ETF Expert Corner

Abnormal Returns’ Tadas Viskanta on Investor Behavior, ETFs

February 23rd, 2016 by ETF Store Staff

Tadas Viskanta, Founder & Editor of Abnormal Returns, offers his perspective on the importance of investor behavior and the proliferation of ETFs.


You can listen to our interview with Tadas Viskanta by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: I'm now pleased to welcome to the show Tadas Viskanta, founder and editor of Abnormal Returns. This is one of the more popular investment blogs out there. You can find it at Tadas has over twenty-five years of experience in the financial markets. He's co-authored numerous investment papers. He's also written a book appropriately titled Abnormal Returns: Winning Strategies from the Front Lines of the Investment Blogosphere. Tadas is now joining us via phone from just outside of Indianapolis. Tadas, great to have you back on the program.

Tadas Viskanta: Hi, Nate. It's a pleasure. Thank you.

Nate Geraci: Tadas, let's start with you blog, Abnormal Returns. Basically, you curate content from all across the so-called investment blogosphere and you have really developed quite a reputation as a go-to resource for both professional and everyday investors. Tell us about the blog. What's the goal here? How do you curate content? What can investors generally expect to find?

Tadas Viskanta: Generally, investors can expect to find really an overview of the financial markets on any day. And to be clear, it's really not a news site. There are lots of sites that look at the news and follow things on a daily basis. What I'm looking for is analysis, commentary and research that really provide investors with some greater perspective on what's going on in the markets and how to manage their portfolios.

Nate Geraci: As I mentioned earlier, you have over twenty-five years of experience in the markets. You have written a book on investing. You have an MBA from the University of Chicago. I'm just curious, what type of content really captures your attention? What makes for a good blog or good article or podcast, and how does that tie in to your own beliefs as an investor?

Tadas Viskanta: That's a great question. I think anytime you are looking through a lot of content and trying to sort through, you are really looking for something that surprises you ... something that you hadn't heard before. Obviously, that's a pretty rare thing to find. But when you do find it, you kind of grab hold of it and want to tell everybody about it. So, that's really something that I am really looking for. I think that's important ... because I think one of the challenges of dealing with the financial media is that it is a bit of an echo-chamber. I think a lot of what you hear is reiterated, regurgitated, however you want to describe it. It is kind of a little bit of a game of telephone. I think when you really do find something novel, that's something you want to shout from the rooftops.

Nate Geraci: I'm glad you mentioned that echo-chamber because, you spend a great deal of time reading through all sorts of investment blogs and articles and listening to podcasts ... and clearly you have developed a knack for filtering through the noise that's out there ... but for the average investor, they are just inundated with news and headlines every single day, when you think about CNBC and the mainstream financial media, and all the various on-line resources ... how does the average investor even begin to cut through this noise? Because on one hand, I think it is extremely important for investors to stay educated on the markets, but on the other hand we know the 24/7 news cycle can certainly stir emotions and perhaps lead to poor investment decisions. How can investors balance this?

Tadas Viskanta: Obviously, it's a great challenge. I think one of the challenges for the average investor, who really is someone who has a 401K, they have an IRA, investing isn't at the front of their minds all the time. The challenge is that when the markets, particularly when they go down, they kind of hit the front pages or they hit the nightly news when things are really bad. I think that is a real challenge because it kind of skews the way people view the markets. But I think one way to off-set that, I think, is really time horizon ... the one thing that individual investors really have is time. I think that investors really ... you think about most people who are either saving for retirement or saving for college, they really do have a long time horizon. We are talking years or decades. We are not talking minutes, hours and days.

So, I think from that perspective, I think the best thing for investors to do is really kind of focus on the long-term. The thing that they should focus on are really kind of the big trends. One of my favorite bloggers, Josh Brown, talks about books are better than articles, which are better than blog posts, which are better than articles in the news. I think focusing on the long-term, focusing on your investment philosophy, investment strategy, is far more powerful and a better use of your time than trying to focus on the minute-to-minute gyrations of the market.

Nate Geraci: Let's talk a little bit about investment strategy, because when you joined us on the program last year, one of the questions I asked you was, if you could distill all of your experience from the blog and all of your experience with the markets, into some takeaways for our listeners, what would those be? What should every investor know? And you answered that by talking a lot about investor behavior and the ability or inability to stick with an investment strategy. And, as I look at the current market environment and I think about the constant 24/7 news barrage we just talked about, I think this is becoming more difficult than ever. So, two questions here: 1) what advice can you offer to investors to help them stick with a good plan? and 2) what if an investor's plan is a bad one? How can they know? Because clearly you don't want to stick with a bad investment plan.

