Be a Good Loser

I’ve been writing this white paper/book on asset allocation strategies which has been really insightful and fun.  Actually I’ve been mostly putting off writing it but here’s to hoping that I get it done by year end.

One of the biggest challenges of investing is long periods of underperformance, or outright negative performance and losses.  Cliff Asness has a fun piece out on his blog where he talks about 5 year periods in stocks, bonds, and commodities and basically how anything can happen.

Unfortunately for investors there are only two states – all-time highs in your portfolio and drawdowns.  Drawdowns for those unfamiliar are simply the peak to trough loss you are experiencing in an investment.  So if you bought a stock at 100, and it declines to 75 you are in a 25% drawdown.  If it then rises to 110 your drawdown is then 0 (all time high).

One challenge for investors is how much time they spend in drawdowns.  It is emotionally challenging largely since they anchor to the high value in their portfolio.  If your account hit $100,000 last month up from $20k ten years ago, likely you think of your wealth in terms of the recent value and not the original $20k.  If it then declines to $80k, many think in terms of losing $20k rather than the long term gain.

I thought it would be interesting to look at a few asset classes and ask how long they spend in each outcome – either all-time highs or in a drawdown.  Below is a chart of a basic 60/40 portfolio’s drawdown since 1972, REAL RETURNS.  Notice how brutal the high inflation 1970s were to the portfolio:



The investor only spends about 22% of the time at new highs, and the other 78% in some form of drawdown.  A few values for common asset classes below….

US Stocks  17%

Foreign Stocks 12%

Bonds 16%

REITs 16%

Commodities 9%

Gold 4%

60/40  22%


So if you’re going to be an investor, get used to being a loser!



Global Asset Allocation White Paper

I’ve mentioned this a few times before, but I’m putting together a survey of various global asset allocation models.  I would be curious to know what sort of topics or questions you may like to see included…below is a very rough draft chapter outline…goal is for this to be short, with plenty of supporting material in the appendix…email me any ideas!!


Screen Shot 2014-12-04 at 10.43.24 AM


CHAPTER 1: A History of Stocks, Bonds, & Bills

CHAPTER 2:  Asset Class Building Blocks

CHAPTER 3:  The Benchmark Allocations: 60 / 40 and Global 60/40 (Norway)

CHAPTER 4 – All Weather and Risk Parity (Ray Dalio)

CHAPTER 5:  Global Market Portfolio

CHAPTER 6:  Rob Arnott

CHAPTER 7: Endowment Style:  El-Erian, Swensen, Ivy

CHAPTER 8: Buffett

CHAPTER 9:  Comparison of the Big Five (Dalio, Arnott, GAA, Swensen, and Buffett)

CHAPTER 10:  Implementation (ETFs, Fees, Taxes, Advisors)

CHAPTER 11:  Summary


APPENDIX B: Permanent & Global Permanent



APPENDIX E: Marc Faber


APPENDIX G: Bernstein


November Tweets

Price Going Up

Just a quick last reminder to all those looking to subscribe to The Idea Farm  – the price is going up at year end…

Subscribers that join us in 2014 will always pay the lower rate of $299/year.  Starting in 2015, a yearly sub increases to $399 – but those that join by year end will be grandfathered in for the life of their subscription.

You can view some samples here.

New features this year include a weekly hedge fund profile every Sunday along with current 13F stock picks.  You also get access to:

– 1-2 emails each week with new research pieces from the top research boutiques across the country.

–  Quarterly valuation ratios for over 40 countries around the world including CAPE, CAPB, CAPD etc…

–  Excel quant backtester to test momentum and trend strategies.

The focus will be research that tends to be independent, actionable, and practical. Often we will disagree with some or all of the material, but believe in being exposed to ideas that contradict our own. You will gain access to publications that would cost well over $100,000 to subscribe to individually. We will never share, sell, or otherwise pass along your email address.  You can unsubscribe at any time.

Don’t miss out – subscribe to The Idea Farm before year end!



