QTAA Paper Update: Introduction 1/10

Below we have updated our 2006 white paper.  While you can download the full 70+ page paper here, I’ve also chopped it up into a series of more digestible posts for the blog.  

Updates included in the 2013 paper include:


1.  Results are extended to include the years 2009-2012.

2.  Additional asset classes are included (from 5 to 13, although still includes results from original 5 model).

3.  Alternative cash management strategies are included.

4.  Additional conservative and aggressive approaches are included.

5.  Alternative allocations are included.

6.  References translated into hyperlinks.




In this paper we update our 2006 white paper “A Quantitative Approach to Tactical Asset Allocation” with new data from the 2008-2012 period. How well did the purpose of the original paper – to present a simple quantitative method that improves the risk-adjusted returns across various asset classes – hold up since publication?  Overall, we find that the models have performed well in real-time, achieving equity like returns with bond like volatility and drawdowns. We also examine the effects of departures from the original system including adding more asset classes, introducing various portfolio allocations, and implementing alternative cash management strategies. 



 Much has happened in the world since the original publication of this white paper in 2006.  However, change has always been the constant, and indeed has anything new really been seen in our world of investing?  Bubbles, defaults, government interventions, bear markets, downgrades, quantitative easing, fortunes made and lost – they’ve all happened before. (For a lengthy examination of bubbles, see our paper “Learning to Love Investment Bubbles”.)

Since publication of the original paper we have seen a devastating bear market in 2008 – 2009.  The normal benefits of diversification disappeared as many non-correlated asset classes experienced large declines simultaneously.  Commodities, REITs, and foreign stock indices all suffered drawdowns over 50%.  (Drawdown is the peak-to-trough decline an investor would experience in an investment, and we calculate it here on a monthly basis.)  The classic barometer of stocks, the S&P 500 Index, declined 36.77% in 2008 alone. 

The fantastic book Triumph of the Optimists: 101 Years of Global Investment Returns (and 2012 update here), illustrates that many global asset classes in the twentieth century produced spectacular gains in wealth for individuals who bought and held those assets for generation-long holding periods, but the assets also went through regular and painful drawdowns like 2008. All of the G-7 countries have experienced at least one period where stocks lost 75% of their value.  The unfortunate mathematics of a 75% decline require an investor to realize a 300% gain just to get back to even – the equivalent of compounding at 10% for 15 years!

For some long term perspective, below are some long term charts based on the data from Morningstar / Dimson Marsh Staunton.  Below are the best, middle, and worst case scenarios for the main asset classes of sixteen countries from 1900-2011.  All are real return series on a log graph (except the last one).

First, here are the best cases for returns on your cash.  This chart goes to show that leaving cash under your mattress is a slow bleed for a portfolio.  Germany is excluded after the first series as it dominates the worst case scenarios (in this case hyperinflation).

Chart 1 – Cash Real Returns, 1900-2011

Best Case:  -2.30% per year

Middle:  -4.10%

Worst Case:  -100%




 Next up is real returns for short term government bills.


Chart 2 –Short Term Government Bills Real Returns, 1900-2011

Best Case:  2.25% per year

Middle:  0.71%

Worst Case:  -3.63%

(Real Worst Case, Germany -100%)




Followed by the real returns for longer dated bonds:


Chart 3 –Long Term Government Bonds Real Returns, 1900-2011

Best Case:  3.04% per year

Middle:  1.40%

Worst Case:  -1.91%

(Real Worst Case, Germany -100%)




And finally, the real returns for equities.


Chart 4 –Stocks Real Returns, 1900-2011

Best Case: 7.43% per year

Middle:  4.60%

Worst Case:  2.00%

 (Real Worst Case, China, Russia -100%)





And the same chart presented non-log…

 Individuals invested in U.S. stocks in the late 1920s and early 1930s, German asset classes in the 1910s and 1940s, Russian stocks in 1927, Chinese stocks in 1949, U.S. real estate in the mid-1950s, Japanese stocks in the 1980s, emerging markets and commodities in the late 1990s, and nearly everything in 2008, would reason that holding these assets was a decidedly unwise course of action.  Most individuals do not have a sufficiently long time frame to recover from large drawdowns from risky asset classes.