Tadas Viskanta: Those are both great questions. Let's talk about the first question. I think that one of the great challenges for investors is behavior. I think we often times underestimate the challenge of sticking to a plan. I think that's in part because we just aren't built for investing. I think that all the research that talks about behavioral economics and behavioral finance really shows that we kind of ... our worst instincts kind of come out when it comes to dealing with our portfolios. So, I think there is a couple of ways to deal with that. And I think they are related. One is, I think, trying to keep things as simple as possible. With that, I mean, we are talking about simple asset allocation strategies, minimizing the number of funds that you use, focusing on those things that you can control. Those things that you can control include expenses, commissions, and trying to lower one's ... increase one's after tax returns and trying to minimize taxes in the meantime. Really, it's trying to focus on those things that you control. You can't control the markets, you can't control the geo-political environment ... those things you have no control over. The only thing you control is your investment strategy and how you follow that. So, I think taking a little bit of time, putting down on paper what that philosophy and what that strategy is provides you with a guidepost.

Going to your second question is, when you have that down in writing, and if you want to revisit that every six months, every year, every couple of years, that's really your opportunity to see whether your strategy is a sound one and whether you're following it. Again, there's no ... that's really the only way you can do it ... there's no program that you can go to that says, "Hey, is my investment strategy working?" That's really kind of a question that you have to ask and answer for yourself and it is a bit of a conundrum. Because like I said, the only way to figure that out is to look at what you have laid out as a guidepost prior, and kind of measure yourself against that. Again, that's difficult because the markets are going to do what they're going to do and that provides all sorts of crosscurrents when you look at performance. But that's really the only kind of way to proceed.

Jason Lank: Tadas, Jason Lank here. On the subject of investor behavior, sometimes that comes across, at least the discussion as ... we are talking about other people. But in reality, we're investors, you're an investor ... as human beings we sometimes suffer from the same maladies that the general public does, and I always enjoy asking our guests is ... in your own investing, is there an area where you have really found challenging and maybe some solutions you might suggest, in an area where you've really got it licked? Help out listeners understand the humanity here.

Tadas Viskanta: No, absolutely. Everybody has these biases. And if you don't think you have these biases, you have another bias, because we are all prone to these types of behaviors. And especially the more acute the market behavior, the more apt these behaviors are to come out. I keep harping on it, but the one thing that I have kind of come to over time is simply doing less. The older I get, the more experience I have, the more I understand that I really don't have edges in all sorts of different areas. Simply avoiding them is really the way forward. I think all the academic studies show that whether it be an institution that are hiring, firing managers or individual investors that are buying and selling stocks or buying and selling funds or ETFs, it is almost on average and over time, it is always the case that the stock or fund that you sell ends up outperforming the one that you buy. That's simply in part due to hind-sight bias. We are looking to buy the funds that have done well, and we are selling the ones that have done poorly. The markets tend to reverse those sorts of things. Trying to avoid those sorts of decisions ... just avoiding those decisions, I think put you in a better stead than trying to always find the hot fund, find the hot stock, find the hot market. I think that's a real challenge ... it's in part a challenge, especially in the ETF space. Because we have always had this ongoing flow of new funds that are coming at us, and trying to pick apart the strategies is a difficult challenge. That's one thing that investors need to be aware of. Just because there is a new fund doesn't mean you have to buy it.

Jason Lank: Tadas, that’s fantastic. You just lead to my next question. It’s more around the products. Obviously at the ETF store, we are proponents and we talk about a lot of the positive attributes. But a criticism of Exchange Traded Funds might be that ... you're right, there is a tendency to over-trade. Just because there are levers, doesn't mean we have to pull every single one of them. From an investor behavior standpoint, has the introduction growth of ETFs helped investors? Has it hurt them? Is it net-positive, net-negative? What's your take on that?

Tadas Viskanta: I would say, net-net, I think it’s positive. I think having choice, having options, having the ability to target your decisions with a specific fund that does what you want it to do ... I think is important from that sort of perspective. But I think again, like you said, that is a challenge. There are funds coming out every day. So, I think from an investor perspective, you really do have to flip it. It kind of goes to what we were talking about earlier. You really have to set yourself an investment strategy and a guidepost and let that be the guide for your fund selection, as opposed to the other way. What often times happens is, people see a new fund and they say, "Oh, that's really cool. That's a great idea. It's a currency hedged Japan fund. I really want that." And they buy it. They put it in their portfolio and they end up with a portfolio of all sorts of random stuff that really doesn't add up to a strategy. It's kind of a collection of funds, as opposed to a thoughtful portfolio. I think from that perspective, investors really need to be conscience of that and flip it on its head and they say, "Look, I want a portfolio that's fifty percent US equities and fifty percent US bonds. And I'm going to look for funds" that's just an example, "I'm going to look for those best ETFs that track their index, have low expenses and that really fill those two spots for me." And so, obviously, you can make for a more complex portfolio. But I think having the slot and then looking for the fund I think is more important, because now, look there's now thousands of ETFs. It used to be the case a long time ago when I could really ... you could count on your hands the number of ETFs and the number of asset classes that are covered ... but now it's gone so far that it's a real challenge to try and figure out what all is out there. So, I think being thoughtful and constructing a portfolio, as opposed to having a collection of funds is an important way to balance that.

