Investment Beliefs

It's what you choose to believe that makes you the person you are.

~ Karen Marie Moning

Beliefs drive actions and actions build reputation.

In the investment world, a correct set of beliefs are critical to generating above average results. The difficulty is that there are many false or misunderstood investment beliefs floating around - don't trust everything you read. Part of the problem is that an investment belief that works today, often will not work tomorrow. There is an odd dynamic in investing where the more popular an investment belief (or strategy) becomes, the less benefit it produces. This is a big part of why the investment world is so difficult to navigate.

In this post I would like to share a core investment belief that has helped me develop the investment system I share in this blog. It is definitely not common or mainstream, so I am not worried that it will go away soon. The belief came when I ran a chart of the cumulative returns of the coupon return vs price return for the US Aggregate Bond Index. The results are below.

First the cumulative coupon return (flat line and slow steady cumulative growth):

Next the cumulative price return (very volatile and very limited gains):

And finally, so you can put them in correct scale, both together (Price = Interest Rates + Credit):

It amazed me that almost all the cumulative returns could be explained by the coupon and all the volatility by the price changes. It was also interesting that the price changes seemed to have a cycle to them. This is where I  began developing the idea behind my investment strategy.

I seek to always have exposure to the market (to capture the income), but since the price component is volatile and does not add much (if any) return over time, I adjust price sensitivity to benefit from the fluctuation.

This is a belief that runs through my investment system. I am always in an asset class that has some sort of income (dividends or interest) but I rotate through the different asset classes because their prices have different sensitivity to market sentiments.

I would love to hear what you think about my interpretation of the graphs above. Do you see the same thing or does it say something different to you?