Time Spent Before Making a Purchase

I made a offhand remark on Twitter awhile back but was curious about how much time people spend researching before purchasing something. 

“Amount of time people likely spend researching buying a: car > tv > plane ticket >  crowdfunded startup > stock. My guess it is exponential.”

The irony of course is the volatility and spread of the results is much higher at the right side than the left…

Anyone seen any research or surveys on how much time people spend researching X before buying?

Thanks in advance, will share results…

Asset Allocation Tactical Backtester Download

I’m not sure why I didn’t do this before now, but I’m going to try and make a simple asset allocation backtest Excel sheet available to the readers of The Idea Farm.  I’m trying to figure out how to hide and lock the data in Excel to avoid any issues etc.  But the goal is to have a simple buy and hold and tactical backtester available like Shiller’s download from his site. I was going to do it as a website but want to see what sort of interest there is first…

It will include:

-5 – 20 basic asset classes (US Stocks, Foreign Stocks, Bonds, REITs, Commodities)

-ability to backtest any buy and hold strategy

-ability to alter the % allocations to create any basic allocation

-ability to backtest simple moving average strategies

-ability to backtest relative strength & momentum strategies

-ability to combine trend and momentum strategies

-ability to alter cash management strategies

-(maybe) ability to expand with as many asset classes as users want

- (maybe) create a forum where users can interact and improve upon the simple sheet in any manner they choose.

So, sign up this week to The Idea Farm so as not to miss out!  I’ll send out the excel in a week or two once it is setup.  

What Works Better, Earnings or Dividends?

I wanted to take a look at another long term valuation metric to see how it does relative to our CAPE metric from our paper  Global Value: Building Trading Models with the 10 Year CAPE . So, we ran the same study with dividends as we did with earnings.  Short summary:  CAPD works well but CAPE is the winner…also didn’t seem to matter what timeframe one used for dividends…

Off to the beach in Sayulita for some fish tacos and stand up paddleboarding…


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Top 10 ETF Launches of the Year

I think this is a really interesting article for a few reasons. 

1. The continued acceptance of ETFs by large institutions.  Not just acceptance, but also CREATION.  A number of these ETFs were created by an institution willing to seed the fund at size, and going to an ETF provider to launch the fund. I used to write about this on the blog, and it surprises me that more family offices do not do this with their active taxable strategies.  Theoretically one could even get creative with how it was structured to benefit the institution if the product was very successful.  I had no idea Fisher was behind a few of these.

(If you’re interested, contact me!)

2.  It surprised me that many ETNs were on the list.  People are unconcerned about credit risk.

3.  Notice how hard it is to launch a successful ETF, over 150 launches at it looks like it took at least $150m to break the top 10.  $20-$40m is breakeven for most funds.

4.  And, of course, my favorite is #10!

Travel: Mexico City

I’ll be in Mexico City next week, drop me a line if you want to meetup!

Also on the schedule in the next two months are Arizona, Colorado, Las Vegas, and a whole bunch of Florida.

Are Stocks Overvalued?: CAPE vs. Dividends

People seem to have a lot of misgivings when it comes to CAPE.  I have no idea why as almost all valuation indicators usually line up on the same side when a stock or market is over/undervalued.

Here is another chart, this time looking at CAPE vs CAPD.  They are basically the same chart (with dividends showing even more overvaluation) and CAPE is 90th percentile and dividends 94th.  Neither are good places to hang out the next 3-10 years.  Next q, next y?  Who knows.




Note that we published a paper on sorting countries by earnings.  What about dividend yield?  Same outperformance:




Source: GIRY 2011, 2013giryyy

Gameplan for 2014?

We did a paper years ago that combined the Presidential Cycle and the January Effect.  It was also known as our least read paper.  Anyways, if you were to follow history, and I’m not sure that you should, conclusions would be that the investor should be a little more concerned in 2014 , or at least rotate into mid or large caps until near year end.  Then strap on for big runs in 2015/2016.

But that is just what happened in the past.  (data up to 2009, will update soon.)

Amazingly, since publication, had one just rotated each year into the size (small, mid, large) that historically did best that year you would have beaten the S&P500 by 15 percentage points since 2010. Who says history doesn’t rhyme? 

CLICK ON BOTH TO ENLARGE (note these are median returns, arith and geo average would be different but similar). French Fama dataset.






What Would You Rather Own?

From this paper:

Emerging markets have > 30% world GDP, but only 12% of world market cap. A Shiller CAPE of about 15.  55% of global population.  


The US is about 25% of world GDP, but 45% of world market cap. And a Shiller CAPE of about 24. 5% of global population. 

Now, how much of your portfolio of stocks is in the US?  My guess for most is 50, 75, or 100%.

