Late Week Diversion

I originally thought this might be NSFW, but fiat currencies having sex is hardly X-rated. Now you all know the odd reader emails I get everyday…(HT:SD.)

Value Investing Congress

I was going to do some live blogging from the VIC this week in Pasadena until I found out the conference didn’t have wireless.  Instead, I took a bunch of notes to post later (ie did you know Lebanon has 30% of their GDP in gold?), but then noticed that Zain at The Manual of Ideas did a far superior job of live blogging the conference.  I’ll link to their blogs below, and then chat a bit about my take on things.

I love going to these conferences, and the concept of tracking the smart money is one of the reasons we started AlphaClone.  Wayyyy back at the end of 2006 we started tracking a group of 10 hedge funds I like (Baupost, Berkshire, Blue Ridge, Eminence, Greenlight, Lone Pine, Maverick, Okumus, Private, and Tiger).

The portfolio of the 10 most popular ideas amongst these funds has outperformed the market by 14% a year since 2000, and is beating the market by over 25% YTD in 2009.  That is astonishing to me (and even includes one fund imploding).  At the end of the year we replaced Okumus with Appaloosa – and their clone is absolutely destroying the market this year.

Summaries below (I’m trying to get the guys to let me post the PowerPoints as well). More later.



David Nierenberg, D3

David Chu & Igor Lotsvin, Soma Asset Management

Zeke Ashton, Centaur Capital

Charles de Vaulx, International Value Advisors

Brian Gaines, Springhouse Capital

John Burbank, Passport Capital

Gus Spier, Aquamarine Capital

Jed Nussdorf, Soapstone Capital

Dave Rabinowitz, Kirkwood Capital



William Waller & Jason Stock, M3 Funds

Scott Klein, Beach Point

J. Carlo Cannell  Cannell Capital

Whitney Tilson & Glenn Tongue, T2 Partners, Presentation here






Some Recent Milestones and a LinkFest

Blogging has been light due to a heavy travel schedule, but it should pick back up.  I’m headed to the Value Investing Congress in Pasadena if anyone is around this week…


Some cool recent milestones:

Launch of two private Cambria Funds

500th blog post

25,000 downloads for my paper, putting it in the top 10 all time on the SSRN!


Some videos of yours truly:

Forbes video 1

Forbes video 2



A Framework for Risk Based Fund Manager Comp


Finally a Convertible Bond ETF is here


Great post with lots of charts on hedge funds.


Buffett and Fairholme


Back in May 2007 I penned a list of ETFs I’d like to see.  Amazing to see that many holes have been filled:

My original list

1. Foreign Small Cap
2. Foreign Bonds, Emerging Bonds
3. Municipal Bonds
4. Russia
5. Convertible Arbitrage
6. Value Hedge Fund of Funds (tracking the 13Fs)
7. Activist Fund of Funds (ditto)
8. Dogs of the Dow with Net Payout Yield (Wisdom Tree but with Payout Yield weighted instead of dividend yield)
9. U.S. Listed Hedge Funds and FOFs

Reader Suggestions:
1. Emerging markets non-free (all the countries that cannot exchange local currency for dollars like Sudan and Iran).
2. Timber
3. Individual commodities ala LSE
4. Disease (Diabetes, etc)
5. Country ETF’s by market cap, style
6. Emerging Value, Small Cap
7. Emerging Real Estate
8. Lots of individual country suggestions (Vietnam)
9. Lots of leveraged suggestions for asset classes (AGG, GSP)


Let’s say you knew nothing about investing, and someone presented you with the following choices. Over the past 36 years there are two asset classes, and their return statistics are :

1973-2008 Asset Class A

Return: 9%

Volatility: 16%

MaxDD: -45%

Sharpe 6% : 0.21


Asset Class B

Return: 9%

Volatility: 9%

MaxxDD: –19%

Sharpe 6% : 0.30

Most investors would choose asset class B due to the similar returns as A, but with much less volatility and drawdown. Obviously, asset class A is stocks and B is bonds. The problem with this analysis is a big bias in the period chosen – one of largely declining interest rates and two big bear markets in stocks. If you take the results back further to 1900, the results are a little different. Here stocks handily outperform bonds, albeit with much more risk.

There are lots of observations to be made here (the cyclical nature of returns, the importance of the period chosen, path dependency, what works in the past doesn’t mean it will work in the future etc) but the main point I wanted to highlight here was just how much risk a 60/40 portfolio has (60% stocks, 40% bonds). An investor putting 40% of his portfolio in bonds would still have been subject to a nasty 60% decline in the value of his portfolio. This doubles the roughly 30% drawdown investors faced with a 60/40 portfolio in February. How many investors do you think have a 60/40 allocation and are willing to absorb a 30% loss, let alone a 60% loss? Timing helps on the risk management front, but that is largely due to decreasing the risk in the equity allocation.


What’s your stock’s O-Score?


And if it is as nice where you are as it is where I am today, quit reading this and go play!  Or at least take a copy of my book and read it outside. . .



I’ve been on the road and will be in SF this Monday and Tuesday (at the Finnovate conference).  If you’re there stop by and say hello.


I’m chatting with Mark and Erin on CNBC in the morning ( little after 10am East Coast), tune in!

Link here:

Intro to Investing Book

I had a friend ask me the other day what the best book was for their son who was graduating high school and wanted to learn more about investing. I drew a blank. I used to say the WSJ Guides to Money and Finance but they seem outdated.

Leave a comment with your favorite Investing 101 book…

Finding the Best Ideas in a Portfolio

(Hat Tip: Abnormal Returns)

I tried to get the professors to change the title to "Why you Need AlphaClone" but no luck so far.  The bolding below is mine.  1 to 4% per Q = over 4 to 16% per annum in alpha if you know where to look.  The Tiger Cubs popularity clone is beating the market this year by 20% (and has beaten by 15% per annum since ’00).


Best Ideas by Cohen, Polk, and Silli


We examine the performance of stocks that represent managers’ "Best Ideas." We find that the stock that active managers display the most conviction towards ex-ante, outperforms the market, as well as the other stocks in those managers’ portfolios, by approximately one to four percent per quarter depending on the benchmark employed. The results for managers’ other high-conviction investments (e.g. top five stocks) are also strong. The other stocks managers hold do not exhibit significant outperformance. This leads us to two conclusions. First, the U.S. stock market does not appear to be efficiently priced, since even the typical active mutual fund manager is able to identify stocks that outperform by economically and statistically large amounts. Second, consistent with the view of Berk and Green (2004), the organization of the money management industry appears to make it optimal for managers to introduce stocks into their portfolio that are not outperformers. We argue that investors would benefit if managers held more concentrated portfolios.

CAIA buys AllAboutAlpha

Well deserved for such a good site – congrats Chris!

Article here.


I will be in NYC next week for meetings.  Let me know if you are around and want to meet up.


I mention this in my book, but next time someone tells you the market is efficient tell them to pull up a quote for the CUBA closed-end fund that is up 35% today (and already trading at a 30% premium as of the market close Friday).


"Is US Small Cap a Viable Alternative to US Private Equity?" (HT: LW)


A cool TED speech on electric cars.  Looks like the first Aptera should ship this year. (HT: SD)

In a related note, an interesting rebuttal from the Tesla founder Musk to some recent criticism. . .


A couple nice book reviews and mentions:


Why mean ignorant monkeys beat median jumping clowns in the investment circus

Designing Better Futures


Ha, I interviewed once at GETCO, and after being interviewed by at least 15 people and having been there for about 6 hours the last two finished the interview with the question, "What are our names?".  No idea.


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