Wall Street – The Modern Piggy Bank

Trade Like A Quant

Sometimes dubbed the rocket scientists of Wall Street the meaning of quantitative analysts often takes on a broad meaning. Quant is a fairly broad term honestly, but roughly means someone who takes an extremely mathematical approach to the markets. While some quants use Einstein level math there are some practical lessons you can take away to use in your own portfolio.

More than anything quantitative analysts apply a rigid rules based approach to the markets. They have specific buy and sell signals that they adhere to religiously and consistently. This is where their great returns come from(if their algorithms are correct). While some get blamed for things like the flash crash where the DOW dropped 9% in minutes it would be wrong to say that it was the strangest thing to ever happen in market history. A signal for a quant could be something as simple as the 200 day moving average or as complex as analyzing S&P 500 futures contracts volume and expiration and placing an order nanoseconds before the futures expire and pocketing the spread, which is the high frequency trading world.

So how can you apply this? Well a buy and hold strategy sounds great in theory, but its harder to stick to in practice. Sure its easy to say when the market has not had a down year since 2008, but it would have been really hard to hold onto your portfolio is 2008 when the US equity market shed about 40%. If you haven’t experienced a massive drawdown like that imagine draining half of your savings.

So if you are someone who can’t weather massive drawdowns, and we don’t blame you if that is the case, consider taking a rules based approach. It is great to have an investment plan that you can stick to and might even help you sleep better at night. Here is a simple rule to get you to start thinking about what you might want to do:

Apply a short, medium, and long term moving average to your portfolio. When conducting your rebalancing, best done once a year for tax benefits, tilt most towards the assets in upward trend above the moving averages, more towards the one that are not trending as strongly above one or two of the moving averages, and least towards those in a downtrend under the moving averages.

Note: This can be considered a trend following approach and is a popular investment style that may or may not suit you. Over time strategies go in an out of favor so its often wise to pick a strategy that you understand and believe in and stick with it over the long term.

Building wealth takes strong discipline and taking your emotions out of investing by applying rules to a strategy that works can often help mitigate bad decisions.

Main Street’s Edge

One thing that new investors, myself including, usually grapple with is the belief that investing is a zero sum game. There is a winner and loser on every end of a trade. Furthermore, another hesitation plaguing retail investors is the belief that Wall Street has the edge with their superior research and execution ability.

The bad news is Main Street is completely right. In the short term, trading is a zero sum game, there will be a winner and loser on either side of a trade. This is especially true when we look at the options and futures markets. If that’s not bad enough, fund managers have armies of PhDs at their disposal to conduct cutting edge research and legions of engineers designing computer systems to place trades in nano seconds essentially cutting the line in the execution queue.

If you’re still reading good! There may be hope for Main Street yet. First, I would challenge you to think long term. Investing education is fundamentally flawed in the sense that most people learn that the best way to invest is to pay close attention to a handful of hand selected stocks. This causes us to over trade and exposes us to a lot of unnecessary risk. If we look at the major indices we see a steady increase over time. This makes sense because as the economy expands due to things like population growth which increases the labor force, technological advances which makes workers more productive, etc. All of this steadily increases corporate earnings which is reflected in the steady increasing of major indices like the S&P 500.

In the past 90 years an investor could expect a 10% return annually on average from the S&P 500, though don’t take this at face value because annual returns fluctuate widely. A modern investor could capture this utilizing the ETF SPY or the Vanguard 500 fund which have both minimal tracking error and costs. You would continue to collect dividends, eliminate single company risk, and significantly outpace inflation in the long term all at a cost of less than 20 basis points per year.

So why doesn’t Wall Street just buy and hold if it’s that easy? If you look at a hedge fund’s fee structure you may see that most charge 2 and 20. 2% on your total account value and 20% on returns. The truth is Wall Street relies on investor money to pour in to make money. To attract that money they have to outperform the benchmark S&P 500 and unfortunately few managers can consistently outperform ultimately resulting in being canned by their investors. This is not to say that all money managers don’t deserve their paychecks. In fact, there are countless managers who provide amazing strategies that outperform with low correlation to the equity markets you just have to do your due diligence to find them.

The edge that the small investor has is that they can buy and hold over long periods without having to answer to stakeholders. While money managers were begging people to stay in 2008 the average investor could smile and pour more money into their IRAs buying US equities at huge discounts.

“Our favorite holding period is forever” -Warren Buffet

A prime example of this is Warren Buffet. AQR published a paper on how he generates his alpha, a measure of market outperformance. They concluded that Buffet’s philosophy of buying and holding great companies trading at fair prices outperforms because of two main factors. First, Buffet believes in his strategy as his market holding period is “forever.” If you’re still not convinced, Buffet has seen his holdings decline by over 50% on two separate occasions in his career. His sheer ability to sit through massive drawdowns is a big reason he is regarded as the greatest investor of all time. Second, he is able to strategically apply leverage, a concept we’ll discuss in articles to come.

So there you have it. As a retail investor you have the luxury of not answering to stakeholders who want consistent outperformance and are less tolerant of drawdowns which every portfolio is subject to. Of course you have to have the discipline to sit through them, but being able to accept market returns over long periods of time is usually all the edge an investor needs to build wealth.

Welcome To The Modern Piggy Bank

Welcome to The Modern Piggy Bank. Most likely you stumbled across us on your search to save more or make your money work for you. Either way, we’re happy you’re here.

