Ep655: Pim van Vliet – Just Because It’s Cheap Doesn’t Mean You Have to Buy It

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Quick take

BIO: Pim van Vliet is Head of Conservative Equities and Chief Quant Strategist at Robeco. He is responsible for a wide range of global, regional, and sustainable low-volatility strategies.

STORY: Pim wanted to make more money investing, so he decided to go all in on a cheap stock. He believed the price would eventually go up as it had done a few years back. Unfortunately, the company went bankrupt, and Pim lost 75% of his investment.

LEARNING: Don’t be overconfident and over-optimistic when investing. Just because it’s cheap doesn’t mean you have to buy it.


“I thought taking risks gives you a return. That’s not always the case. Taking more risk could give you a lower return.”

Pim van Vliet


Guest profile

Pim van Vliet is Head of Conservative Equities and Chief Quant Strategist at Robeco. He is responsible for a wide range of global, regional, and sustainable low-volatility strategies. He specializes in low-volatility investing, asset pricing, and quantitative finance.

He is the author of numerous academic research papers and various books.

Worst investment ever

Pim has been fascinated with money-saving ever since he was a small kid. His father was an entrepreneur who had a family business. Growing up, Pim would sometimes work at the family business and save the money he made in a savings account. He would get good interest. He learned about the compounding of interest in the process. As Pim learned more about saving, he decided to go into a mutual bond fund to earn more return on his money. Now he would make an 8% yield, up from 6%.

This was during the 90s when the stock market became increasingly popular. The newspapers started to write more about it. Pim was getting a bit bored by mutual bond funds because he wanted to make more money. Bonds were just very low, volatile, and boring. Being an eager kid, Pim started to follow the news and learned about a Dutch aircraft manufacturer trading for $13. He researched and discovered that the stock price had once been $40, so it was cheap he thought.

Pim believed the stock price would return to $40, so he invested in it. His advisor at the bank cautioned him against investing in just one stock. But of course, Pim was overconfident that the stock price would only go up. So he put a sizeable amount of his wealth into this one stock. Then things went sour. The stock price went down and down. The company eventually went bankrupt. Luckily, Pim could get out at $3 but lost 75% of his investment.

Lessons learned

  • Don’t be overconfident and over-optimistic when investing.
  • It’s more important to protect your downside than to keep your upside.

Andrew’s takeaways

  • Just because it’s cheap doesn’t mean you have to buy it.
  • Don’t go all in on one stock.
  • As an individual investor, having more than 10 stocks would be overwhelming. And to have less than five would leave you with too much risk if any of them went bad. So invest in 10 stocks and put stop losses on them.

Actionable advice

If you’re young, take some risks. Risks allow you to learn even if you don’t get a reward for it in investing. So take some controlled risks with the objective of learning instead of becoming rich.

Pim’s recommendations

Pim recommends reading good investment books that are time-tested such as Benjamin Graham’s books and Warren Buffet’s philosophy.

No.1 goal for the next 12 months

Pim van Vliet’s number one goal for the next 12 months is to continue living his dream with his family and colleagues.

Parting words


“I really enjoyed it. Thanks for having me, Andrew.”

Pim van Vliet


Read full transcript

Andrew Stotz 00:00
Here we go. Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community. We know that to win in investing, you must take risks but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives to join me go to my worst investment ever.com and sign up for our weekly free become a better investor newsletter where I share how to reduce risk and create grow and protect your wealth. Fellow risk takers this is your worst podcast host Andrew Stotz from a Stotz Academy and I'm here with featured guests, Pim Van Fleet, Pim, are you ready to join the mission?

Pim van Vliet 00:40
Yes, ready to go.

Andrew Stotz 00:43
Let me introduce you to the audience. Pim is head of conservative equities and chief quant strategist at Rebetiko. He is responsible for a wide range of global regional and sustainable low volatility strategies. He specializes in low volatility investing, asset pricing, and quantitative finance. He's the author of numerous academic research papers and various books. Tim, take a minute and tell us about the unique value that you are bringing to this wonderful world.

Pim van Vliet 01:12
Thanks for having me, Andrew, was really looking forward to this also the name of the show is as awesome with Otto von Bismarck, we said learn a wise man learns from others mistakes. So what I'm trying to bring to the world is bring simplicity and translates academic scientific insights to basically normal people or to translate that and to have an impact. Also, by doing something with this research insights in actual trading, and managing portfolios, which we currently do multi billion,

Andrew Stotz 01:50
maybe you could just tell us about your client base and kind of what's the size of your assets under management and what you guys are doing.

