Finding Yield In A Low Yield World – New White Paper!

I’m writing this post from snowy Japan.  After a day of skiing, an onsen, and some sushi and sake it is easy to reflect on the state of the world.  This is a picture I took on top of a mountain in the Honshu region today:


Japan has long had low bond yields (their 10-year is currently around zero), but I never thought I would see this in my lifetime but lots of government bonds have negative yields.   At a recent shareholder meeting of the Daily Journal Corporation, Charlie Munger commented – ” [Negative rates]…surprised everyone, including economists who pretend that they knew it all along. I was flabbergasted when they became low, but when they get negative I became really flabbergasted.”

Think about that for a second, paying governments to hold your cash!  (Below is a chart courtesy of Pension Partners detailing some of the yields around the world. )

So, what is an investor to do?  Can we build a better strategy for investing in global bonds? I believe you can.  Much like value investing in stocks, one can apply a value methodology to global bonds.

You can go here to download for free my short new white paper that tackles the subject.

Let me know what you think!




C’mon Bounce

We had one of the lowest bullish readings ever on the AAII Sentiment survey.  That’s not surprising, of course, after the worst start for stocks EVER.




I’ve been quite bearish on US stocks for awhile – the combo of high valuations, and a trend rolling over isn’t a good setup for a long trade.  However, buying into awful sentiment is usually a smart thing to do.  Just pulling up the 10% most bullish and bearish sentiment readings since 1987, and future returns:



Lots and lots of posts in the archives on reversion strategies.  We may trigger a few this month if the current prices hold…



Institutional Investors, They’re Just Like Us!

On of the popular celebrity magazines has a feature called “Stars, they’re just like us!” It shows photos of celebs doing such mundane activities as getting coffee at Starbucks and going on walks with their babies.  There is a genuine fascination with celebrity culture (believe me I live in LA), mainly because many of these celebs have attained status, wealth and fame, what many are seeking.  But reality is much more dull, and most celebs face the same struggles and life challenges as everyone else.  And research has shown that in general, after a basic livable wage, happiness doesn’t increase that much with money (and especially fame).

Retail investors get a terrible rap (though mostly deserved) for their terrible behavior.  Graphics like the below from AdvicePeriod demonstrate that invdividuals are terrible at timing their investments largely due to emotions of fear and envy.


But are institutions any better?  One of the biggest misconceptions in our industry is that investors with a lot of assets are better investors.  They’re not.  In fact, they often do similarly dumb things that retail investors do, just with fancier names and the backing of committiees and RFPs. Every journalist asks on every call “What is your AUM?” as if that acts as the final validator of your ability.  If this were true, many shops that manage in the billions and charge 2% for nothing wouldn’t have any assets.  Just try to find performance #s on some RIA sites, it is impossible.  (And pro tip to journalists, you can look up any investors AUM online on sites like Brightscope.)

I goto a lot of institutional conferences and while the themes change there is one constant – herding and chasing performance.  In the early 2000s it was moving away from market cap indexes (and tech!) and back toward value, in the mid 2000s it was allocating to real assets to protect against coming inflation and rising interest rates, in late 2000s it was tail risk and tactical strategies, in early 2010s it was risk parity, and then low vol and alternative yield assets and MLPs, followed by angel investing and FX hedging now.  What’s next?

See a theme?  If you don’t believe me, look at the below graphic (via Vanguard via A Wealth of Common Sense).  It shows 8,800 hiring decisions by 3,400 plan sponsors.  They just chase performance.  They fire managers that do poorly, then allocate to managers that have done well, who then go on to do poorly.  It is a never ending treadmill.


If you read my book Global Asset Allocation you know that your asset allocation doesn’t matter much over long periods.  But it matters a ton over short periods.  Meaning, it can diverge quite a bit over 5-10 years but over 40 all of the allocations grouped within 1% CAGR of each other.  The best and worst strats from my book diverged by 50 percentage points in the 1970s.  The worst allocation would have been fired, and the best garnered all the assets.

