Trillion $ Mistake

We sent out the below to The Idea Farm list recently, and the chart was so good I had to share it here.  

John Del Vecchio is a rare forensic accountant that sees opportunities both long and short (he runs funds on both sides including the new forensic accounting ETF).  He did a short piece recently that isn’t publicly available,  but touches on one of the biggest mistakes in investing – ignoring valuations and going with market cap indexes.  We’ve done a lot of blog posts on the topic, including this one on Apple in 2011:  “Apple – Too Big To Succeed?”    

JDV includes this great chart that illustrates investing in the largest company in the US….good idea? 



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The Trillion Dollar Mistake

PS: In the month since The Idea Farm went private we’ve featured some great research:
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  • Macro Updates with Cornerstone  (upcoming)
  • Inflation expectations and commodities with Guggenheim
  • Cantor on Kamikaze QE
  • McClellan on copper inventories
  • Fundamental improvements with Janiczek
  • and our GTAA paper update.
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Travel: SF Speech Saturday

Technically this is in San Jose, but chatting early Sat AM with the AAII crowd, come say hello!

“Shareholder Yield: A Better Approach to Dividend Investing “


Discussed by:

Mebane Faber
Chief Investment Officer, Cambria Investment Management 


Attend This Meeting and Learn…
How to find returns in a low return world
Why focusing on dividends alone is a mistake
A better approach to income investing


Saturday, May 4, 2013
9:00 a.m.    Registration/Social/Coffee & Tea (No Breakfast)
9:30 a.m.    Program
11:00 a.m.    Q&A
NEW LOCATION! San Jose Airport Garden Hotel 
1740 N 1st St.
San Jose, CA, 95112
Map This Location ] 

In Advance (Mail postmarked by 4/27 
or Online by 4/30) 
Everyone, $25/person
Late Registration (Online by 5/2) Everyone, $35/person
Register online
At the Door
Space permitting.
Everyone, $35/person
No Refunds

Another Dividend Mistake

There are lots of cliches you hear when people are discussing dividends and buybacks.  Realize one of the biggest benefits of including net buybacks in your calculation rather than dividends alone is not necessarily including the companies that are reducing share count, but also avoiding the companies increasing it.

I ran a quick screen on the S&P500.  Of the 20 highest dividend yielding stocks, FIFTEEN had share counts that were increasing!  In some cases the share count swamped the dividend yield, actually turning the total amount of cash returned to shareholders into a negative number.  This is sort of a silent but deadly killer.  Investors think they are getting a nice return of cash, the really they end up owning less of the business.  Of the 30 worst companies with the biggest increases in shares outstanding, 18 had dividend yields over 2%.

Below is a simple graph of the stocks in the S&P with mkt cap weighted yields on the vertical axis.  



0.1% Management Fee and 10% Performance Fee Above S&P500

Fun article on the internal hedge fund managers at Berkshire.

Closer Look at the CAPE Ratio

Below is a fun webinar put on by Shiller/Barclay’s/IndexU.  Who better to hear chat about CAPE than Shiller?

My only comment is I think their current values on the consumer disc/staples are way off…but fun to hear them talk about CAPEs of railroads for the entire 20th Century!  Also good to hear they are doing research in foreign countries and sectors…


Topics covered include:

  • Long-term sector valuation: CAPE ratio
  • Applying the momentum signal to avoid the “value trap”
  • Best practices for both strategic and tactical use of CAPE



A Few Happy Funds Yesterday

One of the cool features of AlphaClone is the ability to sort the hedge funds with high exposure to a particular stock.  Below are a few funds and their % 13F long exposure to NFLX and AIG, two names up big yesterday.

Screen Shot 2013-04-23 at 10.39.25 AM Screen Shot 2013-04-23 at 10.38.56 AM

Real Returns

This is an older post but I had a reader asking about a similar topic so I thought I would repost…

Here 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.  I excluded Germany after the first series as it dominates the worst case scenarios (in this case hyperinflation).


Best Case:  -2.30% per year

Middle:  -4.10%

Worst Case:  -100%



Next up is real returns for short term bills.

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.

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.

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…


Intrinsic Value by Another Method

Good post by Thompson on another global value methodology, this time from the bottom up (via ValueWalk).


Broadening the Window – Aligning Indicators with Correct Holding Periods

One of the biggest problems with value is the time it takes to work itself out.  Over, and under valued securities and markets can stay stubbornly mispriced for years, or even decades.  My favorite grandaddy of all bubbles, Japan, took about 20 years to get back to normal valuation.  And even now the stock market is down 30% from all time real highs (including dividends).

One popular criticism of the valuation models that Hussman, Gray, Buffett, Shiller, Grantham, and Philbrick et all propose is that they tend to work over 5-15 years.  Many conclude that they are then worthless as most people are trading on shorter time frames etc.  It doesn’t matter if it is PE, CAPE, Tobin’s Q, dividend yield or mkt cap to GDP, most don’t work that great in the short term.

(Note:  Our Global Value paper introduces another element, and that is relative valuation, which was shown to work great on much shorter time frames.)

So what is a simple answer to this criticism?  Simple:  hold the position longer.

Below we set out to test a very simple system.  The goal is to have a maximum allocation at cheap secular lows, and a minimum allocation at secular, expensive highs.

We divide the portfolio into five buckets of 20% each.  Each bucket can be anywhere from 0-100% invested in stocks, and the remainder is in 10 year bonds.  Therefore, the entire portfolio can be 0-100% invested in stocks or bonds.


Each year only update one bucket.  

If CAPE < 10, 100% of that bucket is in stocks. 0% in bonds.  Hold that position for 5 years.

If CAPE < 15, 75% of that bucket is in stocks.  25% in bonds.  Hold that position for 5 years.

If CAPE < 20, 50% of that bucket is in stocks.  50% in bonds.  Hold that position for 5 years.

If CAPE < 25, 25% of that bucket is in stocks.  75% in bonds.  Hold that position for 5 years.

If CAPE > 30, 0% of that bucket is in stocks.  100% in bonds.  Hold that position for 5 years.

Next year, repeat with the next bucket, so that each year you are updating just 20% of the portfolio (talk about lazy portfolios!)

(Note:  These cutoffs and % were picked out of a hat.  I’m sure there are better parameters, such as holding for 7-10 years.)

This way you have a portfolio that matches the holding period with the intended indicator horizon.  More importantly, how does it work?  (CAPE is the above strategy, not the CAPE strategy from the paper. 10 SMA is the moving average model from our QTAA paper.  )

Not bad – nice reductions in volatility and drawdowns.  I’m sure you could tweak the parameters with longer holding periods as well as better CAPE cutoffs, as well as even potentially using leverage and shorting.  Even better would be to use all of the global markets instead of just one.

Will try and write up in a longer paper at some point…readers, feel free to play around with the Shiller data on your own and report back!  



timing cape 

Before the Boom

Nice white paper from SEI and ETF Trends


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