Pim van Vliet 01:57
Yeah, that's good. So that's a big aerobic of my company I work for it's based in the Netherlands. It's 96 years old, so we're getting close to 100 pure play Asset Management. Based in Rotterdam, so Rotterdam's the row from Roby co stands for Rotterdam. We serve clients all over the world. Because in the Netherlands, if you step in your car, in one hour, you're abroad. So we are international investors, serving international client base about more than 70 billion, we managed with a large team of researchers, portfolio managers and clients researchers, to clients in Asia as well, Europe and North America.

Andrew Stotz 02:41
I remember I was telling you before we turn on the recorder that I went there, as an analyst sell side analysts out of Bangkok and probably 9095 or so. And I remember, what I remember was kind of a modern style standalone building in a parking lot that we arrived in. And it was really kind of a really unique looking experience. It was not like, like he's like a bank or something like that. And it was a really interesting environment. What's it like these days there?

Pim van Vliet 03:09
Yeah, so that's a beautiful building, it's still up in Rotterdam, we moved closer to Central Station. So now we're only 20 minutes from the airport by train. So the airport is south of Amsterdam. So very convenient. And it's a very light building more Scandinavian look, lots of glass, lots of space. The previous building was more vertical. And this one is more horizontal, so much more cooperation. But we do have a history of nice buildings.

Andrew Stotz 03:40
So tell me more about what you are doing these days. You know, what's hot in your space?

Pim van Vliet 03:46
Yeah, so I'm a quants, quantum Portfolio Manager, also one lakh in academia. So I also like to continue to do research to join the debate. What's going on? A lot. So academic factor based investing has become accepted. When I joined, did my PhD, it was still at its infancy. But due to the rise of computer power, dissemination of research, more, more people getting surveys getting to know about what the academics are writing about factor premiums. So that's really become mature and big. And in particular, low risk investing. That's a special animal. And that's where I'm specialized in. So I basically dedicated my career to a very basic thing finding that fish can return on the stock markets and other markets are not related. And that's a big puzzle.

Andrew Stotz 04:42
And, yeah, I mean, that goes against everything that we learned in the world of finance is that those are, in fact directly related. And what you're exploiting or you're, you know, you're studying and applying is that there's that tell us, tell us what you found in something You research in your book in that type of stuff?

Pim van Vliet 05:03
Yeah. So when I was at university, my Bachelor's, I started to read my first academic articles. One of them was by an American professor Robert Hogan, who basically laid out as if you, if you select low risk stocks, you get a high return. And then fama French also the famous seminal 92, paper Rhodes, that's the cup is a fit empirical failure. So lobito stocks have high risk adjusted returns. And I was so puzzled by that, like, wow, how can this be? And ever since then, I've been working on this in my masters in my PhD, I really tried to get my head around, like, How can this be? Is the model wrong? Or are the investors wrong? What's up? And, yeah, at this moment in my life, I can say, you can profit from this, this market anomaly.

Andrew Stotz 05:55
And, you know, one of the things from my experience in finance is that people, you know, wrongly call volatility risk. And so a lot of times, they're saying, you know, I have more risk in this particular stock, or that, when in fact, what they're saying is I have more volatility. And of course, we would prefer a stock that kind of goes straight up, versus one that goes up and down a lot. And they end up at the same place. Maybe you can explain from your deeper experience than mine about what really is risk. And is there a difference between risk and volatility? Yes,

Pim van Vliet 06:31
good one. So when I started my PhD, this was exactly the thesis I was working on. My thesis was Could it be that there's floods relation between risk and return is due to how we measure and define risk? Because traditionally, we equate volatility and systematic volatility, which is betta, with risk. However, in practice, people are loss averse, they don't like fat tails. So negative outcomes, and returns of stocks are also not normally distributed. So maybe we should change the model, which I did. So I've worked on extensions of the capital asset pricing model, works on modeling downside risk, using models from the 70s. These were developed, applying them to these anomalies and factors to see whether these alphas were maybe compensation for downside risk. And maybe that's why this disposal exists. The answer to death was that that's not the case. So if you change volatility for downside volatility, you still find this anomalous pattern. So this is not the reason why this pattern exists. Results do get, in fact, a bit better. So if you look at more downside risk measures, more longer time horizon, then you still cannot explain why dose stocks which have a lower downside risk, have such a good long term compounded return.

