWAP or PNB has or would state that they invest based on value investing.

There are people who knows that they are gambling but there are also people who truly believes that they have an "investment process". For example, a prominent investor (who laid his case for one of the stocks in your Appendix) has clearly enunciated his investment process and has made his money. I suspect though you would have disagreed with his investment process and vice versa.

So I'm just wondering, and I don't mean any disrespect here, but I'm really curious as to how you convinced yourself your process is correct because I also struggle with this. I presume you would have to derive from first principles because quoting other successful investors (e.g. Buffett) or stock market returns won't be convincing. There are also other investors that don't adopt value investing that has shown tremendous success e.g. Stanley Druckenmiller, George Soros, James Simons. In short, how do you know your alpha factor was "value investing" and not say "malaysia small cap" or "high volatility" or something else?