However, also since the recent update of this paper in 2009, we have seen a strong recovery in many of the world markets.  While some markets are still down considerably from their peak values, here in the US stocks and bonds are trading near or at all-time highs including dividends. 

 Most importantly for any investor is that they have a plan and process for investing in any environment, regardless of how improbable or unfathomable that may be.  Are you prepared for all of the possible outcomes, such as declines of 50-100% in your asset class or portfolio?  Are you prepared for currency devaluations, but also massive rallies in stocks or bonds?  Can you fathom a world with interest rates at 0.1% as well as at 10%?

Travel & Macro Pessimism, Micro Optimism (Part III)

I will be in Las Vegas this Friday and Alaska later this month if any readers are local and want to meetup!

This is the third post I have done that focus on cool new ideas and startups I have never heard of.  It just goes to show the creativity and brilliance of all the entrepreneurs out there.  Part I here and Part II here.

Most descriptions are from Entrepreneur mag article 100 brilliant companies.

Yessay – website aimed at helping students write better college application essays.

PaperKarma- Scan unwanted paper mail with the app, which will contact the sender and unsubscribe you from the mailing list.

 Freight Farms upcycles shipping containers into stackable modular mini-farms, reducing the footprint required for growing crops and allowing for locally grown produce in urban areas.

The Full Monty by Front Yard Coop: A solar-powered, self-propelled coop that moves around the yard to provide birds with fresh foraging, while a fence keeps them safe from predators.

Wide Open Spaces- A deal site for hunting and fishing gear, also curates under-the-radar brands.

AgLocal scored $1 million in funding last year from Andreessen Horowitz for an online platform that allows local and family farms to sell responsibly raised meat directly to consumers.

NatureBox: A monthly subscription snack-food box full of minimally processed and nutritionist-approved goodies.

Speek is changing the free conference-call game: The platform uses links instead of phone numbers and PINs, while browser-based controls make it easy to manage file sharing and see who has joined and who is talking.

and my favorite:

Rent-a-Goat.com - Online directory lists herders around the world who rent out their goats for clearing away unwanted brush and weeds, as an eco-friendly alternative to machinery or chemicals.



A Tale of Two Bubbles

Lots of gyrations in Japan lately.  Below is a chart that lines up the US and Japanese 10 year PE ratios so their bubbles are synched.  This goes to show just how ginormous the 1989 bubble was in Japan – more than twice the biggest stock bubble in US history (2000).  This is also the main reason it took Japan 21 years to get back to a normal valuation while it only took the US 9 years. (defined as CAPE of 17)



My Mantra is Diversity

“My mantra is diversity. I clone my mentors. I copy everything they do, and then I innovate on top of it.” – Henry Markram

Great article in this month’s Wired Magazine.

Searching for Yield

Great chat with Priest and Mack…while we depart on a few methods of screening, the general approach is very similar:


Case Study on Self-Publishing an eBook

Below is a summary of my views on self publishing my first book, which you can find on Amazon here –  Shareholder Yield:  A Better Approach to Dividend Investing.  This post will be updated periodically with my thoughts on the experience…

I thought I would summarize some of my experiences with self-publishing an eBook as I get a lot of emails from readers inquiring about the process.  After publication I’ll update this every quarter or so with sales numbers and other thoughts on the experience to try and bring a little transparency to this somewhat murky world of publishing.  My friend James has written a lot of great material on the subject so you can find some background here and here.  Patrick Wensink also has a humorous piece on his best seller, and the amount of money he made from it…

We have been waiting to publish this short ebook for about a year and a half but had to wait due to the timing of my company getting exemption to launch ETFs with the SEC.  It is shorter than our last book (60 pages or so I believe), but I see no reason for a book to be long just for the sake of being long.  Actually, most books I read in finance could should be about 20 pages or so instead of 300.  