Andrew Stotz 08:02
I remember doing some internal work, trying to figure out a way and you probably have done this much better than I have was trying to I was trying to figure out a way to try to understand like, what's more important, losing less or gaining more like, when you look at a trajectory of returns over a long period of time? You know, is it protecting the downside? Or does that put you in a position where you don't capture the upside? And I'm curious about what your thoughts on that?

Pim van Vliet 08:34
Yeah, when you look at low vol stocks, they tend to have especially good downside protection, whereas on the upside, they are pretty good. So there's just a few winners. When you lower your volatility, you especially lower your downside volatility. And that's the reason why they on a long term basis, beat everything else. But I use the metaphor of the hair and the turquoise. And Eric goes quick. These are high volatile stocks. That's the thing is if you lose your money once, like with minus 100%, then you're out and with low volatility by protecting your downside and then participating, okay, on the upside. That's how you win in the long run. So winning by not losing. Often, when people talk about investing, they talk about compounding, and then they think about compounding, of course, if you double every year, it explodes. But compounding works two ways. And the problem with downside is every entrepreneur knows if you have your money and you lose all of it, you're out. You cannot grow back again. So it's more important to protect your downside. And then keeping your upsides Okay, that's really the formula for long term winning.

Andrew Stotz 09:50
Let's do a hypothetical example. To try to simplify this. Maybe. i When my nieces were 18 Back in America, I would fly by I'm from Thailand, and I would bring $3,000 in my pocket, and give them a gift as a present for graduating high school. And then I said, but you can't spend it, we're going to set up an account at Vanguard. And we set up an account and they own VT fund. So they own basically 9000 stocks across the world. And I said, don't even think about this, just every month contribute, never sell. And 40 years from now, when I'm long gone, you can thank me. And now, if we got confused along the way, and went through an emotional roller coaster of the ups and downs of that strategy, we may decide, Oh, crap, we got to get out. Now we're gonna get back in later. But if they don't nothing, and they just kept contributing, and let that grow over a long time. To me, that seems like the number one best thing to do, is there something better to do than that

Pim van Vliet 11:03
you're describing something which is also evidence based and scientific, the markets is pretty efficient. That's one. So that's why you should diversify and hold the broad market. And the second is that the less you look, the higher your utility is. So if you're having an evaluation horizon of like three years, so you look every three years or every year, it increases your happiness, your utility. And also you will face less risk, because stocks in the long run have lower risk than in the very short term. So that sounds like a very good, scientifically evidence based way to do it. It can be improved. The problem with the market is it's not really efficient, it's nearly efficient. So if you buy the whole markets, you also buy the speculative part of the market, which is the very volatile option like stocks, these stocks are too expensive, because they have some certain attraction, a fatal attraction, you could even say, and if you move away from the markets, and you bring your portfolio still diversified, more to the low risk, boring part of the market. So cutting out these high volatile speculative stocks, your knees could do even better. Also in the long run, but that's the sort of small enhancements to the basis of very good, prudent investment strategy.

Andrew Stotz 12:28
And is that the type of strategy that you're offering clients?

Pim van Vliet 12:32
Yeah, that's the philosophy behind the products I offer. Now maybe to explain it a bit more. So the low volatility stocks outperform the iPhone, volatility stocks, that's an empirical facts, it's proven in the US stock market. I recently did a research to back going back to the 19 century, really 1866. Also back then, the boring low vol stocks outperforms the risky once you also see it in China and Asia, any markets, you test. So the evidence is really strong. For those interested, you can also check this, if you do Google search on low volatility, go to Wikipedia, you can read all about it. I also decided to write a book about it more for the layman. So maybe it'll some free audiences might be interested. Interesting. It is in six languages. So it is called high returns from low risk. And I'm showing it now to the camera. But on the front of it, there's a turquoise, which is sort of a metaphor for low risk investing. And I decided to write this to my dad's who is an investor, and entrepreneur, and to really explain in simple language, how you can take academic insights and translate them into a real life strategy.

