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.



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.



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!



August 5th 12 Noon



August 6th 8AM



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% 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% 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.








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.)



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. 


Indexing 2.0 (aka Better Indexing)

Here is a fun email I sent out to The Idea Farm this week…thought I would share since lots email me about similar topics…

I was considering doing this post as an entire book, but I have too many other articles in front of it.  The basic thesis is that there are a lot of simple, small improvements one can make to a market cap portfolio.  Below are two papers from the good folks at Cass Consulting:

Part 1: Heuristic and optimised weighting schemes

Part 2: Fundamental weighting schemes

(Video Here.)

Basically the take away is that most weighting schemes are better than simple market cap weightings.  As a fun example, many of you have read our Global CAPE paper that constructs 10 year PE ratios for global markets.

Had you sat around the dining table cheers-ing your loved ones at the end of 1999, and as you sat reviewing your investments, and say you were planning a 10 year cruise (no internet, no email, no phones), you could only invest in 3 countries over this time period.

Had you invested in the 3 most expensive, average CAPE 57, of you would have returned -40% real.

Had you invested in the 3 cheapest, average CAPE 14, of you would have returned 24% real.

Remember this was bubble territory so not many countries were cheap, so total returns were not that exciting for any equities.  

So, think about it right now.  If you could only invest in three countries, would you prefer the basket trading at an average CAPE of 5 or 26?  I think you should be name agnostic.  While you would have been buying Thailand, New Zealand, and Chile in the late 1990s, now you would be buying Greece, Ireland, and Russia (and Argentina if you consider that investable).

This goes to show a simple value sort rather than market cap, and note right now, the largest country by market cap in the global index is the fourth most expensive in the world…

Below is a simple table that looks at many different published anomalies and their subsequent investable ETF counterparts.  None of the names are recommendations, and some are probably not even the best fund in their category.  There’s also a lot of other factors one could include like profitability but I was just trying to demonstrate a simple point….(you could also do cross asset class and allocation tables too.)


Shareholder Yield Book Free on Amazon

Amazon lets you offer your book for free on Amazon for five days per quarter, so I have it setup to be free today through Monday.  

So, download a free version while you can (you can read on Kindle, iPad, computer, etc)…!

Download here

Screen Shot 2013-07-18 at 8.00.00 AM

Is Gundlach Right, Have Bonds Bottomed?

A few weeks ago bond king and fellow Angeleno Jeff Gundlach mentioned that he thought bonds were near a bottom.  From Reuters:

“The momentum of higher interest rates is slowing,” Gundlach said. “Now is the time to be thinking about taking advantage of the price discounts that exist in some of the risk areas of the bond market,” he added.

Now I don’t know why his econometric analysis had led him to this conclusion, but history is certainly on his side, and we agree with him.  We used to do a lot of posts on asset classes, drawdowns, and really bad months.  Here are two charts on bond drawdowns from a post in 2010:

In general it shows that 10 year bonds usually don’t decline much more than 8%, and if they hit mid teens that is a great buying opportunity.  


Longer duration 30 year bonds obviously have higher drawdowns, and 15% is rare, with 25% being even more so.



A post we did in 2011 titled “When things go on sale, people run out of the store” examined what happens when you buy bonds in these drawdowns.  10 year bonds are down around 7% and 30 year around 12%.  That is usually time for a nice intermediate term trade.  Please visit the 2011 post for many more tables and charts.

Note:  This long term drawdown system usually couples well with short term really bad months.  We examined what happens after really bad months in asset classes (usually around -8% for equity like and -4% for bonds) and no surprise, that is usually a good time for a short term trade.

More on Timing

Fun article on timing stocks.

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