For those new to the blog here is a little context as to how I came to self-publish a book.  I started (reluctantly) publicly writing about six years ago with an academic paper and this blog which has now passed over 1,300 articles.  I’ve also written for a few websites (fired by one), and published some more academic papers, magazine articles, videos, and a book at the beginning of 2009 so I have gained a pretty broad overview of the various outlets to publishing in the investing space.

My first publisher was Wiley, one of the most prolific publishers in our field.  My first book was They Ivy Portfolio, which probably should have been three separate books, but being a first time author I wanted to try and get in as many of my views and beliefs across as possible.  Wiley receives the lion’s share (85% or so) of the profits.  For a $50 book, we would end up getting about $3-4 per copy.  Granted, Amazon et al immediately discount the book to about $30 from the $50 price tag.  I liked my editor and everyone there, but from a business standpoint I don’t think that arrangement makes a lot of sense.  

However, nothing beats the feeling of seeing your book in the window of a bookstore, or having someone email you from Brazil to say they saw it, or see it translated into Chinese, or the ability to send it to someone in the mail, etc.  It is hard to get past the romance of writing a physical book, and possibly I’ll go back to it after this experiment…It was a good experience for the first book, and I learned a lot.  

However, I always recommend to first time writers to go the traditional route – at the very least you will learn a great deal.  We used to joke any future books would be “100 Things Not To Do When Writing A Book”.



Lots of writers depend on their writing for their livelihood, and profiting from their publications is a high priority.  For many in my field of money management, it is more of a distribution tool to circulate your views or research, and profiting from a book is much lower on the list.    My partner and I have a lot of debates here, as he thinks not doing a hard copy is a mistake (an argument which I don’t disagree with).  All I really care about is as many people reading the work as possible, and it seems the world is quickly moving to i-everything, although I think I am the only holdout in the world that still reads mainly physical books.  I hate reading electronic books but I think I’m the rare exception.



“The charts and tables in the Kindle edition are virtually unreadable, either on the Kindle itself or on a computer using the Kindle app.”  That was a recent Amazon reviewer comment on my last book.  I almost had a heart attack noticing the errors in my first book, and I can barely pick up the hard copy without the nails on the chalkboard feeling of seeing them in print and especially in digital format.

For this reason I wanted software that would be able to let you preview the copy, so we’re trying Vook as it looks like it is fully capable of that and I will report back.  They seem to be transitioning their business model to an outsourced platform (which is a good idea), and everything on their site is easy to use ala WordPress.  By far the best part is that you can preview your book on any device, which was huge for me.

I’m not altogether certain why Amazon doesn’t buy/build a much better platform for uploading your own content but I would expect that to change in the future.  Absurd really.  Barnes and Noble has this feature, and you can see screenshots from Nook and Vook below.







In general, since I no longer had an editor ala Wiley, I relied on friends and family as well as a cool website called Kibin.  Jacqueline at the Reality Test was a fantastic writer/editor as well.


You don’t really need one if you’re doing it on your own, but they can be priceless when negotiating with the publishing companies.


We did a simple cover design contest on 99 Designs.  If you have a vauge idea of what you want, and are willing to invest some time in feedback you can come up with some pretty killer designs.  Obviously, the more you spend the higher quantity and quality of submissions, but for $500 we got about 100 cover ideas.  The winner is our current cover.  (And if you like our cover you can contact the designer directly here: designer@adibustamandesign.com and view his work at http://adibustamandesign.com/category/my-portfolio/ .)

You can also get a discount on 99Designs if you are a FoundersCard member.


I don’t pretend to have any marketing ability, so we played around with some subtitles for Shareholder Yield.  One of the ideas ala Tim Ferris is to setup a Google Adwords campaign with the potential titles and test to see what titles get the most click-throughs.  The challenge here is that the results will be just that,  where the more outlandish or click bait the headline is the more click-throughs you get.  The winning title (which we are not using since I think it is snake oily) was “If You’re Investing in Dividends, You’re Doing it Wrong!”.  Ha.