Andrew Stotz 13:53
So I have the links in the shownotes to the book so people can check it out. I wonder, one question I have about risk that I've always kind of been baffled about is that for me, like I'm not I'm not an I don't go on an emotional roller coaster in the stock market. Because I know I learned a long time ago not to get on that ride, you know, like, so I don't feel a lot of pressure in I know that you're going to underperform periods of time. And so I'm not like I had a call strategy call the other night. And they said, commodity is underperforming right now. And you're overweight commodities, what are you going to do? And I said nothing, because my next rebalance where I set every quarter, and that's when I look at it's coming up in the end of February, early March. And then I'll look at it and I think it's so the point that I wanted to ask you though, is that I wonder if we're doing people a disservice by talking about their emotional aspects, right. So when we talk about when the market is going to be really terrible. What you're going to do is you're going to take your money out or you're going to make a mistake because you're going to be on an emotion to a roller coaster, and therefore, we have to somehow reduce your risk so that during that time you have less of a drawdown. And really what we should be telling them is, you know, you shouldn't freak out at that time, but maybe we just give up on that. And we just tell them, Look, here's the situation. I'm just curious, where, where do you fall on how to help the client?

Pim van Vliet 15:25
Yeah, that's a good one. So emotions are usually of great help, but investing often not. The question is, how can you protect yourself from them, especially the ones which are hurting your performance? So I'm a quant Portfolio Manager, as I said in the beginning, so we use a rules based process. So we find patterns, we lay down rules. So one rule is buy the stocks which have a low volatility and do not buy the ones which have a high volatility. That's what you can implement it on a rules based basis, as you say, regular updating like a monthly or a quarterly rebalance. And then you take all the emotions out, because you follow the rules. You think about it, it's very rational, evidence based way of investing. So that's why I love quant investing. Because if I had to do with myself, I would be at night thinking, Should I buy Tesla or Apple? Or should I should have sold material stocks and stick to your process? Yeah, it's sciences based. So that's why I really respect stock pickers who are successful because they can manage their emotions very well. Yeah, then your question is about clients. So what we do is we invest in education a lot for explaining our clients, the what a quant strategy or consultancy is doing and what is not to be doing, what to expect what not to expect. And then before they become a client, really explain them the process the philosophy, so that they know what they're doing. And then during underwrites, you're more of a coach where you explained performance, often our clients, our fiduciary managers, so they manage money on behalf of other clients. So you should also help them give lines of how they explain to their clients. So I mentioned to book that's one thing we did to really bring this philosophy out. But we also write academic and white papers to really explain the things we're doing in our strategies, what to expect and what to expect. But you're keeping your emotions tight, that's if you can manage that you can make a lot of money, especially avoiding losing money, which is in the end, good for your return.

Andrew Stotz 17:56
I have one last thing I want to talk about with you. Since I've got an expert like yourself on the line. It was actually during the time I was working on my PhD in China. So I was in China, Thailand traveling around. And I had two things kind of happening. At the same time I read an academic paper that was talking about volatility and reducing risk, or let's say volatility, and they were saying, Oh, the research is wrong. In fact, you need 100 stocks to do reduce terminal volatility, the volatility of the outcome at the end of let's say, 1020 30 years. And you know, you see these I would I'm holding my hand up like a fan diagram of all these potential outcomes. And I just thought, you know, that's just so impractical. And then I had another case where I was asked to go speak in the Philippines. And I was speaking about my book, which is a simple book called How to start building wealth investing in the stock market. And it's basically what I told you about my nieces. So I went to the Philippines, it was 2000 young students in the audience. And I got up on the stage for three hours. And I realized I had a problem, you know, there are no ETFs and diversified, you know, global exposure in it. And then the market is so expensive. And many of these countries were trading fees are really high and all that. And then these guys were not finance students. I didn't want to like learn how to pick stocks. And I thought I really don't have any good advice. But then I thought back to this paper, and then I was thinking, how could I help these guys? And I thought, I wonder if Why don't we test out randomly selecting 10 stocks out of the Philippine market? Because we know the brokers have been commoditized. So we know that the cost of transactions at a broker is actually pretty low. For stocks, what if we had them randomly pick 10 stocks, and then I created like a fan diagram using the stock market to try to understand what the outcomes would be. The problem is that you end up with some really extreme negative outcomes that are below you know, pretty bad. If you're the unlucky one out of 1000 that pick the one that just went all the way down. So then I asked the question, okay, what would happen if I combine a stoploss into that knowing that these guys don't know anything? So they're going to 10 Random stocks and put in stop losses for 20% and 25 30%. And what I found from that was it truncated the downside. And it actually expanded the upside. And then I thought to myself, well, maybe for a beginner, that doesn't have the stock picking skills and doesn't have the resources like your funds. Maybe that would be a strategy. I'm just curious what your thoughts are on the whole thought process I was going through with that.

