Weekend Reads

I have come to post most of my links and what I’m reading over on Twitter these days, so if you’re interested you can follow there at @MebFaber

 

a few good links recently:

 

Gundlach and Shiller teaming up on CAPE fund http://www.investmentnews.com/article/20130815/FREE/130819947 …

All weather except when it’s raining on bonds. http://www.bloomberg.com/news/2013-08-14/dalio-patched-all-weather-s-rate-risk-as-u-s-bonds-fell.html …

speaking of 13F week – over ten manager clones top 10 holdings are up over 50% YTD. Saba, Baker Bros, Elm Ridge, and Par all up there.

 

and from some friends:

 

Great Citi graphic via @valuewalk – Gold miners have spent the last decade burning through $11 bil in cash http://ify.valuewalk.com/wp-content/uploads/2013/08/gold-companies-burn-11b-in-cash.png …

Price to Sales charts for all 30 $DJIA components going back to 1984 http://stks.co/df3h 

The Best Hedge Fund You’ve Never Heard of http://goo.gl/fb/KM7L8 

 Bridgewater All Weather since inception vs 60/40 and levered portfolio. pic.twitter.com/FOTmOHrYxE

 

Ackman vs. Loeb vs. Soros vs. Icahn

It seems like the financial news consists largely of news items on what these four managers are up to. Who is buying Herbalife, what are they doing with Apple, what are they talking about on Twitter.

However, I have yet to hear, EVER, either of the following questions which underly the entire point of talking about them.

1.  Does it make sense to follow what these guys are doing, ie is it helpful, or are you wasting your time?  Can you actually use this information in any way?

2.  How has following these guys done historically?  Have they beat the market, and if so, who is the best?

I know the answer to these two questions.  Do you?  

It may surprise you.

Undervalued Fantasy Players

I’ve chatted with the Sports Insights crew for a while on constructing quant ideas in the sports analytics world.  They consistently do a good job, and one of their favorite concepts is betting against the public.  (Check out this 2011 post of mine.)  They also looked at vegas prop odds for various players to win most yards in each category and compared those to Yahoo draft spots to find over and under valued players.  Worth a read!

Looks like I’ll be drafting Welker, Stafford, and C Johnson….

Country Multiples…Gabon a Buy?

Great post from NYU prof Damodaran on country multiples.  (HT: Marcus)

While we only did 40 or so countries, he takes it all the way to Kazakhstan and Gabon (which only has one company).  It looks like he did it the correct way (what he calls aggregate what we call harmonic averages).

Good stuff!

Screen Shot 2013-08-14 at 9.05.42 AM

Investing With Third Point

Third Point has been one of the best hedge funds in the world for the past decade or so.  The fund has returned about 17% annually since 2000, an impressive feat considering the paltry 2% returns of the S&P 500.

Interestingly enough, investing alongside Third Point through 13F filings does a decent job, but doesn’t capture all of Loeb’s alpha.  The clone would have done 11% vs 17% for the fund, but that is still leagues above the S&P.  

Note:  We wrote a lot about foreign listed hedge funds in our book The Ivy Portfolio (update here and here).  Loeb’s London based public fund does an even better job of tracking the hedge fund, and you can often buy it at large discounts to NAV (like when we wrote about it at a 40% discount  in 2009!).

I didn’t include 2013 but Loeb’s clone is up another 25% or so YTD.

 

tp

Source: AlphaClone

The 7/12 Allocation

People seemed to really like our last post on asset allocation strategies.  Below is a sample allocation from an oft requested model, the 7/Twelve portfolio.

 

sev

Travel: NC

I will be chatting up the CFA societies in Charlotte, Winston-Salem, and Raleigh next week.  Stop by and say hello if you’re in town!

 

http://www.cfasociety.org/northcarolina/Pages/default.aspx

 

Charlotte

August 5th 12 Noon

 

TRIAD

August 6th 8AM

 

TRIANGLE

August 6 12 Noon

 

Asset Allocation Strategies

I have been contemplating writing a book or white paper on asset allocation strategies.  But like many pieces I have started to write this summer, I have simply ended up condensing an entire 200 page book into one blog post.  Maybe it is a case of summer-itis, but I seem to be following the old Thoreau quote – simplify, simplify, simplify.

Below are a handful of the most popular asset allocation strategies from lots of different gurus.  I did my best to recreate their allocations from public asset classes back to the 1970s.  So which asset allocation strategy performed best?  

Scroll to the bottom to find out!