We settled on “A Better Approach to Dividend Investing”.



The 10 or so papers (and over 1,300) blog posts have been free to download and read.  However, I like Amazon as a great distribution method for all the folks that like reading on their Kindle and iPad.  My first book cost $50! retail, although Amazon immediately discounts that to around $32, and now the kindle and paperback are about $10.  I would be happy charging as little as possible ($1), or possibly even the Radiohead model (pay what you want), but my partner brought up the perceived value question.  Will people that do not know me as a writer perceive a $1 book to be of poor quality?  In the end we settled on $4.99 as a reasonable alternative, or the same cost as a large latte from Starbucks.



Once you get past the romance of seeing your book in bookstores and airports, distribution doesn’t matter since you can upload your eBook to any of the online platforms (most sales will be Amazon, but also iTunes and B&N).  Many money management companies use a different model where the content is free, but you have to give up your contact information (ala Fisher).

If you decide to go the Amazon route, they actually have a program that lets prime readers download the book for free one week per quarter (and the writer still gets part of a pool of $ AMZN has set aside).  Although you agree to be exclusive to Amazon for 90 days.  They also allow you to designate a 5 day period per quarter where people can download your book for free, but you get no royalties.  Not sure if the Prime download outweighs not being on Apple and Barnes and Noble.  We are going to upload the book to Apple and Barnes and Noble to test to see if they generate many sales (apparently it takes awhile to get vendor approval).  If they don’t I’ll move to the Amazon KDP Select program to try it out.



My experience with the traditional publishing route didn’t leave me feeling the publishing company offered a whole on the marketing side, which seems to be confirmed with most of my author friends.  For many authors your brand and audience is the #1 asset you have.  Lots and lots of ideas over at Tim Ferris’s (who is self publishing and also promoting via BitTorrent) site.  Most important is that you put our a quality book that people want to read.

While most of the sales will be from your own brand, hiring a decent PR firm doesn’t hurt if you want the exposure.  We like the Dukas crew in NYC to help get the word out, but nothing beats having an audience that is willing to spread the word.



I am surprised most books don’t have a simple landing page for readers, especially if the author doesn’t already have a blog.  We have used CAVENDO and LeCompte out of DC for all of our design work, and you can see their capabilities on Shareholder Yield, The Ivy Portfolio, Cambria Investment Management, Hedge Fund Letters, The Idea Farm, and of course on  this blog.



I often wake up to a bunch of emails from readers (more when something new comes out) asking questions about various articles or research pieces/book we have written.  I strive really, really hard to answer every email I receive, which is incredibly time consuming.   One idea I think is reasonable is to request the favor of writing a review for spending the time to take the time to personally answer all their questions (good or bad, 1-5 stars doesn’t matter).  Many are happy to do so.

Invariably you will get bad reviews, and the worst is bad reviews from people that never bothered to read the book and give 1 stars for shipping or formatting…  So it goes.



I’ll update this every quarter or so once they come in. 


And to close out this blog piece, one last question: 


“What do you wish you’d known about the process of writing a book that you didn’t know before you did it?”

Here is a fun article for my writer friends that looks at advice from 23 published authors on the process of writing a book.  Some cool advice:

Be ready to organize vast amounts of data. Use a wall, or software like Scrivener.  - Carl Zimmer

Make it great, no matter how long it takes. There’s no such thing as too many drafts. There’s no such thing as too much time spent. As you well know, a great book can last forever. A great book can change a person’s life. A mediocre book is just commerce…..Let some of you come through. You’re obviously not writing a memoir here, but this book is still partly about you — the world you see, the way you think, the experiences you have with people. And trust me, readers are interested in who you are. So don’t be afraid to let bits and pieces of your personality and even life details seep into the text. It will breathe a lot of life into the book. -David Shenk

Write when the book sucks and it isn’t going anywhere. Just keep writing. It doesn’t suck. Your conscious is having a panic attack because it doesn’t believe your subconscious knows what it’s doing. - Cory Doctorow