Pim van Vliet 20:33
One nice, the diversification, so when once you buy one stock, or two or three is really starts to help. So and then usually you don't need 1000s, but you get the quick wins first, to every stock, you adds, its first step goes quickest. The second is stop losses. Academically, there has been this has been investigated and why it works. And one of the things is that you're then long momentum, so you sell your losers, you profit from the reaction due to interaction momentum words. So a stop loss rule is really something for a layman, with a broker accounts to get exposure to momentum, which is a proven academic factor, which gives you higher return. So that's how you can improve terminal wealth. So that's, that's how I look at these two examples,

Andrew Stotz 21:25
which would also allow you to have a smaller portfolio size, as opposed to having to get diversification to 50 stocks, you could go down to maybe 10, or 15. What is your thought on that?

Pim van Vliet 21:40
If you do it smartly. So you suppose you have 10 sectors you pick from each sector? We present the starting point, yeah, then, then you can do it smartly. With the tools you have, of course, if there's no ETFs, if there's no funds available, this is a way to do it. And it's like the 8020 rule. So if you do it like this, you know, you have 20 stocks from 10 sectors, then you basically get to 89% of the diversification potential, you might achieve so good enough,

Andrew Stotz 22:10
which works well in the US market. But in the Philippines, where there's only one there's only 40 list, you know, large and liquid stocks, it raises so many other you know, so I ended up doing it randomly. But I think if we have the potential to do that random selection within sectors, it seems like that's the optimum way.

Pim van Vliet 22:28
And then some Philippine stocks might have more international exposure, you know, and then you pick them.

Andrew Stotz 22:35
Well, it's, um, I'm fascinated to learn what you're doing. And it sounds interesting, and you've answered some questions that I've been taking some notes on. So now it's time to share your worst investment ever. And since no one goes into their worst investment thinking and will be tell us a bit about the circumstances leading up to and then tell us your story.

Pim van Vliet 22:53
Yeah, thanks my story about my faults about this. And it's, it's good to show your, the lessons you've learned. So for me, I had to go back in history. I have been fascinated with money saving ever since I was a small kid. Like I said, My father is an entrepreneur. We had a family business. I was sometimes working, I was saving, made some money, put it on my piggy piggy accounts, I saw good interest. I learned about the compounding of interest. Fascinating. You know, that's if you get 10% interest and do two magic, more money appear. So I was still young, I remember that. Then I decided to go into a mutual bond funds. So instead of interest rates on my saving accounts, I went into a fund. And it is together with my dad, he also bought some and I was like, wow, now I go from six to 8% yields back then it was in the 90s. So this was the few years before you visited the Netherlands, I was then a teenager. What then happens was that in the 90s, stock market became more and more popular. The newspapers started to write more about it. And I was getting a bit bored by mutual funds in bonds, because I looked up the price every day, wanted to go up of course, and then it was flat or it went up 10 cents or down 10 cents. It was just very low, volatile, boring. So that was a young, eager kids. And I thought I could be smarter than that. And then I started to follow the news. And then my I felt on a Dutch aircraft manufacturer that was trading for 13. Dealers roughly euros, roughly dollars. So it's frustrating a 13. And I was looking at the price and so it was 40 a couple of years before so it's really He went down, it was a cheap buy. It was in the news a lot because it had problems. though. It was partly bought by a data set as German conglomerate. They were investing in it and aircrafts are really good products. So they were basically building 100 cheaters 150 seaters. So below Airbus. And Boeing, although the production base was a bit high, so in Europe back then, the currency was strong. The Geller said the costs were too high. Still, I was like, the stalkers in the news, it went down, it was very volatile. I thought, let's do it. My advisor at the bank said, don't don't do one stock. And just if you go equities do it in offense. But of course, I was a bit overconfidence because I only go up, it's an airplane. So usually, usually they go up, airplane company, then things go sour, it went down and down. So it gave me lots of stress. Because I put a big amount of my personal wealth in it. I think it was overhauled or something. So it was closely watching it first with the emotion of greed, and then the emotion of fear. So exactly the roller coaster as you refer to. It was a wild ride, and it ended up with the stock went bankrupt. Luckily, I was able to get out at three. So I basically lost 75%. I also described this episodes in my book. It's funny that when people read my book, they come back, and they all have their own experience like this. Also, when you asked me to join the show, so I thought I should join and tell this about this experience. It learned me a lot of things. So first, I was overconfidence and overcome optimistic. So I was not reading the information, right? I was greedy, I thought it was 140. So it will go back to 40. So I assume some sort of gravity law or something going on. I also learned that compounding works two ways. Because if you lose 75% at a certain amount, so should I buy more of it. And then yeah, if you lose 75, you need to unload, from the percents, to break even. So that's terrible. And I learned that risk. If you take risk on stock market, it's not rewarded, like some sort of karma. Like normally when you work you get income, that's follows. If you take risk, I thought you get return. But that's difference. It's not the case. And as I learned later on in my professional career, it's even if any, there is a negative relation, so taking more risk, will give you a lower return. And we That's the story of my life. And I can tell you this was a big loss in my personal wealth, some ego of course, I also later on later other gurus investments, so I was not losing the money I lost it was every penny worth in lessons learned. Especially because I learned at a young age.