Millennial Investors Don’t Trust The Market – And They Shouldn’t

Morgan Housel is one of my favorite journalists right now.  His recent piece If Other Industries Were Like Wall Street had me smiling (especially the gardening reference).  He had a recent piece in the Journal The Market Is Your Friend. Really: One Millennial’s Advice to Peers though that I disagree with a bit.  (Being born in 1977 I think I qualify for Gen X?). The article mentioned “Last year, a Wells Fargo survey showed 52% of Millennials are “not very confident” or “not confident at all” in the stock market.”  Is that because Millenials are slacker morons?  Or are they actually justified in their distrust?

The article mentions the benefit of time to starting early as an investor, as well as the fact that the market has returned about 6.8% real per year since 1871 as a reason investors should stay the course with stocks (since 1900 the number is 5.8% and worldwide closer to 5%).

But here’s the problem – it greatly matters what you pay when you start.  Examining each decade in a similar fashion as the article back to 1900, and holding stocks for 12 years, we find that:

–  Real returns ranged from -2.5% per year if you started in 1930 to 16% per year if you started in 1950.  That is a wide spread of potential outcomes…

– Roughly a THIRD of all holding periods of 12 years per decade resulted in a loss!

–  Starting valuations ranged from a Shiller CAPE ratio of 6 (1920) to 44 (1999).

–  If you grouped the 11 decades into thirds, and averaged the best returning four decades and the worst four you have:


10.42% annualized returns with average starting valuation of 13.25.


-1.41% annualized returns with average starting valuation of 24.5.

Notice the difference?  Cheap starting points resulted in better returns, and paying too much ended up with losses.

The problem is, of course, where we are now with a CAPE ratio of 26.5.  I would argue Millenials are actually smarter than they look and that they are correct in avoiding stocks.  That is depressing but is the unfortunate reality.  However, not all is lost.

Valuations for equities around the world are much, much more reasonable at an average CAPE of about 15.  And if you’re willing to be a little different, the average CAPE of the cheapest 10 stock markets around the world is ridiculously cheap at about 8.

So my advice to Millenials (and Gen X and Baby Boomers alike) is this – don’t abandon stocks, but consider the below steps to improve your chances of better returns

-The bad news is the US stocks are expensive, although not in bubble territory. The good news is most of the rest of the world is quite cheap.

-At a minimum, allocate your portfolio globally reflecting the global market cap weightings. In the US, that means allocating 50% of your portfolio abroad.  Likely you have home country bias and invest about 70-80% of your assets in the United States.

-To avoid market cap concentration risk, consider allocating along the weightings of global GDP. This would mean closer to 60-80% in foreign stocks.

-Similarly, ponder a value approach to your equity allocation. Consider overweighting the cheapest countries and avoiding the most expensive ones. Currently, this would mean a low, or zero, allocation to US stocks. Note: This does not mean simply picking one or two countries, but rather a basket of the cheapest countries – 10 is a reasonable number.

If you want to read some more on equity valuations I have a short book on Amazon called Global Value.  It’s only $5 and you could probably read it in an hour or two.  If you promise to write a review I’ll even send you a free copy just enter your email here..

Paul Tudor Jones on the 200-Day Moving Average

I mentioned the new Tony Robbins book out “Money: Master the Game” in our prior post “The All Seasons Portfolio“.  I think it is a good book, especially for the newbie wondering what to do with their money.  It is really long, but market pros could probably skip to the last 25% of the book for the interviews, and honestly the Paul Tudor Jones one made the entire book worthwhile.  I would buy it for that alone.  As you know I’ve always been a trend guy, and Paul talks quite a bit about trends below.  (Likely I will update our 2006 trendfollowing paper again in January.)

While I would like to post the entire interview here, a few highlights are below (TR=Tony Robbins, PTJ= Paul Tudor Jones)

PTJ: So the turtle wins the race, right?  I think the single most important things that you can do is diversify your portfolio.  Diversification is key, playing defense is key, and, again, just staying in the game for as long as you can.

TR:  Following up on diversification, how do you think about asset allocation in terms of playing defense?

PTJ: There’s never going to be a time where you can say with certainty that this is the mix I should have for the next five or ten years.  The world changes so fast.  If you go and look right now, the valuations of both stocks and bonds in the US are both ridiculously overvalued.  And cash is worthless, so what do you do with your money?  Well, there’s a time when to hold em and a time when to fold em.  You’re not going to necessarily always be in situation to make a lot of money, where the opportunities are great.


TR: Okay, any specific strategies for protecting your portfolio?

