The Problem with Buybacks

Valuewalk has a nice mention of a new recent report from Goldman on buybacks (US Thematic Views, Oct 7th will update with attachment if they give me permission).  

In the report Goldman demonstrates how focusing on total cash distributions to shareholders has performed better than dividends or buybacks alone (shareholder yield book readers already know this).  Investors in buyback or divided strategies are making the same mistake – namely, ignoring roughly half of how all companies distribute their cash. 

A nice chart I had not seen before shows that the number of S&P 500 companies buying back stock has gone from ~40% in 1992 to over 80% today.

Below is the alpha from all three of the strategies, and the tickers you can use to track their baskets on Bloomy:




Webinar Tomorrow

Tune in and ask some questions!


 THURSDAY, October 24, 2013

10:00 AM EST, 3:00PM BST


Accepted for 1 hour CFA® credit. 

The Stock Market Time Machine

You often see claims in ads about unbelievable returns in the markets.  Even though markets have only returned about 5-10% per annum historically, you see claims of 20,30,sometimes 50% per year.  (Or if , you read ads like one I saw this morning on a popular investing website, penny stocks ready to explode from $0.5 to $6!!!)

So, what if you were perfect?  What if you were like Biff in Back to the Future and you had a time machine to go back and pick all the best performing stocks?  How would you do?  Our buddy Wes Gray at Empiritrage /Turnkey Analyst takes a look here.

30% per year.  Even if you were perfect, with FULL foresight, you would do 30%.  And you still would have had a massive, massive drawdown.

Kind of amazing right?  

So next time you hear some huckster talking big gains, tell him he better be PERFECT.





Asness on CAPE

Fun interview with Consuelo:



What’s in Store for Year End?

One of the benefits of having written 1,400 articles on a blog is you can go back and revisit them.  (and often cringe!)

Below is a fun one we did a few years ago…we are now at the end of Year 1…the next six months are pretty good historically with the 2nd biggest Jan for small caps next to 2015…

Politics and Profit (also known as our least downloaded white paper)


NOTE we are now at the end of Year 1, the old arrow is from the old post and I’m not in the mood to go find the file and edit…


Pre and Post Tax Profit Margins

Yardeni does a great chartbook.  Below are two charts from his Sep publication


ETF Contest

I enjoyed hearing one of the top three ETF issuers mention all the ETFs that needed to be launched have been launched.  So, with that theme, I’m having a little contest inspired by Horizons ETFs in Canada.

It’s simple:  email in your top ETF ideas for new funds you think should be launched.  Feel free to get as creative as possible.  

Top 3 ideas get a free year subscription to The Idea Farm.

I’ll post some of my favorites to the blog at the end of the month…


The Dividend Challenge

I was giving a talk the other week in Chicago and one audience member asked me what was my biggest concern in the markets.  I responded that it was high yield stocks in the US.  I am finishing up a longer piece that should be out next week, but below is a simple exercise for those that want a sneak peek.

1.  Goto Morningstar and input a ticker for a high yield stock ETF or fund, let’s say VIG since it’s the biggest:


2.  Scroll down and take a look at the valuation metrics.


3.  Compare to the overall market.


4.  Be surprised.


Due to flows, this is a good example of an asset class getting distorted and investors buying into something and getting something quite different than what they expected.  This asset class, which historically trades at a 20-40% valuation discount to the overall market is now at record PREMIUMS.  Dividends have worked historically because they have had a value tilt.  What happens when they don’t?  Buyer beware.





The Perfect Asset Class

I wanted to illustrate a point I was trying to make to a friend about asset allocation.  Most people approach it with the “more is better” mentality, when in reality you can achieve a a nice, simple base case portfolio with only a handful of assets.  However, most people just don’t feel diversified with only a few funds for whatever psychological reason that may be.

Below is a nice well diversified portfolio.  It is a bit equity heavy, but it holds:

10% US large cap stocks

10% US small cap stocks

10% foreign developed stocks

10% foreign emerging stocks

10% US 10 Year bonds

10% Corp bonds

10% Commodities

10% Gold

20% Real Estate


I wanted to design a truly awesome hedge for this portfolio.  Kind of the “perfect asset class” or a hedge fund’s dream.  It would have the same return as US stocks, but a totally negative correlation.  You can see a chart of the asset below since 1900.  



So, what happens when you allocate a whopping 10% to this amazing hedge?  It should really juice your portfolio’s value right?


As you can see, the effect on total returns is almost imperceptible.  It does however reduce the vol and drawdown noticeably.  My points are twofold:  

1)  when you allocate to a new asset don’t bother unless you are going to allocate AT LEAST 5-10%.  Otherwise it does nothing.

2)  If you are looking for return enhancing, a non correlated asset isn’t really going to help.  You need to add something with higher CAGR.   


Now, what happens if you add the ultimate equity alpha fund?  In this case lets find a alpha substitute for the S&P that adds 300 bps per year.  Even though you replace the S&P with a better fund, it only adds 30 bps of total performance.  




20% YTD, is that Normal?

I used the word “normal” above on purpose, as there is really nothing normal about stock returns.  They tend to be more extreme than people realize, obeying the distribution of power laws rather than any sort of bell curve world.  (We have a fun paper on the topic, Where the Black Swans Hide and the Ten Best Days Myth).

We’ve had a monster year in stock (even though we think they are expensive) thus far here in the US, so it is worthwhile to review where this year (if it ended today) would stand in history.  Interestingly enough, about a third of all years have HIGHER returns…  I’m guessing that would surprise most readers.  The median is around 13%, the average 11%, and the geometric average about 9%. (Damn those volatility gremlins!)

Below is a chart with a distribution of all the stock returns since 1900.  Now what would really surprise people…a 30-40% up year…



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