Andrew Stotz 28:22
Yeah, that's key. Maybe I'll share a couple things I take away from this. The first one is that it's got to be like one of the first things that you do and you're in the world of finance, and you're starting to invest, it's like, you get caught into these super cheap stocks like this has come down a lot. And I think this is a great deal. And you feel like you know, I'm really finding something unique here. And I'm putting into practice, you know, some of these research principles, and it's an easy one to get sucked into. I like to remember what my mother always says is just because it's cheap, doesn't mean you have to buy it. And she said that about when you go shopping, you know, just because something's on sale? And how many times have you gone out and you bought something you think I bought that because it was on sale for 30%. And it doesn't actually fit me. And, and so that's kind of a big lesson that I take away and think about and for the beginners out there. You know, that raises the second point, which is the diversification aspect, which your broker mentioned, you know, don't just buy one. And I did a academic paper a long time ago, I call it 10 stocks are enough in Asia. And what I was just looking at is the relationship between risk and var, let's say volatility and return. And obviously, as you mentioned before, risk or volatility falls very quickly as you start adding stocks to portfolio. And I would say that for the average individual investor, it's hard to come up with individual stock ideas like what are you going to find in the newspaper from a broker someone's going to tell you so I always say that you know, it's for an individual investors that Have more than 10 stocks would be very hard to manage. And to have less than, let's say five would mean way too much risk if any one went bad. And so I always say, for the average individual, if you really, really want to invest in stocks individually on your own, then I would say invest in 10. And I would say put stop losses on it. But that's kind of one of my takeaways that I think about is that how often people get started in the stock market, and go all in on one or two stocks, anything you would add to those.

Pim van Vliet 30:33
Yeah, it's prudence, and wise advice. In the fence, we manage, mostly for institutions also in your region. So we have offices in Japan, Singapore, Korea, China, Australia, but of course, also in the rest of the world. In those funds, we manage mostly for institutions, we apply also stop losses, which differs by strategies, buying local stocks, getting momentum in and that's the best way to have your sell discipline. So if something goes down, sell it and don't think Oh, it's getting cheaper. So let's put more in. So that's really stop losses really are difficult to overcome your own biases. And then we still add some value factors in as well. So income, because in the long run, that's also a good predictor of returns. So this mix is something which works best. So diversification local, stop losses, momentum and, and income value. That's what we call the conservative formula, which we apply with success. And also, the interesting thing is also people listening to your podcast might be also both retail investors themselves, but also professional investors. And that's interesting. Also, to see that some of the clients we meet, they manage, they are responsible for billions of state fund money or other insurance money, but all they're also investors themselves, and then explaining those quant rules, in simple ways could also help them better understand the more sophisticated quant strategies we run off of our institutional clients.

Andrew Stotz 32:18
Now, it was one of the one things that I remember, as a young analyst, and then watching and listening. When I first started out, I really had no money, I came to Thailand with pretty much nothing. And, and, and so I got a job and all I could think about was paying off my student loan debt. And then all I could think about is, I'm just a poor kid from Cleveland, Ohio area. And, you know, nobody's taking care of me here, I've got to really hoard my cache. So it was a long time before I started investing. But what I saw was that the brokers that I worked with even some of the fund managers, I could say that they were on a rollercoaster ride with their own personal investments. And I always said, of throughout my years, if we measure the performance of the typical financial professional, it probably would be significant underperformance because they're taking big bets, and then they're taking care of their clients, and then they're not focusing on their portfolios. And then next thing, you know, boom. So that's kind of been my predictions. One other question I had, you know, how could a client walk away from your strategy, let's say, you go to do a presentation, and there's a mandate there for x 100, millions, whatever that is. And you're, you're presenting against some other competitors? It's very hard for me to understand why someone would walk away from your type of strategy, why would they

Pim van Vliet 33:43
walk away? So do not invest in SEO?