PTJ: I teach an undergrad class at the University of Virginia, and I tell my students, “I’m going to save you from going to business school.  Here, you’re getting a $100k class, and I’m going to give it to you in two thoughts, okay?  You don’t need to go to business school; you’ve only got to remember two things.  The first is, you always want to be with whatever the predomianat trend is.


TR:  So my next question is, how do you determine the trend?

PFJ:  My metric for everything I look at is the 200-day moving average of closing prices.  I’ve seen too many things go to zero, stocks and commodities.  The whole trick in investing is: “How do I keep from losing everything?”  If you use the 200-day moving average rule, then you get out.  You play defense, and you get out.


TR:  That is considered one of the top three trades of all time, in all history (1987 Crash)!  Did your theory about the 200-day moving average alert you to that one?

PTJ:  You got it.  It had done under the 200-day moving target.  At the very top of the crash, I was flat.


TR:  What’s the second thought for students?

PTJ:  5:1 (risk /reward).  Five to one means I’m risking one dollar to make five.  What five to one does is allow you to have a hit ratio of 20%.  I can actually be a complete imbecile. I can be wrong 80% of the time, and I’m still not going to lose.


TR:  Since asset allocation is so important, let me ask you:  If you couldn’t pass on any of your money to your kids but only a specific portfolio and a set of principles to guide them, what would it be?

PTJ:  I get very nervous about the retail investor, the average investor, because it’s really, really hard.  If this was easy, if there was one formula, one way to do it, we’d all be zillionaires.  One principle for sure would get out of anything that falls below the 200-day moving average.

There you have it folks – trendfollowing advice from one of the greatest traders of all time…

Lots more great stuff in the interview on giving back, charity, kindness, etc….Money: Master the Game is worth a read!

In a follow on post we will examine the two allocations in the book, David Swensen vs. Ray Dalio….




Fees of the Top Advisors

I was updating an old table I used to post on the blog called “A Survey of the Money Manager Space”.  It examined a lot of the online and offline offerings from various providers – RIAs, roboadvisors, custodians, etc.

My prior quote from 2012:

Investors shouldn’t pay much for buy and hold portfolios.  Honestly they shouldn’t pay anything on top of the 0.30% in fees one would pay for a portfolio of indexed ETFs or mutual funds (we detailed a few of these in our book The Ivy Portfolio).  Now, if you have a killer advisor that is doing tax harvesting and/or adding alpha that is different but not the topic of this post.  (Although if I was one of these software sites I would perfect the tax harvesting algorithm that would be huge differentiator.)

Anything more than 0.5% or so on top of fund fees is either paid a) out of ignorance, which is not always the investor’s fault or b) as a tax for being irresponsible.  For the latter I mean a fee to keep you out of your own way of chasing returns and doing something stupid, much in the same way someone pays Weight Watchers or any other diet advice program when you know what you should be doing (eat less, exercise more).  Some broad generalizations here but trying to get to the data below.  That fee is worth a lot if you cannot keep out of the way of your own emotions, and the evidence is massive in favor of that being the case.  We have a great research piece coming up on the topic here soon.

I made the dividing line 0.5% for a $100,000 account.  Anything more is labeled in red (ie charge as much as you can get away with model), anything below in green (charge as little as possible model).  I can’t understand why the custodians charge anything at all considering they likely just load the accounts with their own funds (double dipping on fees).  I actually applaud some of the lower fee entrants and their fees (Betterment, Wealthfront), though I will say I think this is a very difficult model to differentiate yourself compared to simply buying a few ETFs and rebalancing that once a year.

Not too much has changed in the two years since I wrote this post.  More and more roboadvisors have entered the space, raised a TON of VC money while raising AUM as well.  Huge congrats to the companies raising the money, though I think the VCs have lost their mind at these valuations. I think it is a great trend and will include Schwab in the table once they launch.  For the most part we are are on the same side of the ball as the roboadvisors versus the old school high fee offerings (though some roboadvisors are not low fee).

I decided to update the table with some famous RIAs, and I was actually shocked how much most of them charged.  You can find all of this information for free on the SEC website – click on “Brochure” on the left side of the screen to get an easy reading summary of fees, etc.  Some of the most famous RIAs like Ken Fisher, Ron Carson, and Rick Edelman, charge fees much higher than I would have expected.  Some offer additional services such as estate planning, trusts, etc.