(also here is a related piece from Vanguard)

Emerging Equity Markets in a Globalizing World


Given the dramatic globalization over the past twenty years, does it make sense to segregate global equities into “developed” and “emerging” market buckets? We argue that the answer is still yes. While correlations between developed and emerging markets have increased, the process of integration of these markets into world markets is incomplete. To some degree, this accounts for the disparity between emerging equity market capitalization in investable world equity market benchmarks versus emerging market economies in the world economy. Currently, emerging markets account for more than 30% of world GDP. However, they only account for 12.6% of world equity capitalization. Interestingly, this incomplete integration along with the relatively small equity market capitalization creates potentially attractive investment opportunities. Our research has important policy implications for institutional fund management.


The Dividend Challenge

Beginning in the 1980’s Pepsi started running the Pepsi Challenge — television commercials featuring taste tests that would pit their soda versus Coca-Cola.  Tasters would take sips of each unmarked beverage, and were asked to declare which soda they preferred.  Invariably, Pepsi was the favorite choice.  Coke conducted its own trials and astonishingly found similar results.  The oft cited reason was that Pepsi’s formula was sweeter, and this led to the conclusion that Coke needed to change their formula and resulted in the disastrous roll out of the abomination called New Coke. 

 However, even though people blindly prefer Pepsi, people still buy Coke to the extent that it commands a much larger share of the soda marketplace than Pepsi (I’m more of a Diet Mt. Dew guy.)    In tests, researchers also found that foreknowledge of the brand led to the results changing – people’s responses changed and the majority preferred Coke when they knew the brand.

Why is this?  Are people totally irrational?  Or are there other factors at play – childhood memories of drinking a Coke with grandpa on the front porch swing, or perhaps the warm fuzzy feelings you have from watching the polar bear commercials and the Super Bowl.  Regardless, the simple conclusion is that there is more at work than simply taste, or even logic alone.  Brand means something, and this applies to other items such as wine, automobiles, and clothing.

Does the same branding imprints apply to investing and stocks?  Certainly – for the older investors think back to the old EF Hutton (“When EF Hutton talks, people listen”) or Smith Barney (They make money the old fashioned way, the earrrnnnned it)  commercials.  Or perhaps the great brands of Warren Buffett of Peter Lynch.  The Pepsi challenge can provide a metaphor for high yielding dividend funds as of late.  Investors love dividends, and rightfully so.   Companies that pay dividends have historically outperformed the broad market in the United States, and in other countries all the way back to 1900.  Since 2000, dividend-paying companies have trounced the overall markets, and sorting countries by dividends works as well.

Dividends also have a great “story”.  You may have learned about them from your parents, or perhaps taking an investing course in college.  Historically, when you invest in dividend stocks you are adding a value tilt to your portfolio.  This is one of the reasons investing in dividend stocks works – they are value stocks.  One could go as far to say dividends have a great brand.  Much like Coke, thoughts of dividend stocks immediately conjures images of regular checks coming in the mail from profitable, established companies.   

 However, market valuations and stock and fund characteristics ebb and flow based on cycles as well as investor psychology.  And while it was nearly impossible to find someone wanting to invest in dividend stocks in the late 1990’s, almost everyone you talk to currently seems to love dividends as interest rates have fallen and investors search for yield. 

One useful exercise for investors is to examine their funds (mutual funds or ETFs).  In the spirit of the Pepsi Challenge, you should type their tickers into the Morningstar portfolio report here.   I try to stay away from mentioning tickers on the blog but you can find a list of dividend funds at ETFdb.com or certainly the Morningstar screener.  

Notice that these funds are more expensive across every valuation measure (this is a generalization but true for most of the funds I examined).  What most people want is solid returns and safety.  But looking at these stats do you feel safe?  Does it seem reasonable to be paying a higher valuation than the overall market for high yield? (Note: this may not be the case for high yield funds that have a quality and or valuation screen.)

In addition to overvaluation, one additional headwind for dividends is the potential interest rate environment.  O’Shaughnessy found sixteen periods of rising rates in the United States since 1927.  The average duration for each cycle was 25 months, where the 10 Year US bond rate change was 2.35 percentage points.  The market averaged an 11.1% return over these periods (though wide dispersion from 40.9% to -45.9%).  However, the high yielding dividend bucket underperformed the market by 2.6% compounded.   

So with potential headwinds of valuation and rising interest rates, why do investors still invest in dividend funds when they could be investing in something else?  There are a few possibilities.  For many investors they simply may not be aware of the characteristics of their funds, and they may simply assume a high yield strategy confers a value tilt.  Other investors probably prefer the high dividend funds for the same reasons they prefer Coke – they are familiar with dividends.  Perhaps they think back to getting burned by non-dividend stocks in the 2000 tech bubble – or maybe they recall talking to their parents around the kitchen table as a child.  Making the best investment choice requires a separation of logic and emotions.

Enjoy the old broker commercials below!


Online Backtester

Finally starting to see some innovation here.  Two great entrants, all they need is a little more front end design, and of course a little tactical special sauce and they will be killer!  





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