Follow-Up Post To Largest Company By Market Cap

About a year and a half ago I wrote and article investigating the performance of the largest public stock by market capitalization each year.

The original study was featured in the book “Mosaic: Perspectives on Investing” by Pabrai.

Pabrai did a backtest and reported a near 500 bps underperformance for the top mkt cap company vs the S&P 500. I extended the study a few years and found the results to be consistent, with the underperformance in CAGR of almost 7% from 1986-2006. This intuitively makes sense as the forces of capitalism work to compete with the top company (in addition to the difficulty in growing earnings at a massive scale).

How did this strategy perform in 2007?

Awful. Exxon’s stock (XOM) was up about 24% vs. 5.5% for the S&P 500. XOM would have been the largest company again in 2008, and both XOM and the S&P are down about equally in 2008.

Bespoke takes a look at the top companies in the world by market cap and 2008 stock performance.

PS One of the topics Pabrai covers in a subsequent book is cloning the best investment processes of great investors such as Buffett, Graham, and Munger. He argues that there is no need to reinvent the wheel – and simply apply the same selection model these investors have for decades. I go a step further and argue that an investor can perform equally well by simply following the holdings of these investors.

I have no idea how Pabrai’s funds are performing, but if he is just running a long only book, then it sure looks like he is in trouble (from SEC filings). I don’t see him on the implode-o-meter list…

LinkFest

Some of my research got mentioned in the new issue of the New Yorker. You can find the article here: “That Uncertain Feeling“. Although the author makes it sound like the reason markets are more volatile when they are declining is that traders are chasing losses – which I disagree with. I think it is simply that people are fearful and using a different part of their brain – namely, the flight response.

Here is some more on the psychology of losing.

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PTJ’s new quant fund Tensor is having a great year.

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The first shipping ETF launches.

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AllAboutAlpha has an article about Lo, and I must say I am more excited about his upcoming book The Heretics of Finance: Conversations with the Leading Practitioners of Technical Analysis than any other book in a long time.

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Nice graphic of voter turnout by age.

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The best photos from the Olympics.

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China is probably a great 6-12 month buy here. I remember an academic paper that tracked the results of local stock returns following hosting an Olympics, and the excess returns were high. Email me a link to the paper if you can find it.

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I thought Tropic Thunder was fantastic, especially Robert Downey Jr. Great recent interview in Rolling Stone here.

And the Winning Cover is. . .

I thought my book was coming out in November, but now it looks like February. Sheesh.

A good indication of the quality of my design tastes shows that my favorite cover garnered a puny 5% of the total vote for the three covers. Maybe that is a good sign that I am a contrarian (or have really bad taste I am not sure which.)

You can click through and see which cover won.

The Ivy Portfolio: How to Manage Your Portfolio Like the Harvard and Yale Endowments

It also makes me wonder about Amazon’s algorithm “Customers that bought this book also bought”.

How can they compute this if my book hasn’t even gone on sale yet? (Maybe they’re using pre-sales numbers, I dunno.)

Hedge Fund Masters Update

Are the top value hedge funds going to beat the market every quarter, or just outperform when the market is going up?

Maybe we should ask Will Ferrell, errr, I mean Robert Goulet:

“You win, you always do – that’s why I come up here.” (Video at the end – thanks to reader SB.)

All data is from the close on Wednesday. (For a much more in depth look into the 13Fs check out these posts over on the Market Folly blog.)

It is time to update the two hedge fund 13F portfolios we track on World Beta. If are are unfamiliar with the approach it is spelled out numerous times on my blog – you can just search “13F” and a bunch of posts will pop up.

I am not sure if I am going to continue to track these after the launch (hopefully next month) of AlphaClone. This blog is mostly about investment theory and applications rather than making investment advice and picks, so unless there is a lot of interest I may discontinue the updates. The strategies have outperformed the indexes by around 15% over the past year and a half, and there is some validity behind the approach. The two strategies we have tracked seem to follow the market on the downside but have much higher upside volatility. Those numbers are in line with my historical backtests of 6-12% outperformance per year. If you have a strong opinion either way, let me know. On to the filings!


Hedge Fund Consensus - Top holdings owned by 15 value hedge funds, ranked by # of funds with the same position. Qualcomm (QCOM) was the standout performer at around 18%, and American Express (AXP) was the worst performer at -23%. Everyone still loves Qualcomm, but everyone really loves American Express (AXP) now. Is it a falling knife or just a really cheap stock? Currently AXP is down about -40% from its high.

