Shiller CAPE for the G8

Most stock market valuation models are not that predictive in the short term.  However, value tends to work great on longer term timeframes.  We rebuilt Hussman’s valuation models (both the PE and dividend ones) with the Shiller data, and right now at future P/Es of 15 the US stock market should do about 5% a year nominal (so, net of inflation maybe 2-3% per year) over the next decade.  P/E contraction to 10 means -3% losses per annum, and a future PE of 20 implies around 8%.  (We also rebuilt the Arnott models on CAPE and inflation here.)

We couldn’t find much in the way of Shiller CAPE’s for foreign markets, so we have built a lot of these in house.  There is a lot of evidence showing sorting countries on value produces outperformance over time (section in the Tweedy Browne paper and an old post here:  sorting countries by dividend yield).

Source:  Global Financial Data



















Sentiment Update

For all the visual folks, source AAII:



Permanent Portfolio ETF to Launch

One of the trends in ETFland is launching funds that fall under the banner of what I call ‘investable benchmarks’.  Depending on your worldview and strategic asset allocation mindset, you may favor an endowment style portfolio (heavy in equties, global, with decent chunks in real assets).  Or perhaps you fall under the risk parity spell (examine asset classes on a vol adjusted basis or economic regime basis, basically ends up with more in bond and usually requires leverage).  Recent article on Dalio here.

In any case, after you come up with the initial allocation there is not a lot more to do with the portfolio than rebalance it every so often and upgrade funds when better or more representative ones come out.  I am generally in favor of these portfolios being available to investors, but in no way do I think they should cost any more than 0.5% for a buy and hold allocation.  And over time I expect them to converge to around 20 bps as the old high fee model dies a slow mutual death.  Lots of these funds have garnered a ton of assets this year, and I was interested to see a filing the other day for a Permanent Portfolio ETF.  If they are smart they will come in at a reasonable cost.  But in general one can replicate these funds for free (and is why we put sample portfolios in our book for the buy and hold investor.)

We’re putting together a piece on dynamic risk parity (permanent falls under this banner I think) and endowment portfolios.  Stay tuned!

8%? Try 4% (or 1.1%)

Long time readers know that we take issue with the arbitrary 8% return target for most real money funds.  We put out a paper in 2011 titled “What if 8% is Really 0%?”  With news that CalPERS returned 1.1% in 2011, I thought I would update a little chart that seemingly would give many investors pause.

Below is the rolling 7-year return of the average endowment from NACUBO  (data through 2010 as 2011 data comes out in February.  Also recall endowment year end is in June.)  Even though they have experienced years above 8% (1997-2000 all above), on a rolling basis they have YET to exceed 8%.  If you compare the returns to simple bond yields it seems obvious that benchmarking your return target to long term or corporate bonds would be more reasonable (but painful).  (This analysis also does not consider the exceptional outlier endowments such as Harvard/Yale.)

If you realize most real money funds are also heavily invested in equities, you can then even do a simple Shiller CAPE valuation model to predict equity returns (old post here on some of Hussman’s great work.)  We use a 60/40 allocation, and as recent as the summer of 2010 the model predicted meager returns of around 4.5% to the portfolio.

Better ideas than using an arbitrary 8%:

1.  Long Bond Yields

2.  Corporate Bond Yields

3.  Projected 60/40 returns (for those with equity like exposure, can tailor to their exact mix)

A few more good reads from the Barron’s crew here:  A High Cost of Low Interest Rates, and A Deep Money Pit

I predict

Twitter will implode this weekend when my Broncos take down the Pats!

Here is a gorgeous video of Teahupoo to take ease you into the weekend, HT:KP:

More Surfing Videos



7% Alpha

We published The Ivy Portfolio back in 2009, and honestly it probably should have been three separate books (investing like the endowments, global tactical approaches to investing, and picking stocks via the 13F tracking of hedge funds).  We went with the kitchen sink approach, and now the good news is that you can buy the $50 book for $9 on Kindle which is pretty cool.

I’ve got a good bit of totally new material coming out in the next few months so stay tuned (finally).

Anyways, we spent a chapter educating on 13F investing in Ivy, what works, what doesn’t work.  We then have done lots of follow up posts on 13F ideas, and we will update this post from last year with new stats:

The Value of Ira Sohn (Hedge Fund Stock Picks)

There are a lot of people debating the value of stock picking events like the recent charity Ira Sohn Conference.  Felix Salmon and David Gaffen debate the usefulness (Felix responds here)  and Joe Weisenthal chimes in here.