But what if you picked the top allocation per decade for the next decade, how would that do?  (HT to Newfound for the idea.)

It would reduce your return by 1.5% per year, more than the spread of the best performing allocation vs. the worst.  And if you remember in the book I said that fees matter more than anything, I’ll add sticking to your plan.  Not paying a ton in fees and sticking to your plan contribute vastly more to your return than your asset allocation.

So don’t look to the talking heads and institutions for help, they’re just like us.

How to Beat 98% of all Mutual Funds

I don’t know why I didn’t include this idea in my new book, but consider it a bonus chapter.

How long have people known that Buffett is a great stock picker?  After he closed his hedge fund in the 60’s?  Or perhaps 10, 20 years later in the 1970s or 80s?  Certainly by the 1990s, right?

Almost everyone in the world knows that he is a great investor.  Hell, he has to be to rank in the top 5 richest people in the world.  So why don’t people simply follow along and ride his coattails?

Because it’s hard.  Let me explain.

You could simply allocate to Buffett’s top 10 stock picks, and rebalance that portfolio each quarter.  He doesn’t trade much so there shouldn’t be a lot of turnover.  How would tracking his portfolio have performed?

According to Morningstar, his picks would have done over 9% a year and would have beaten about 98% of all stock mutual funds in the United States. This also excludes currently dead funds which makes his results even better.

And you wouldn’t pay any fees.  So why don’t people simply follow along and ride his coattails?

Because it’s hard. (It’s also boring and isn’t as “fun” as trading Facebook and Biotechs.)

The reason Buffett is successful is not because he has a magic stock wand, but rather has unbelievable ability to stick to his style.  There are numerous investment styles on Wall Street that work – value, momentum, trend, buy and hold – they all work.  The challenge is sticking to your style and not selling at the worst time.

Below is a simulation from AlphaClone that looks at the 13F tracking performance.  Crushes the market.  But notice something else.  It would have underperformed US stocks seven out of the last nine years!  When would you have fired this manager?  2009? 2010? Certainly by 2013…

So, as you think about your strategy, are you willing to give it 10 years?  15? 20?  Now understand why all of the academic studies show people are so bad at timing….they’re human.


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11 Bearish Charts, 0 Bullish

I penned a post last spring on how most indicators were bearish for the US stock market except for the trump indicator, the trend.

Well, it seems like that too is now bearish.  So, buyer beware!

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New Book!

My new book is out Thursday!  I think this is a really fun one, and in honor of the publication I made my last three books free from 7th-12th.

Pick up a copy, or four, and let me know what you think!

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Global Stock Market Valuations in 2016

I talk a lot about global stock market valuations on this blog.  For those unfamiliar with my work, here is an old article “Everything you Need to Know about the CAPE ratio“, or you can pick up my book Global Value. I believe long term valuation metrics are incredibly useful in predicting long term future stock returns.  But, value is a blunt tool and understanding how the macro environment affects what people are willing to pay for stocks, and cash flows, is vital.

Rob at Research Affiliates has done a lot of great work with the CAPE ratio.

Below are a few screenshots from a Powerpoint presentation he gave to the Q Group this fall.  For those unfamiliar, the Q Group is a quant forum that has been around for 50 years that hosts seminars with some of the top quants, fund managers and academics in the world.  They charge $6,500 for membership, but they post all of their presentations and audio, so just think of how much I’ve already saved you in 2016! (Homepage with links here.)

The valuation metric that is suggesting low single digit returns for US stocks is also suggesting some whopping double digit returns for emerging markets.

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One of the key observations is that investors are willing to pay more for stocks when they are in the inflation “safe zone” of around 1-4%, and ditto for real interest rates.  Why?  Likely future cash flows are more certain and less likely to be eroded by inflation, or deflationary problems.