AAPL (3)
BRK(3)
MA(3)
QCOM(3)
TGT(3)
V(3)

WLP (4)

AMX (5)
GOOG (5)
MSFT (5)

AXP (6)

The list of double repeats is at the end of the post.

Hedge Fund Best Ideas – Top two holdings from each of 10 value hedge funds listed below. Qualcomm was the standout performer here as well, and Cadence Design Systems (CDNS) and News Corp (NWS) were the worst at around -31%.

AAPL
AMT
AMX
AXP
CDNS
CA
CY
GOOG
HLX
HPQ
KO
MA
MSFT
NWS
RIMM
SD
TGT
WFC
WLP
WYE

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Baupost Group

Klarman still holds his top positions in News Corp (NWS), Wellpoint (WLP), and Exterran (EXH). New positions include PDL Biopharma (PDLI) and United Health Group (UNH).

Top 10 holdings are:

WLP
NWS
EXH
PDLI
UNH
UFS
LINE
LMDIA
THRX
HRZ

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Blue Ridge Capital

Griffin runs a pretty diversified portfolio, and he was added to top names Google (GOOG) and Wyeth (WYE). New positions include Anadarko (APC) and Visa (V).

Top 10 holdings are:

GOOG
WYE
AXP
AAPL
CVA
MIL
TV
SCHW
APC
DISCA

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Warren Buffett

Not much going on here. Bought some NRG Energy (NRG). The Conoco (COP) stake was exempted from filings (thanks reader MC).

Top 10 holdings are:

KO
WFC
PG
BNI
AXP
JNJ
KFT
WSC
USB
MCO

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Eminence Capital

New position in Google and Abbott (ABT), sold out of Yahoo (YHOO) and UPS (UPS). Added to top positions American Express (AXP) and Cypress Semi (CY).

Top 10 holdings are:

AXP
CY
ORCL
PHG
FISV
DGX
MSFT
SAI
UTX
IGT

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Greenlight Capital

50% of Einhorn’s portfolio is in his top five holdings. New positions in Teradata (TDC) and Republic Airways (RJET).

Top 10 holdings are:

TGT
HLX
MSFT
AMP
MDC
HMA
BAGL
MIM
URS
PCX

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Lone Pine Capital

Bought new positions in Entergy (ETR) and Weatherford (WFT).

Top 10 holdings are:

SD
AMX
XTO
GOOG
QCOM
ETR
FAST
WFT
MON
MSM

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Maverick Capital

Ainslie added new positions in First Solar (FSLR) and CVS Caremark (CVS). Sold Qualcomm and Amazon.

Top 10 holdings are:

AAPL
RIM
AMX
BK
MRVL
FSLR
BAX
AMD
JWN
RTN

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Okumus Capital

Lots of turnover here. 60% of the portfolio is in the top three positions Microsoft (MSFT), Cadence Design (CDNS), and Office Depot (ODP). MSFT is a new position and accounts for a third of the portfolio.

Top 10 holdings are:

MSFT
CDNS
ODP
M
AN
MHP
ORLY
DST
EXPE
CTA

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Private Capital

Bought a little Sothebys (BID), sold out of BEA Systems (BEAS).

Top 10 holdings are:

CA
HPQ
SYMC
MGM
S
RCL
RJF
JW
IGT
NTRS

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Tiger Global

Mentor (MNT) and Trustmark (TRMK) are new positions, and sold out of Luxottica and Focus Media (FMCN).

Top 10 holdings are:

MA
AMT
CSX
GOOG
AMX
QCOM
BIDU
SBAC
TDG
MELI

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List of double repeats:

AMT
APC
BID
BNI
CA
CDNS
CSCO
COV
CY
DST
ETN
IGT
HPQ
HMA
HLX
KO
MDC
MSTR
MRVL
NWS
ODP
ORCL
PCLN
RIMM
SAI
SD
TDC
UNH
WFC
WMB
WMT


via videosift.com

LinkFest

Man I bet the magazines are going nuts over this site – Mygazines. I have no idea how this is possibly legal.

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One more aggregator launches – Blogs.com. At least they have the name going for them, but I can’t say I have any reason to go to their site. . .

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Man I wish I had this when I was writing my book or my college thesis – would have saved me a ton of time. Bibme.org

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I’m thinking about a Fall fly fishing trip to Montana. Any suggestions?

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Looking for a new job? CalPERS is hiring.

