I know a lot of my readers don’t use Twitter, so every week I’ll post a few tidbits that you may have missed.

This week starts with a fun podcast with Stansberry Radio (iTunes here):

The title could just as easily have been ‘The Problem with Market Cap Weighting’

When overvalued assets grow to be bigger and bigger parts of a market, or become the market, you no longer want to invest in that market.  That, to me, is the biggest failing of buy and hold.  It ignores common sense.  Below is Japan’s historical CAPE.  It is by far the biggest bubble we have ever seen.  Our cute internet bubble in 1999 (CAPE of 45) is HALF the size of this one.  Can you look at your client with a straight face and say it is just as good of a time to invest in Japan in 1989 as it is now?  

Japan got to be nearly half of the world’s market cap.  And if you believed the ‘efficient’ market, you just went along and invested half of your stock allocation in Japan.  What did that cost you?  About -4% per year real returns in Japan from 1990-2010.  That’s 20+ YEARS of negative returns. 

What is the biggest market cap in the world now?  The US (at half).  What is the 2nd most expensive country in the world?  Yep, same.  Now there is a big caveat and that is the US isn’t in a bubble.  Nowhere near it.  But the US isn’t cheap like the rest of the world.  So you are still depriving yourself better opportunities elsewhere.

Below is a great piece from Alliance Bernstein.  Note how bad investing in these bubbles is.  

What is it flashing warning about now?

You guessed it, my least favorite asset, US high yielding dividend stocks…

I’m going to do a series for readers of The Idea Farm where I identify and chat about my 20 favorite hedge fund managers to track via 13Fs.  Below is an example, Michael Price.  He ran money at Mutual Series with Max Heine before merging with Franklin and starting his own family office. (Seth Klarman cut his teeth at the firm.)

Below is a video from his recent London Value Investor Conference.  WELL worth watching.  He also mentions a book I have never heard of called “There’s Always Something to Do: The Peter Cundill Investment Approach” – in the mail.

How does investing alongside Michael Price work historically? Great! Below is what happens when you follow his top 20 holdings through 13Fs, and you see some of the stocks he mentions in the video.  From AlphaClone:

I’ll be in NYC the last week of the month to chat up The Evolution of Active Asset Allocation, and best part, it’s free!  

Register Here

Tuesday, 
October 29, 2013 
1:00 – 4:30 P.M. 

McGraw-Hill Headquarters
1221 Avenue of the Americas
50th Floor
New York, NY 10020

The biggest mistake investors can make that risks them blowing up is concentration, especially coupled with debt/leverage.  One would think that, at the time, a top 10 world’s richest man would learn some of those lessons, but below is a must read on how not to invest.  Especially once you have some money.

Lots of “smart money” lost a ton investing alongside Francisco d’Aconia, err, I mean Eike Batista.

How Brazil’s Richest Man Lost $34.5 Billion

How have assets performed in previous gov shutdowns? And how do they do in the following two weeks?  Scott Minerd answers with buy stocks and bonds, sell commodities:

A nice little video from Oakmark’s Nygren:

“Investors have been overpaying for dividend stocks while undervaluing companies that are buying back shares, Oakmark Fund’s Bill Nygren said Tuesday.

“One of the things we think investors have gone a little excessive on is bidding up companies that pay high yields, good income generators,” he said.

“And we think it’s interesting that companies that have been large share re-purchasers — effectively, it should be the same to an investor whether the money comes back as money or share repurchasers. But those stocks aren’t as expensive, so we like the big share repurchasers.”

I’ll be talking at these two events next week, drop in and say hello and pick up a free book!

NYC

High Income Strategies in a Challenging Interest Rate Environment

Tuesday October 1, 2013 8:15 AM through 3:15 PM
NYSSA Conference Center

CHICAGO

Morningstar ETF Conference

I’ll be on a panel Friday…

Maybe the combination of two seemingly unrelated things will make the whole more complete?

Much like the Merkel shirt on a plumber, the above phrase is really asset allocation summed up in a nutshell.  Add assets that should pay you cash flows, and do so in different environments.  We did a few posts on this already, and I added a new one after reading the new edition of Gibson’s Asset Allocation book.  

“Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve.” -Talmud

So I added a column for 33% REITs, 33% US stocks, and 33% in 10 Year US Bonds.   How did it perform?

Basically the same as all the other asset allocation strategies.  Buy and hold asset allocation is great, you just shouldn’t be paying people much for it…

My buds Wes Gray and Jack Vogel  just put out a killer new paper where they asked the above question.  The simple answer is “yes it does”.

The more interesting answer is 1) there are other cyclically adjusted measures that work better and 2) there is some other factor (you know I like) that reaaaalllly gets the returns flowing.  Our friends at O’Shaughnessy should like this one too.

Enjoy!  (and if you email Wes please shame him for canceling on our Morningstar panel at the ETF conference next week!)

 “On the Performance of Cyclically Adjusted Performance Measures” 

Below is a summary of the 20 cheapest S&P500 companies with positive values CAPES all under 10 from CAPERatio.com:

PS this is another wonderful resource from Wes at his Turnkey Analyst site…sort of like the FF data resource…