Andrew Stotz 33:46
I mean, like, why don't you manage half the money in the world, you know, type of thing with your strategy.

Pim van Vliet 33:53
Now, one thing, there is a limit to active investing. So we manage about more than 70 be 70 billion, we can go up to 150 200. And at a certain moment, you start to impact your own prices. But that's one reason for alphas always scares, the quest for alpha. And the second is not everybody knows about it. Many and also many investors face constraints. So many professional institutional investors have benchmark and leverage constraints. So they say, Hey, I've got the Amisha rules as a benchmark, or MSA or countries or any markets index, and then they say, if I lower the risk, so I go for a conservative, low volatility strategy. I get lots of benchmark risk. So that's also fascinating. That's in the institutional rules. Many institutional investors face benchmark constraints which is limiting them from I'm not only walking away and not investing in this very appealing strategy. And that's where sometimes retail investors have an advantage because they have less benchmark problems, or risk, they have other biases. But at least this is one day dance. And that can be an advantage.

Andrew Stotz 35:16
It's a huge factor in the financial world, that people are tied to benchmarks and all of that. And it's, it's, it's dangerous sometimes for the retail investor, that there's many people that won't take the risk because of the risk to their career and their reputation, as well as the rules that have been set by people that may not even know that much about finance, and the idea of investing and then all of a sudden, you're kind of trapped in somewhat of a low return high risk strategy.

Pim van Vliet 35:45
True. So benchmarks aren't a serious issue. And it's getting worse because more and more money is invested by not by or owned by NC investors, but by asset managers, so agents who manage on behalf of which is in one way or several ways goods, but when it comes to benchmarks, it can be not a good thing.

Andrew Stotz 36:09
I wrote something recently that you cannot write, I know you can write this. It's called 26 reasons why I'm anti ESG. And I went through a lot of stuff, and I just see some stuff that I really don't, I don't like and so I laid it out. And the one thing that I said is that theoretically ESG should be lower risk, lower return higher risk only just because we're limiting the universe. Do you think that like say, say there's I look at VT fund and say okay has 9000 stocks? Let's say there's 5000 investable stocks around the world, that you could put sizable amount of money in whatever that number is, or maybe it's 1000. But if you put ESG constraints on it, you're naturally going to lower the potential for outperformance and potentially increase the risk. Where am I wrong in that?

Pim van Vliet 37:12
If the market is efficient, and you're putting constraints, when you're investing in a universe, then you're it becomes less efficient portfolio. But then that's on the premise of markets are efficient. So I believe that they are nearly efficient. So there is some way to do better, but in a very humble way. Or even quants can be too over optimistic on this on their models or their skills. I believe we can so in the strategies I run, we now have statistical significance of the outperformance after 60 years, nearly 3% alpha t stats around above two. So yeah, that's pretty good. But still, it might have been luck. You never know. Yeah, when it comes to ESG, we, our research shows that some more proprietary variables linked to social so if there's good governance in companies treats their employees rights, that can be a source of alpha, not priced in by the markets. That's another thing. And putting some easy deals might be beneficial. So I'm a bit agnostic here. In the market, if markets are efficient, if you're on the Chicago school, then you say just buy the whole bunch and anything else will not work. But then also factor investing can also be dismissed because it also excludes very risky stocks from the universe. And I do this for good reason. Because I found that markets are inefficient in that part of the market. That might also be true might be true for some really bad AEC firms. If they have some big price risks, which the market is not pricing that's important here, then it might be beneficial. If the market is overpricing this, that could also be the case that market participants just love green, green stocks and that they premium for that. And then it can go the other way around. So it's all depends on whether the market is pricing the risks of ESG right or not.

Andrew Stotz 39:18
I have to follow up on something you just said which was 3% outperformance. Hopefully, I can remember how you said it, but like not, maybe not attributed to luck. And one of my questions I have to you that I don't know the answer at all. But we know that based upon some sorts of statistical distribution, that there will be some persistent winners and persistent losers and therefore, we can say that there's a certain number of investors or funds end up 20 years from now massively outperforming only B cause of luck. Like there is an underlying rare randomness and variability. How do we determine if the person we're looking at is ending up 20 years out? Having outperform how do we differentiate between whether they were lucky or whether they did it through skill?