CalPERS, the largest public pension plan in the United States, seeks an experienced investment professional for the role of Chief Investment Officer (CIO). This individual leads and manages the 200+ person Investment Office, which invests CalPERS assets across a diversified global portfolio in public and private equity, fixed income, real estate, and inflation-linked assets. The CIO makes recommendations to and works closely with the CalPERS Board of Administration to determine prudent, forward-thinking investment strategies in accordance with CalPERS fiduciary responsibilities, policies and corporate governance standards. The CIO is a visible investment leader for CalPERS globally – within the investment community, public pension industry, before regulatory and governmental bodies and in the media.

See http://www.calpers.ca.gov/eip-docs/about/facts/investme.pdf for further details about CalPERS investment allocations.

If I Were A Woman…

that was looking for a permanent mate, then I sure wouldn’t be taking the pill.

(Sorry for the random non-investment related post, but I have to indulge my biotech background on occasion.)

Studies have shown that individuals prefer members of the opposite sex to have highly different genes that code for the immune system. This makes evolutionary sense, as the offspring will be much more likely to survive with a diverse and healthy immune system. The MHC genes (genes involved in the immune system that they also use for organ matching) can be detected by smell and taste (saliva), and it has been shown in many animal studies (mice, fish, etc) that individuals prefer mates with diverse MHC genes (in humans they are called the HLA genes).

Couples with differing MHC score all kinds of benefits including better sex life overall, higher rates of orgasms for women and a much lower chance of female cheating.

Thus, the famous saying about how chemistry can determine attraction and happiness in a relationship!

Check out the famous 1995 t-shirt smell study by Claus Wedekind for an example (and it works for Brazilians too):

In the first “sweaty T-shirt” experiment, a Swiss zoologist, Claus Wedekind, set up a test of women’s sensitivity to male odors. He assembled volunteers, 49 women and 44 men selected for their variety of MHC gene types. He gave the men clean T-shirts to wear for two nights and then return to the scientists.

In the laboratory, the researchers put each T-shirt in a box equipped with a smelling hole and invited the women volunteers to come in, one at a time, and sniff the boxes. Their task was to sample the odor of seven boxes and describe each odor as to intensity, pleasantness, and sexiness.

The results were striking. Overall, the women preferred the scents of T-shirts worn by men whose MHC genes were different from their own. However, their preference was reversed if they were taking oral contraceptives.

So basically, if a woman is on the pill she is picking the wrong dude.

From this article:

Not only could MHC-similarity in couples lead to fertility problems but it could ultimately lead to the breakdown of relationships when women stop using the contraceptive pill, as odor perception plays a significant role in maintaining attraction to partners.

“The results showed that the preferences of women who began using the contraceptive pill shifted towards men with genetically similar odors,” Roberts said. Roberts suggests a likely reason for the pill’s effect on a woman’s odor preferences. The pill puts a woman’s body into a hormonally pregnant state (the reason she doesn’t ovulate), and during that time there would be no reason to seek out a mate. “When women are pregnant there’s no selection pressure, evolutionarily speaking, for having a preference for genetically dissimilar odors,” Roberts said. “And if there is any pressure at all it would be towards relatives, who would be more genetically similar, because the relatives would help those individuals rear the baby.”

So why can’t you order a MHC panel and compare your genes with your honey? There are lots of genetic services that will read your genome and comment on health related findings (23andme) or ancestral lineage (National Geographic), but none that would simply type you for compatibility.

The closest company is ScientificMatch who aims to unite people with dissimilar MHC genes. The problem here, in addition to the lifetime $2,000 fee, is that you don’t get the test results yourself. You also have to be single looking for a mate. Interestingly enough, you can’t join the site if you are on the pill. I’m sure a lot of people would love to order a simple online test for MHC compatibility that were already dating. Here is an overview of the academic literature from ScientificMatch (highly recommended reading).

As far as I know, MHCtest.com isnt in business yet. . .although if the government keeps it up, no one will be able to order genetic tests.

Now to put on our Freakonomics hat and take things a bit further, you gotta wonder if the invention of the pill has led and entire generation of women to select the wrong mate? Increases in infidelity, divorce rate, spontaneous abortions, and increased health problems would result. (For a dissenting view, check out the Alas blog.)

I’m sure there are a lot of reasons the divorce rate skyrocketed, but it is still eerie.

Also reminds me of Michael Crichton’s book Next. Can’t you just picture a lawyer using these findings in divorce proceedings? Kind of a creepy thought.

PS My all-time favorite book has a blurb on the t-shirt study. . .