There is so much misinformation in the 13F space, and most comments are simply not based in a firm understanding of what works and what doesn’t, but rather guesses.   But that is what most financial commentary is (ie all of the commentary surrounding buy and hold and market timing, what drives stocks, often has the feel of debating religion or politics).  I like reading David, Joe, and Felix but if you want to know what works and what doesn’t in 13F tracking you should be listening to people that have spent many years getting their hands dirty with the data and truly understand what works (and what doesn’t) like Jay at MarketFolly or Maz at AlphaClone or John Heins at Value Investing Insight.

There is also reams of academic papers on the subject including this paper from my friend Wes Gray at Empirical Finance that demonstrates ability to follow managers and disclosures.

Some of the comments:

Gaffen:  ”Some of them (following hedge funds) work and some of them don’t…the more complicated you get and the more derivitives you get involved in the less you can follow…the ones that are slightly more straightforward you can follow.”  David is spot on here.

Felix:  ”Trying to chase hedge fund managers is a fools errand…my big problem in all of this is that you and I have no ability to pick stocks and if we have no ability to pick stocks then what on earth makes us think we have the ability to think we can pick hedge fund managers.”  Clearly I disagree.

I am a quant.  I used to pour through these filings by hand a number of years ago (take a look at the blog archives back in 2006 and 2007), but being a quant I could never get comfortable with following these managers until I tested them.  I had an inkling that it worked but I wasn’t sure.  Like Fama says, “if it is in the data”…

…so my intern and I went and backtested 10 funds (Buffett, Blue Ridge, Greenlight, etc) and what we found is that there is huge value in tracking the funds that have lower turnover and derive most of their value from their long stockpicking book.  Like Gaffan says, there are some things that work and some that don’t – SAC doesn’t make sense to follow (too active), Rentec doesn’t make sense to follow (derivatives), and if you want more information there is an entire chapter on 13F tracking in my book.  The benefits, the drawbacks, what works and what doesn’t.

But like Salmon mentions, 13F tracking rests on two questions:

-Can anyone beat the market?

-Can you pick a manager ahead of time that will beat the market in the future?

Most of the academic literature suggests no to both answers (on aggregate).  But does that mean someone cannot answer yes to both questions?  Of course not.

We can all backtest until the cows come home but all that matters is real time performance of course.

All data courtesy AlphaClone.

I included a list of 57 funds that I thought would be interesting funds to follow.  Out of that 57, 8 were never added to the database.  Excluding the  never added, the other funds beat the S&P 500 by an average amount of 7 percentage points per year. (Historical research shows that following Buffett since the 1970s would have resulted in >10% outperformance per year – and he has beaten by 8% per annum since ’00.  So much for all those detractors that say he isn’t a good stockpicker!)

Roughly 70% of the funds beat the S&P500 over the time period.  The average fund beat the S&P in 2009 and 2010 before losing about 5% in 2011.

Impressive real time results, and not to mention 13F tracking would have kept you out of Galleon.

So, at the end of the day would you rather listen to Seth Klarman or your local broker when picking stocks?

Top funds that did over 25% a year include:

Eagle, Pabrai, ValueAct, Newcastle, Abrams/Pamet, Baupost, Akre, Tiger, Icahn, Perry, Lone Pine, and Steel.

The worst funds were:

King Street, Tontine, Private, Glenview, Maverick, and Bridger

Here is a chart of all of the funds, and the black dotted line is the S&P 500.



Funds included in analysis:


Blue Ridge


Eagle Value Partners (Witmer)

Pabrai Mohnish

ValueAct Holdings

Newcastle Partners

Abrams Capital (Pamet)

Baupost Group

Akre Capital Management

Pershing Square Capital Management

Tiger Global Management

Icahn Capital LP

Perry Capital

Lone Pine Capital

Steel Partners

Fine Capital Partners

Relational Investors

SAB Capital Management

Jana Partners

Appaloosa Management


Chieftain Capital Management (BW)

Viking Global Investors

Pennant Capital Management

Atlantic Investment Management

Highfields Capital Management

Glenhill Advisors

Cobalt Capital Management

Second Curve Capital

SemperVic Partners (Gardner Russo)

Cannell Capital LLC

Eminence Capital

Trafelet Capital Management

T2 Partners Management

Third Point

Omega Advisors

Chesapeake Partners Management

Bridger Management

Maverick Capital

Glenview Capital Management

Private Capital Management

Tontine Associates

King Street Capital

Defiance Asset Management

Abingdon Capital Management

Alson Capital Partners

Scion Capital

Shamrock Activist Value


Barrington Partners


Lane Five Capital

Libra Advisors

Thames River

Wyser-Pratt Management

Yaupon Partners




Survival of the Fittest

Survival of the Fittest for Investors: Using Darwin’s Laws of Evolution to Build a Winning Portfolio - Dick Stoken

This was a good book to flip through, lots of diversified portfolio ideas overlaid with trendfollowing metrics.  I tried to find contact info for the author but it looks like the links to Strategic Capital Management are broken.