Anyways, email in with any suggestions and I’ll add to the table…(Note: I excluded Fidelity’s Portfolio Advisory Service as I couldn’t get a straight answer out of them on fees – it ranges from 0.63% to 1.7%.)  Any mistakes are my own and I will update with corrections if you see any…



Time Machine: 2010

I’ve been digging through the archives and came across this old post with a fun piece from Paul Tudor Jones, who wrote the foreword to the new edition of Reminiscences of a Stock Operator …:

The interview  is priceless.

Must read.

“There are two rules from this book by which I now live during these later stages of my constitution.  First is the tenet “The trend is your friend,” which is repeated often – but not often enough.  You sill simply never make any money unless you begin and end every trading thought with that in mind.  Second is the old adage actually popularized in the 1880s, as I learned in your annotations: “Sell down to the sleeping point”.

Probably the best lessons to be learned from this book come from his (Lefevre’s) repeated failures and how he dealt with them.  In the book I think he lost his entire fortune four or five times.   I did the same thing but was fortunate enough to do it all in my early twenties on very small stakes of capital….I think it’s no great coincidence that our greatest champions, our greatest artists, our greatest leaders, our greatest everything all seem to have experienced some kind of gut wrenching loss.”


I added a simple one time email login to the blog.  It should work such that you only have to type your email in once – obviously I will never rent or sell your email.

The All Seasons Portfolio (aka The Tony Robbins Portfolio)

Like I wrote about the other day, I’ve really taken to podcasts.  One of the recent podcasts I listened to was an interview between Tony Robbins and Tim Ferriss.  I’m not that familiar with Robbins (I keep calling him Larry Robbins, the founder of the Glenview hedge fund).  He is publishing a new book out next month called Master the Money Game, his first in 20 years, and first on finance.  There are lots of names included in the book our readers will be familiar with (Dalio, Swensen, Bogle, etc).  Anyways, Robbins seems like a truly decent human being, and I enjoyed the interview and pre-ordered the whopping 700 page book. 

Anyways, what interested me was he chatted a lot about risk parity and Dalio.  I’ve written a lot about risk parity on the blog in past years (a long linkfest here), and my very first post ever in 2006 was on the topic.  Robbins refers to Dalios All Weather portfolio, which Bridgewater explains at length on their website – “The All-Weather-Story“.  Robbins seems to be getting into the roboadvisor game with a partnership with Stronghold Financial.  Their strategy is called the “All Seasons” portfolio which is definitely a hat tip to Bridgewater. The fee of 0.75% is in the middle vs the other robo-advisors (Betterment, Vanguard, Wealthfront, Liftoff, Personal Capital, etc…and Schwab rumored to be launching soon). Like most robo sites it is well designed, takes clients through a questionnaire, and makes suggested portfolio recs using ETFs.

Here is the breakdown of the All Seasons allocation: Long Gov Bond 40.00% Intermediate Gov Bond 15.00% Diversified Commodity 7.50% Gold 7.50% US Large Cap 12.50% US Mid Cap 5.50% US Small Cap 3.00% International Stock 6.00% Emerging Market Stock 3.00% Total 100.00%

all seasons
Here is my old risk parity portfolio from 2013.  As you can see they are a little different – Robbins has more in equities, though most in the US (which you know I don’t like for the home country bias…).  (I wonder if the shift in bonds was due to Bridgewater altering the strategy in 2013?)
Below is performance from 1973-2013 for the All Seasons most risk parity portfolios that are heavy in bonds, it tends to do worse in a rising rates environment like the 1970s.  

cagrcagr2  yearlyreal curve .


A quote from my old article last year on the topic of asset allocations models…will update the returns at year end as most of these are only through 2012…

“As you can see, they all performed pretty similarly. People spend countless hours refining their beta allocation, but for buy and hold, these allocations were all within 200 basis points of each other!

A rule of thumb we talked about in our book is that over the long term, Sharpe Ratios cluster around 0.2 for asset classes, and 0.4 – 0.6 for asset allocations. You need to be tactical or active to get above that.

What’s the takeaway? Go enjoy your summer.”


returns by year



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