Nate Geraci: Again, we are visiting with Tadas Viskanta, founder and editor of Abnormal Returns. Tadas, sort of sticking with that theme, assuming an investor has the right investment strategy in place, they have those guideposts and they are building a portfolio ... as they consider all of the different ETFs that are out there, what do you view as some of the most important factors to look at here? You mentioned investment costs and tracking the index closely. Are there other factors to consider as well?

Tadas Viskanta: I think those are the two main ones. When we are talking about index, when we are talking about index funds, the cost and their ability to track those funds are paramount. I think a tertiary issue is their liquidity ... so what it costs in terms of getting in and out of that fund. Obviously, if you're a long-term investor, that's not as big an issue because you really ... you're buying and looking to hold that over a longer term horizon. So what the bid ask spread is less relevant. I think those are the things to look at. It becomes much more complicated when you are looking at either ... when you are looking at funds that are either actively managed or follow some sort of smart beta strategy, which seems to be the term of the day. I think that's where it becomes a lot more complex. It becomes ... in a certain respect, the question is whether it's worth having to put in the education and the effort up front to try and understand what that fund is doing. I think that's ... if there is an advantage ... there's a lot of debate about the passive active sort of debate ... and whether you should buy index funds or whether you should focus on actively managed funds ... I think one of the big arguments for following an index strategy is ... look, once I have a fund that follows the total US market, there's really ... that's pretty much it. There's really not a lot of additional effort that you need to put into it. I think if you're really trying to streamline your portfolio and streamline your thinking when it comes to putting together a portfolio, focusing on index funds ... that is one key advantage there.

Jason Lank: Tadas, I want to revisit something you mentioned just a moment ago along your investment plan. And I want to make sure I understand this correctly. What you're saying is that you should develop a plan, determine what problems you have and then go find tools that solve your own problems. Not the other way around. We don't go look for solutions to problems we may or may not have and back our way into it. Is that what we are really talking about?

Tadas Viskanta: Oh yeah, absolutely. I think one of the challenges is that the fund companies are in the business of gathering assets and they do that in a number of different ways. One is advertising. Another is creating funds ... the kind of the flavor of the month. A lot of those funds are often times able to gather assets. I think you really have to take ... you have to look ... in a certain sense you have to look out for number one first. You have to look out for yourself and not let the fund companies or the financial media drive you into a product that you may not necessarily need. I think that's one of the ways to guard yourself against when we do hit rocky times or when the markets do get volatile. If you have confidence in your strategy and the funds that you selected, you're not going to feel tempted to switch into something else that happens to be outperforming at the moment. Anybody that owns a diversified portfolio is always going to be holding some things that are doing well and some things that are going to be doing poorly. That's just kind of the nature of the beast. If you always feel like you need to be on the search for the hot new thing or the hot new fund, you're going to end up in that cycle of selling low and buying high.

Nate Geraci: Tadas, we have about two minutes left here and I wanted to ask you about professional investment advice. For investors who believe they do need professional investment advice, what do you think are some of the most important factors that they should consider as they go and interview an investment advisor?

Tadas Viskanta: I think that is a great challenge. There is a place for hiring a professional because all the things that we've talked about during this call really come down to ... often times come down to issues of behavior. So, I think you're really talking about a couple different things. One, you're talking about at a base level, an ability to enunciate an investment philosophy that you feel comfortable with. The second is really ... what you're looking for is an advisor who is really going to be a coach for you. You're not looking for somebody to say, "Hey, here's what you need to do. One, two, three and four and I'll call you in a year." You want somebody who is going to coach you through this process and to educate you. I think even if you do feel like you need professional advice, you still need to educate yourself over time. I think that's where it really becomes kind of a coaching relationship, where somebody can provide you not only with the services in terms of putting together a portfolio and managing it, but really trying to provide you with the education and with the behavioral support that you need to follow that process over time. I think it's ... you're really kind of looking for that sort of relationship more than anything.

Nate Geraci: Well Tadas, we'll have to leave it there. As always, a pleasure having you on the program. We certainly appreciate your time today.

Tadas Viskanta: Thank you. It was a pleasure as always.

Nate Geraci: That was Tadas Viskanta, founder and editor of Abnormal Returns. Again, you can find his blog at Tadas is also on Twitter. He is a great follow. His Twitter handle is @abnormalreturns. And you can purchase his book, again appropriately titled Abnormal Returns through Amazon.