One interesting concept was the identification of a bubble as a market that hits a 20-year high (or more), and then triples within three years…Would be fun to test and update with some classic bubbles ala GMO studies…

Below is a totally unrelated video from Kottke on what happens when bees have not evolved against a certain type of hornet…


Momentum for Dummies

Must read!  From the always great Leuthold Green Book, they report stats on a similar study we used to run (post from back in 2006!), which is simply picking the top asset classes in a portfolio, rebalanced yearly:

“Momentum strategies are probably best known and the most widely applied by equity investors, but our analysis finds support for “trend persistence” at the asset class level as well. The naïve strategy of holding the prior year’s top-performing asset class for another year has outperformed the S&P 500 by 4.3% annually since 1973. But, once again, there’s a profitable twist to this basic “momentum” strategy: The best single asset class strategy is to own the prior year’s runner-up or Bridesmaid asset class. Such a strategy—while not without considerable diversification and career risks—has generated an annualized total return of +15.8% since 1973, while matching or exceeding the S&P 500 return in 29 of 39 years.”

Prabhat and I went back and updated our similar study with data from 1972-20110.  Ten asset classes, updated once a year at year end.  Sorted on one year return. (Tbills, US large cap, US small cap, EFA, EEM, US 10 Yr, US Corp, GSCI, REITs, and Gold.)

The first chart is the CAGR for all of the assets, and there is nice outperformance in the top half and major underperformance in the lower half.  Below that is an equity curve of all the assets sorted each year.  (The dark black line is an equal weighted portfolio of all 10 assets.)

We then looked at portfolios consisting of the top X assets.  Solid 2 percentage point outperformance for a once a year update!  The numbers get a little better if you exclude the top asset (theory being it has moved too much), but that feels like a little too much data mining to me.




Amid lots of other fantastic studies (and jokes) was this interesting stat:

“…in 45 of 48 other countries tracked by MSCI…only Ireland, Indonesia and New Zealand had better performing stock markets than the U.S. last year, and the U.S.’ tiny -0.1% loss was almost 18 percentage points better than the median country’s decline of –17.8%….”

Not to mention declines of over 35% in Turkey, Austria, India, Argentina, Egypt, and -60%+ Greece (dollar denominated)!



Extensions to QTAA

I get a ton of emails with ideas and questions about trading systems.  We put together a research piece that answers a lot of these questions and will likely publish it in the coming weeks on the blog or in a white paper.

I’ve also chatted with my buddy Barry Ritholtz, and we’ve been batting around some ideas with various other factors that would apply to timing stock indexes.

If you have any ideas fire them over!

Here is an example of one of the charts detailing the differences between various reblance periods in a five asset class model from the ’06 paper with hypothetical results back to 2000.

FIGURE 1 – 12 Month Rolling Returns, Monthly (10-Month SMA) vs. Weekly Rebalancing (40-Week SMA)


In 2006 we published a paper that outlined a trading system for investing in world asset classes.  The purpose of the paper was to present a quantitative method that improves the risk-adjusted returns of a portfolio while also reducing portfolio drawdowns. The intent of the original paper was to present some basic ideas that could form the foundation for a portfolio while realizing that the correct allocation is a tailored one that suits an investors goals, risk tolerances, and emotional disposition. In this paper we present a few new ideas while trying to answer some commonly asked questions that could possibly increase risk-adjusted returns.  We take a look at increasing the number of assets in the portfolio as well as increasing the granularity within the major asset classes.  We examine whether rebalancing frequency such as daily, weekly, or monthly rebalancing impacts returns, and the effects of different parameter lengths.  We also examine various cash management strategies that could improve returns over Treasury Bills.  We finish the paper with a few more possible extensions that investors may consider as a complement to a trendfollowing system.

Informational Portfolios

Nice article out of Morningstar’s ETFInvestor where they are now tracking six new quant models of ETFs.  Many of these use the 12-month SMA and various combinations of value and momentum.

The white paper can be found here:  Model_Portfolios by Samuel Lee

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