Readers of this blog know that I’m keenly interested in long-term investing. So, you can imagine the thrill (yes, really) at coming across Andrew Ang and Knut Kjaer’s new paper entitled “Investing for the Long Run.” And, I have to say, I wasn’t disappointed. It’s a nice read with some really useful insights. Of particular interest to me was the description of the mistakes that long-term investors make (i.e., pro-cyclical investments and agency-prone arrangements) and how they might overcome these mistakes in the future.
“We recommend four basic steps for exploiting the long‐horizon edge: (1) Institutionalize contrarian behavior, (2) Build a robust factor portfolio to harvest many sources of factor risk premiums, (3) Create close alignment between asset owners and managers, and (4) Demand sufficient risk premiums for illiquid investments.”
The details of these recommendations are well worth reading. And, since it’s a short and very readable paper, I won’t rehash it all here. However, here are two blurbs I quite liked:
- “Any decision on taking risk off the table must be made together with formal rules for when risk should be taken on again. Taking off risk is always easy. It is the ability to put on risk in troubled times that makes the difference between professional and mediocre investors. Funds that lack clarity in the governance structure and have weak alignments between asset owners and managers should have a high threshold for adding this type of safety valve into their rebalancing rules.”
- “Individuals eat food to sustain life, but it is not the food per se that provides sustenance; it is the underlying nutrients contained in food (water, carbohydrates, protein, fiber, and fat) which are essential. Factors are to assets what nutrients are to food. Factor theory is based on the principle that factors are the driving force behind asset risk premiums. Assets are bundles of different types of factors just as foods contain different combinations of nutrients.”
Enjoy your first wintery weekend!