Invest Outside the Box (eBook)

Tariq Dennison is a Hong Kong based fund manager and pension advisor investing retirement accounts across global stock, bond, and alternatives markets. An American raised in Europe and long resident in Asia, Tariq has a lifelong natural interest in interest rates, foreign currencies, and frontier and out-of-favor markets. He has worked at Accenture, Commerzbank, Bear Stearns, J.P. Morgan, CIBC, and Société Générale in San Francisco, New York, Toronto, London and Hong Kong, before starting GFM Asset Management in 2014. Tariq teaches fixed income and alternative investments at ESSEC Business School in Singapore, CFA Singapore, and the Hong Kong Society of Financial Analysts, and holds a Bachelor’s degree from Marquette University and a Master’s in Financial Engineering from the University of California at Berkeley’s Haas School of Business. 

Preface: How Boxes Define Investing 5
Acknowledgments 9
Contents 11
List of Figures 15
List of Tables 22
Part I Asset Classes: The “What” Box 23
Chapter 1: Cash, Bank Deposits, and Interest Rates 24
1.1 What Are the Different Types of Bank Deposits? 25
1.2 Why Keep Money in Bank Deposits? 25
1.3 How Most Money Today Is a Form of Bank Deposit 26
1.4 What Determines the Rate of Interest Banks Pay on Deposits 29
Chapter 2: Bonds, Fixed Income, and Money Markets 30
2.1 The Basics of How Bonds Work, by Example 31
2.2 Why Buy Bonds? 33
2.3 Bond Trading, Money Markets, and Repurchase Agreements (Repos) 35
2.4 Repurchase Agreements (Repos): Leverage, Financing, and a Secured Money Market 40
2.5 The Simplest Asset Liability Matching Problem: Duration Matching 44
2.6 Yield Curves, and the Future Interest Rates They Imply 50
2.7 Sovereigns, SSAs, Municipals, Corporates, and Structures: Five Categories of Credit Risky Issuers 58
2.8 Credit Risk: Calculating the Chance and Cost of Not Being Paid Back in Full on Time 63
2.9 Callable Bonds, and Other Features to Watch Out For 70
2.10 What’s So Outside the Box About Bond Investing: How to Better Buy Bonds, and Further Reading 73
Chapter 3: Real Estate and Property 75
3.1 Essentials of a Real Estate Investment 76
3.2 Why Invest in Real Estate? 79
3.3 The “Four House Pension”: The Simplest Inflation-Indexed Pension Plan and Reason to Own Real Estate 82
3.4 Accounting for Profits and Losses, Appreciation, and Depreciation in a Typical Real Estate Investment 85
3.5 Risks in Real Estate Investing 88
3.6 Real Estate Investment Trusts (REITs) 89
3.7 What Drives Returns from Investing in Property 91
Chapter 4: Equities and Stock Markets 94
4.1 What Are Stocks, Equity, and the Different Types of Stock Markets? 95
4.2 Why Invest in Stocks? 96
4.3 Share Classes, Preferred Stock, and an Example of Higher Returns on a Bank’s Stock 97
4.4 How to Value a Stock, and Understand Why Stock Prices Go Up and Down 100
4.5 Stock Investing Outside the Box 107
Chapter 5: Currencies and Foreign Exchange Markets 108
5.1 Major Currencies and Categories of Currencies 109
5.2 How Foreign Exchange Markets Work 114
5.3 What Drives Currency Exchange Rates Up and Down 120
5.4 How Investors Use Currency Markets and Currency Futures: Hedging, Carry and Momentum Trades 126
Chapter 6: Alternative Assets from Gold, Commodities, Art, Fine Wine, and Other Collectibles to Private Equity and Hedge Funds 133
6.1 Gold, Silver, and Precious Metals 134
6.2 Oil, Copper, Sugar, Feeder Cattle, and Other Commodities 140
6.3 Art, Gemstones, Fine Wine, and Other Collectibles 148
6.4 Private Equity 152
6.5 Hedge Funds 155
6.6 MLPs, BDCs, SPACs: Other Listed Alternatives 162
6.7 Why Invest in Alternatives? 170
Part II The “How” Boxes 171
Chapter 7: Diversification and Portfolio Construction: Maximizing Return and Minimizing Risk 172
7.1 How Diversification Reduces Risk, Increases Returns, or Both 172
7.2 Measures of Absolute Return and Risk 175
7.3 Mean-Variance Optimization and the Classic Maximum Return, Minimum Risk Portfolio 186
Chapter 8: Indexes, Benchmarks, Mutual Funds, and ETFs 196
8.1 Price Weighting 197
8.2 Market Cap Weighting 201
8.3 Price Return Versus Total Return 205
8.4 Alternative Weighting and “Smart Beta”: Growth vs Value, Size, Momentum, and Quality 206
8.5 The Alpha and Beta of Outperformance and Relative Performance 211
8.6 Closed-Ended Funds 214
8.7 Open-Ended Mutual Funds 217
8.8 Exchange-Traded Funds (ETFs) 221
Chapter 9: Blockchain and Cryptocurrencies 226
9.1 The Basics of Public Key Cryptography on Which Blockchain and Cryptocurrencies Are Based 227
9.2 Blockchain Basics: Bitcoin, Cryptocurrencies, and Payments 229
9.3 Advanced Blockchains: Smart Contracts 233
9.4 Valuing Crypto Assets 238
Part III The “Where” Boxes and “Why Break the Boxes” 243
Chapter 10: International Investing and the Importance of Breaking the Country Box 244
10.1 The US Market 250
10.2 The Eurozone 257
10.3 Japan 261
10.4 Greater China 273
10.5 The “ABCS” and Other Developed Markets 284
10.6 Emerging and Frontier Markets 286
Chapter 11: Behavioral Investing That Breaks the Boxes 293
11.1 Procrastination and “Analysis Paralysis” 295
11.2 Comfort Zone and Biases 296
11.3 Fear and Greed, FOMO, Buying High, and Selling Low 299
11.4 Agency Problems 300
11.5 Gender, Age, and Artificial Intelligence (AI) 302
11.6 Further Reading 303
Conclusion 305
Index 307