Pim van Vliet 40:18
Yeah, that's a good question. So this also, in finance, when I teach at university, how to distinguish between luck and skill. Now for that, for example, defense, I manage defense I manage we had roughly 10% out from last year. And the year before we add in the performance have to this year we're looking at about minus five, because markets are really up, it's lagging. So you're looking at plus 10 minus five plus two. So what you then do is you risk adjust the series. And then you can see whether the outperformance pattern is consistent and significant. So we now have 16 observations of annual observations. But we also have more than 150 monthly observations, and then you can look at the consistency. And like I said, the T stats is above two of the risk adjusted performance, which means that there's more than 95% chance that it's not luck. But still, there's a couple of percent chance it could be just a luck. So that's why I continue like to continue my job and now in my 40s, in testing, and yeah, continue to test it, and to see whether these academic insights really work out of sample. So for now, yes. But for me to go with the F T T value of three, then you're really at a 1% chance that it's not luck.

Andrew Stotz 41:49
I'm sure you have some clients that just love to love all this stuff that you're doing, and some others that are going oh my god, that's way over my head. But for me, I really enjoyed our conversation. Let me ask you, based upon the story that you told and what you've continued to learn in your life, let's go back in time to imagine yourself as that young person just about to make this investment, what one action would you recommend our listeners take to avoid suffering the same fate?

Pim van Vliet 42:16
Yeah, maybe you wouldn't expect it. But I would still advise, especially if you're younger, to take some risk. Even if it doesn't give you reward on investing, it gives you an opportunity to learn. So the younger you are, take some risk controls with the objective to learn because you get skin in the game. If you buy this one stock, you're gonna read about it a lot. So I wouldn't give myself other advice to do something really different. That would be my advice, okay. And take risk, but then to learn instead of to become rich or something.

Andrew Stotz 42:55
Or to say, I'm never going to invest again, which some people do right when they get when they get burnt.

Pim van Vliet 43:01
Yeah, that's a pity. Don't just continue to just pick up because I also continue with and I went on,

Andrew Stotz 43:08
and look at you now. What, what's a resource that you'd recommend for our listeners? Obviously, we're going to have your book in the show notes. Is there anything else that's valuable, that you would recommend to the listeners?

Pim van Vliet 43:22
Yeah, recently, good investment books are the classics, I can recommend the ones which are time tested, up to one which is in the shop today, but really the good old classics, like Benjamin Graham, or the intelligent investor or write a bit about Buffett's philosophy. The things you said, Andrew, about diversification. I would start with those basic things. Yeah.

Andrew Stotz 43:49
Okay. Good advice. And last question, what is your number one goal for the next 12 months?

Pim van Vliet 43:57
My number one goal, living my dream with my family, my colleagues, that's my number one goal. Continue doing that.

Andrew Stotz 44:07
And I was gonna say, continue, because it seems like you are living your dream, you've found a place that you can do the type of research you like, and the type of investing that fits your style, and they appreciate it. So that's what we're all looking for, ultimately. Yes. Yeah, that's a great example for listeners. You know, one of the lessons that I've learned over my life is that when something's not right, you know, sometimes you gotta get out of it. And you'll find eventually, that you'll find a place that's really suitable for you. And once you get there, appreciate it. All right, listeners. There you have it another story of laws to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. If you've not yet joined that mission, just go to my worst investment ever.com and join my free weekly become a better investor newsletter to reduce risk in your life as we conclude PIM I want to thank you again for joining our mission and on behalf of a Stotz Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Pim van Vliet 45:12
I really enjoyed it. Thanks for having me, Andrew.

Andrew Stotz 45:16
Well, I appreciate it and I enjoyed it too. And that's a wrap on another great story to help us create, grow and protect our well fellow risk takers. Let's celebrate that today. We added one more person to our mission to help 1 million people reduce risk in their lives. This is your words podcast host Andrew Stotz sang. I'll see you on the upside.


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About the show & host, Andrew Stotz

Welcome to My Worst Investment Ever podcast hosted by Your Worst Podcast Host, Andrew Stotz, where you will hear stories of loss to keep you winning. In our community, we know that to win in investing you must take the risk, but to win big, you’ve got to reduce it.

Your Worst Podcast Host, Andrew Stotz, Ph.D., CFA, is also the CEO of A. Stotz Investment Research and A. Stotz Academy, which helps people create, grow, measure, and protect their wealth.

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