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And the same thing occurs in foreign markets:


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So where do we stand with markets now?  Some are expensive (US, Japan) and some are really cheap (Europe, Russia)…Broad foreign developed is around 15 and emerging around 12.  We update long term valuations metrics quarterly on The Idea Farm and will send them out tomorrow.

Enjoy your Sunday and Go Broncos!

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Stock Valuations and Returns in 2015

Most global stock markets got spanked in 2015.  The average country lost about 10% (USD based investor.)

Using a value approach worked well however.  The cheapest third of global stock markets outperformed the most expensive by about 5 percentage points.  That is why I say value investing is as much about avoiding the expensive stuff as investing in the cheap…You still lost money though!

Below are the markets (as ranked by a valuation composite of long term ratios like CAPE) I sent to the Idea Farm at the start of the year.

I’ll send the new valuation ranks out to the Idea Farm list later this weekend.




2015 Automated Platform Performance Review: Betterment vs. Wealthfront

I’ve written a lot on asset allocation and the automated investment services.  In general I am positive on the low cost, tax efficient, algorithmic investing platforms.  The big four, in order of AUM, are Vanguard, Schwab, Betterment, and Wealthfront.  Vanguard is somewhat of a hybrid with over $20B, charging 0.3% and including an advisor, whereas Schwab ($4B) Betterment and Wealthfront ( about $3B each) are pure robos.

Wealthfront moved into 4th place after being an early frontrunner, prompting them to go on the attack vs. both Schwab and Betterment which is a shame (or possibly the attacks turned people off and actually caused the slide in ranking).Schwab would probably be even higher if they didn’t keep doing silly things like requiring minimum cash balances and blocking active ETFs.  But I do expect the custodians who manage their own ETFs, like Schwab and Vanguard, to win out over time as they have a built in structural cost advantage.

The three platforms combined have < $10B in AUM when the real enemy should be the asset allocation mutual funds that charge over 1% in fees and manage over $330 billion.  As I wrote earlier in the year, it is a wonderful time to be an investor.

(In fact there is only one ETF with a permanent zero percent management fee, but perhaps more to come in 2016!)

Each platform its own unique features, but if you’ve read my recent Global Asset Allocation book, you know that I think they basically all do the same thing.  (If you haven’t read it go here and I’ll send you a free one.)

That’s not a bad thing of course, they all give you a fairly global allocation of stocks, bonds, and a smidgen of real assets for about a 0.2% management fee and limited or no financial planning.  I depart on the allocations of course (moving away from market cap weighting and adding trend/liquid alt strategies would be two areas), but the performance should be near identical.  A much more important impact on performance is fees, which we discussed here, here, and here.

Oddly, none of the platforms publish GIPS performance (an investment management standard), which is weird.  Perhaps they don’t want to “focus on performance”, or perhaps because performance has been poor, but they don’t publish and they should.

So, below I’ve estimated some performance figures from this earlier article I wrote on the platforms in 2014.  This doesn’t take into account any rebalancing or tax benefits but just a ballpark look at performance.  I didn’t go through the Vanguard/Schwab questionnaires but they should be similar.

First, a look at broad market ETFs and performance:

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And below is the performance of the various allocations of the portfolios. They all likely lost money in 2015, but that shouldn’t be a surprise in a year where most assets did poorly.



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What is also not surprising is the reactions on social media about the performance.  People flip out about being down 5 or 10% don’t understand these portfolios have lost 30 to 50% historically!

I think this feature will be an interesting challenge for the robos in the first big bear market in US stocks, whenever that may happen.  Accounts will start to leave at -20% if conversations in the industry is any indication, and without someone to talk to, will be interesting to see if the robos can weather that storm. I’ve always said the biggest benefit of a traditional advisor is being a coach, and they are worth their weight in gold if they can keep you from doing something really dumb.

The automated investment space has been a fun area to keep an eye on, and those that know me should stay tuned – more interesting developments to come!

Off to go ski, happy New Year!


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