And run all quirky one-liners that you hope to include in your author’s bio (do you “always enjoy a good latté”?) past a close friend; they don’t age well. -Geoff Manaugh

Don’t forget to write the book that you want to read. - Mark Frauenfelder

When my self-disgust reaches critical mass I seem to be ready to go. -August Kleinzahler

Develop a very serious plan for dealing with internet distractions. I use an app called Self-Control on my Mac. -Ben Casnocha

How inept publishers are at selling books, even books that, as in my case, they have a significant financial stake in and that they profess to love. Once they get rejected by Today and Terry Gross and once the SundayTimes passes (or, as in my case, assigns a  review and then never runs it), they’ve exhausted their playbook. Solution: what you’re already doing, which is to build your brand among your intended audience. - Anon

The most striking thing about my book processes was that no one at the publisher did any editing at all.  No fact checking, no line editing. - David Gans

Apply to MacDowell, Yaddo, Blue Mountain Center, Headlands — a few other good residencies, including one in Cali I can’t remember now. Four to eight weeks of you, quiet, among other artists, with people feeding you on schedule can do wonders. -Josh Shenk

Hat tip Kottke.


What To Do About REITs?

REITs have been the best performing major asset class since the market bottom in 2009, up over 200%.  

What are the current drivers of REITs saying now across trend, yield curve, and valuation?

-Trend is certainly positive.

-Yield curve is above average, but not as steep as it was a few years ago.

-Valuation is really bad nominal, but not as bad on a real basis:

Below are two charts that I find highly useful.  The first looks at yields on various indexes (the red dot is where we are now and purple/green represent one standard deviation bands).  This chart poses the problem many investors complain about daily – where to find yield?  (Note: S&P500 is TTM PE yield.)

One would conclude, that with the exception of mortgage REITs and US stocks, everything else is highly unnattractive.  Bonds and REITs seem to be at their worst yields EVER (will update these at Q end – data is a bit stale as of March I think).



 When you invest in REITs when they have a low yield, surprise, returns are worse (since 82):


Screen Shot 2013-05-21 at 10.06.51 PM

However, if one looks at yields after inflation, so called real yields, the picture changes.  Most asset classes are in normal valuation ranges, and while bonds are still trading at low yields, stocks are even more attractive, and mortgage REITS too.  

The world doesn’t look so bad.



 And here are my thoughts on the asset class – ready to exit when the trends deteriorate (a few months ago so have cleaned up a bit since!).


Q & A

Fun question and answer session with the folks at Index U.  

Shareholder Yield Book is Out!

I am going to do a longer piece on this topic later this week, but wanted to announce that the eBook is now out!  It’s only $5, and it’s a nice, quick read.  

If you pick up a copy I would love to hear what you think!

Shareholder Yield: A Better Approach to Dividend Investing  If you don’t have a Kindle you can still read it on your iPad or computer (software download here for CPU.)

I am going to upload it to Barnes and Noble (Nook) and Apple this week.  



(Don’t) Follow Me

The Ira Sohn conference is running with a great list of speakers, I attended last year and am sad to miss – it  is a wonderful conference for a great cause.  Here is a list of other good idea conferences.

Einhorn had a quote: ”It doesn’t make sense to blindly follow me or anyone else into a stock,” do your own work.”  I agree with that of course, but what else could someone say, “yes please follow me into all of my stocks”?

I’ve written a book on 13F investing since there is soooo much confusion and misunderstanding in that space.  I’ll try and put it out sometime this summer after we finally publish our Shareholder Yield book next Tuesday (finally).  Curious to see how this ebook experience goes before deciding if next book should be physical or not…

So, how would blindly following Einhorn do?  Well, the answer is, it depends.  Great since 2000, but much better from 2000-2006, and not so hot since then.  This is long only, top 10 longs, 50 days after q end.  Einhorn may derive solid alpha from his short book (I have no idea) but I don’t have the updated monthly returns so can’t comment.  


As always, data is from AlphaClone








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