Traveling

I will be in:

Charlottesville, VA August 28-September 2nd,
NYC Sep 2-4, and
Martha’s Vineyard Sep 4-7.

Let me know if anyone is around for a quick meetup.

LinkFest

I’m not sure exactly what to do with Finviz, but there are lots of cool charts and tables.

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Everyone seems to like Amazon’s Kindle – any readers have any reviews they care to share? I’m thinking about getting one for the plane.

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There was once an academic paper I read on the Olympics and and pre and post games stock returns to the local market. Any one have a link?

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Y Combinator offers standardized legal docs for startups.

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A blogger chimes in on why he does what he does. I originally started blogging to try and find out more info on foreign listed hedge funds, arbing listed structured products, and tracking hedge funds through 13fs. The reasons have changed over the years, but I can say the benefits received from the interaction far outweigh the effort required (which is not trivial!).

I also disagree with marketsci and disclose most of my trading strategies. As Richard Dennis once said, “I always say you could publish rules in a newspaper and no one would follow them. The key is consistency and discipline.”

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T. Boone’s hedge fund loses 35% in July. Ouch.

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A profile of uber-quant Wilmott.

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I used to always have a hard time justifying why so many brilliant people spent their lives in the investing world instead of doing something more productive for the good of mankind. This is good to see – now that Shaw has conquered the investing world he is applying his talents elsewhere, namely in finding the secrets of life.

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We have a little family farm in Kansas, so I like the sounds of this – farm land values are ripping.

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Martingale betting strategies work until the cold reality of probability catches up with you. Just ask Bill Miller.

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Nice follow up article to my post on volatility clustering from MarketSci blog, “Market volatility in Up and Down Markets“. Their conclusion:


In conclusion: when the market is in a downtrend, both positive and negative volatility increases leading to more big up AND big down days compared to when in an uptrend. This observation has been consistent over the last 50+ years. Additionally, an increase in volatility in the current trend doesn’t necessarily carry over to the following trend.

Weekend Linkfest

Three ETN’s are coming out that attempt to replicate Ben Graham’s investment methodology.

In a related note, I always wondered why an issuer didn’t come out with a VIX ETN? Is Direxion coming to market with one?

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Soon to be in the mail, Beat the Market: Invest by Knowing What Stocks to Buy and What Stocks to Sell. I’ve written about Kirkpatrick here before.

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According to my browser history, I am 100% Male.

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At some point this starts to get ridiculous. Rentech’s Medallion is already up nearly 50% this year (following an 85% return in 2008). Of course, that is after the 5% and 44% in fees taken out.

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Bill Miller’s track record is now very average.

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I always wondered if there was a name for negative compounding, and there is – Siegel’s Paradox.

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It is almost like being dishonest is a pre-requisite for running for public office.

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There sure are a lot of hedge fund databases.

Dow 300 Point Days and Volatility Clustering

I don’t really get Kedrosky’s post on 300 point rallies in bear markets (as a follow up to Ritholtz). The point value is not useful in comparing current conditions to past conditions. As an example, a 300 point move on the Dow now equates to about a -2.5% loss. Back in 2002 or 2003, that is closer to a -4% loss (and early 1990s that is a -10% loss, and in the 1920’s it is a -100% loss), but you get the picture.

A better question is:

Does the Dow experience its largest gains and losses in up or down markets?

As I posted previously (and the original post here), volatility is much higher and returns lower when the stock market is declining (as measured using something simple like a 200-day moving average or 10-month moving average).

But it looks like David Rosenberg of Merrill is correct, most of the big days come when the market is under the moving average. About 65% of the time (since 1929) the DJIA is above the 200 day simple moving average (this is using Yahoo data). That makes sense, markets go up a majority of the time.

However, take a look at the table below.

The following conclusions can be drawn:

1. The market returns, on average, are much higher when the market is in an up trend.

2. The market volatility, on average, is significantly higher when the market is in a down trend. (Those vol numbers anualize to about 13.8% and 23.8%, respectively.)

3. The largest moves in both directions occur when the market is in a downtrend.

Note: #3 is due to #2, a point most people miss. The bigger moves occur because the market is more volatile – namely because people are scared. Going back to this great presentation from Andrew Lo, people use different parts of their brain when the market is declining. If you see people lining up at IndyMac across the street like I did a couple weeks ago, you are probably going to be a little more irrational than when your Chinese ETF is hitting new highs.

This is the main reason my timing model works. It sits out the times when markets return less and are more volatile. Nothing earth shattering, but it does buy you peace of mind.

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