The Modern Piggy Bank is a brand new website with the goal of cutting through all the nonsense that litters the internet of how to utilize your money to minimize your expenses and optimize your savings. You aren’t going to find where to get the best deals on $10 wine here or how to eat Bougie on a budget, what you’re going to find is solid research, tried and true techniques, and our own personal stories.

Most likely, we are just like you. We’re two really good friends that just graduated from Penn State and secured our full time jobs. Mike works in aerospace while I work at a startup. We live in two separate areas of the country now but during our four years in college we worked hard to put our dreams for a successful business into life.

We tried a lot of different ideas in college, a lot that never panned out but what mattered to us was that we were trying. We tried everything from delivering home cooked meals made by neighborhood “moms” to committing arbitrage on Amazon. What really drew us in was investing and that is where our passion lies. I did my internships at an asset management firm with $1.5 billion under management while Mike spent his time building planes and focusing on engineering. Yet we both knew we wanted to focus on investing. Fast forward a couple of years later and we secured our jobs and starting making real money.

We realized pretty quickly that with real money comes real expenses. And so The Modern Piggy Bank was born. The goal of this website is not to sell you some product that an advertiser wants to push. But to actually inform you of your choices as a retail banking client, a retail investor, and an average American who wants to make the most out of their money or as Mike and I constantly remind each other, the goal is to minimize expenses while optimizing savings.

“With real money comes real expenses”- Will Hershon

We love the challenge of investing and the rewards you can get from it and one day hope to have our own fund. But for now, we are working every day to save more, learn more, and invest wisely. I have goals to own real estate, mostly rental properties, and I’m going to document my experiences with that here. Mike wants to figure out better ETF and fund strategies that out perform the current indexes for lower costs.

We both really believe in the firm foundation theory of investing while Mike sometimes branches out in the more technical branches of algorithmic trading, considering his background in engineering, this isn’t surprising.

For now we’re both focusing on filling this website with the best information possible. I’ll be the first to admit we are going to make some mistakes, but we will also be the first people to fix them. We’re learning, just like you are. But we’re willing to share our successes and our mistakes. If we blow our budget on a night out we’re gonna write about how we fixed this in the future. When we buy our first rental property we’re going to write the process and what we looked for. Eventually we’re gonna have our portfolios up for you to see. Our views on investing, and the markets will be here as well.

The Modern Piggy Bank is going to focus on four major categories. Investing, Saving, Passive Income, and Education. Investing as you might have guessed is going to be focused on the markets and real estate. Saving is going to focus on the best ways to save money and the most efficient vehicles for doing so. Passive Income will take a little longer to build out as we believe that’s going to be focused more on maintaining the real estate portion of your portfolio, but I promise you, we will get there. And finally, Education. Education is where we will review and talk about the books we’re reading and the ideas we’re learning about, anything and everything helps when it comes to making smarter decisions with your money.

At The Modern Piggy Bank, we’re not going to give you some advice on how to save more from someone who heard it from someone’s brothers friends old roommate and how they managed to move out of their 500 square foot apartment and upgrade to a luxurious 700 square feet. We are going to give you our actual experiences right from our own lives of how we handle money, grow it, invest it, and save it. You’ll grow with us. No doubt, we will make mistakes at times. But we aren’t claiming to be perfect. We claim to be on a path few choose to actually follow yet all talk about.

Knowing what to do with your money is hard. I get it, and all of us at the Modern Piggy Bank struggle to some degree to save our money and make it go further. That’s why we set this website up. But when you get down to the bottom line, saving money isn’t rocket science (although Mike actually does rocket science).

If you’re looking for ways to shop the best deals on luxury items or make a quick buck by taking surveys online, this isn’t the website for you. There are plenty of great websites out there that will tell you how to do this. We are focused on other things, real ideas, true techniques, anything and everything that will help you grow your wealth and yourself.

Actual experiences right from our own lives

And with all that, welcome to The Modern Piggy Bank.

-Will Hershon

-Mike Andriopoulos

A Random Walk Down Wall Street

Everytime. 7/10

Our Rating: 7/10

A Random Walk Down Wall Street by Burton Malkiel

A classic and essential reading for those seeking to further educate themselves on the financial markets. This book reads like an informal textbook that will teach concepts, provide real world examples with accompanying charts, and keep readers entertained with stories and anecdotes.

The author is a Princeton economist who is a champion of the efficient market theory. He begins with a brief history of financial bubbles that most people will think too crazy to be true. But we here at The Modern Piggy Bank looked more into these and were shocked at how irrational crowds can be and how strong mob mentality is.

Next, he shows how the biggest money managers on the street invest. Lastly, the information is wrapped up with practical ways for the average person to invest their money for the long run.

“Forecasts are difficult to make- particularly those about the future”

Malkiel argues that most money managers charge high fees for strategies that 1) not guaranteed to beat the market and 2) are strategies most investors can employ for a significantly lower cost. Malkiel’s main theory is that individual returns are random at best so no one can consistently beat the market.

We enjoyed this book as it shows, with real data, that money managers might not be the geniuses the media portrays them to be. However, our thoughts diverge in that to truly believe in Random Walk you must also believe that investors like Warren Buffet and Ray Dalio, who have consistently beat the market over the long term, don’t actually have an edge.

A paperback copy can cost around $13 on amazon and is a must read for anyone interested in the market. Just click on the link to be redirected to amazon: A Random Walk down Wall Street: The Time-tested Strategy for Successful Investing