 

60/40

60% US Stocks

40% US 10 Govt Bonds

 

Swensen Portfolio (Source:  Unconventional Success, 2005)

30% US Stocks

20% REITs

20% Foreign Stocks

15% US Govt Short Term

15%  TIPS

 

El-Erian Portfolio (Source: When Markets Collide, 2008)

15%  US Stocks

15%  Foreign Developed Stocks

12%  Foreign Emerging Stocks

7%  Private Equity

5%  US Bonds

9%  International Bonds

6%  Real Estate

7%  Commodities

5%  TIPS

5%  Infastructure

8%  Special Situations

 

Arnott Portfolio (Source: Liquid Alternatives: More Than Hedge Funds, 2008)

10%  US Stocks

10%  Foreign Stocks

10%  Emerging Market Bonds

10%  TIPS

10%  High Yield Bonds

10%  US Govt Long Bonds

10%  Unhedged Foreign Bonds

10%  US Investment Grade Corporates

10%  Commodities

10%  REITs

 

Permanent Portfoli(Source: Fail-Safe Investing, 1981 )

25%  US Stocks

25%  Cash (T-Bills)

25%  US Long Bonds

25%  Gold

 

Andrew Tobias Portfolio (Similar to Bill Shultheis & Scott Burns’s 3 Fund portfolios)

33%  US Stocks

33%  Foreign Stocks

33%  US Bonds

 

William Bernstein Portfolio (Source:The Intelligent Asset Allocator, 2000 )

25%  US Stocks

25%  Small Cap Stocks

25%  International Stocks

25%  Bonds

 

Ivy Portfolio (Source: Ivy Portfolio, 2009)

20%  US Stocks 

20%  Foreign Stocks

20%  US 10Yr Gov Bonds

20%  Commodities 

20%  Real Estate 

 

Risk Parity Portfolio (Unlevered, Faber PPT)

7.5%  US Stocks 

7.5% Foreign Stocks

35% US 10 Year Bonds

35% Corporate Bonds

5% GSCI

5% Gold

5%  Real Estate 

 

Below are three charts.  The first is returns vs. volatility, the second is returns vs. maximum drawdown, and the third is returns vs. Sharpe Ratio.  As you can see, they all performed pretty similarly.  People spend countless hours refining their beta allocation, but for buy and hold, these allocations were all within 200 basis points of each other!

A rule of thumb we talked about in our book is that over the long term, Sharpe Ratios cluster around 0.2 for asset classes, and 0.4 – 0.6 for asset allocations.  You need to be tactical or active to get above that.

Blue dots are generic asset classes, red dots are the portfolios from above.

What’s the takeaway?  Go enjoy your summer.

 

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Superhero Inflation

A few fun infographics from Mashable/Samsung.  Kudos to the artist Bob  for getting most of the inflation numbers broadly correct.  (The exception is Batman, once you back out the one time charges for the BatPlane and the BatCave it is more reasonable.)

 

superhero_costs_then_now_4-563x1024

Just Go Halfsies

Many people are attracted to investing (rather, trading)  largely due to the excitement.  Also, a lot of people like to have a position one way or another so they can cheer for the position, much the same way they cheer for a sports team or their home country.  ie I’m long gold!  I’m short Tesla!  Go Broncos!

So, the act of scaling in and out of a position is boring and emotionally difficult for many investors.  I can’t tell you how many investors I’ve talked to that have said, “I don’t know what to do, should I buy or sell? Do I own too much gold?”.

My response is usually, “If you are unsure or it is making you uncomfortable, sell 1/3, or 1/2.”  That way you don’t look back and regret your decision.  However that is boring for many investors.  Once you’ve bet $100 on a football game, likely betting $1 will not generate the same ‘excitement’.  You will also feel much more regret when the reduced bet wins than you will when the reduced bet avoids loss.  

Anyways, this also applies to to asset allocation strategies.  One question I often get, especially from advisors, is mentally committing to a tactical (market timing) system (like our global tactical models).  My advice:  why not just go halfsies?  ie Why not allocate half to your old buy and hold system, and half to whatever new system you are contemplating?

You no longer risk being completely wrong, and you still potentially look brilliant in a 2008 or other bear market.

Below is a look at a simple buy and hold, then the effect of 50/50 buy and hold in a GTAA Aggressive strategy from our paper.  As you can see it still helps, and avoids the “all-in” problem many people have.

Maybe it is not as much fun, but it could help build your portfolio and business. 

mo

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