A Simple Calculation

I think many still do not appreciate the ins and outs of how companies distribute their cash flows.  Our last post included a must read on dividends and buybacks, and below I thought I would include a simple table to illustrate my main point (that ignoring either dividends OR buybacks is a big mistake).

I screened the top 2000 stocks by market cap on Bloomy.  All values are median values below, and I took the top 20% by dividend yield and the top 20% by dividend + net buyback yield. (I excluded debt for the final shareholder yield calc as I’m trying to keep this simple).  Note that the overall dividend yield for the market is about 2.2%, and the highest yielders are at 4.3% – this is what attracts the bees to the honey.  However, what is missed is the net buyback column.  Note that the broad universe, the median stock isn’t buying back any shares, and the dividend stocks are actually net issuers! That is what I like to call sneaky dilution – they pay you dividends with one hand, but issue stock with the other hand.  In fact, of the top dividend stocks, over half are net share issuers…25 over 4%…

Anyways, note the div & buyback column.  These stocks are buying back around 5% of their shares, in addition to the nearly 3% dividend yield.  When you add up all the numbers (which don’t add up exactly as these are median values for each column), you can see why the math makes much more sense when you approach the issue holistically….



Breakdown of Dividend, Buyback, and Shareholder Yield for the S&P 500

Below is a great piece from CSFB / Mauboussin on dividends and buybacks that we went out to the Idea Farm a few weeks ago. It is a must read:

Disbursing Cash to Shareholders

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Santa Barbara Talk

Had forgotten to mention this, but I’m talking at an event in Santa Barbara tomorrow (Tuesday) at 2pm…stop by and pick up a free book!

PowerShares University


1:00 PM – 1:15 PM Registration & Lunch


1:15 PM – 3:15 PM Presentations


Program Eligible for 2.0 Hours of CFP

and Non -IMCA CE Credits

Dividends & Share Buybacks In Portfolio Construction
Nasdaq OMX

The Surprising Alpha from Malkiel’s Monkey & Upside Down Strategies
Research Affiliates
Ari Polychronopoulos, CFA, Vice President, Client Strategies

Momentum-Based Investment Strategies
Dorsey Wright Associates
Andy Hyer, Client Portfolio Manager 



Andrew Nelson, Regional Sales Consultant
Adam Kennedy, Regional Vice President

General Information



Four Seasons Resort – The Biltmore
1260 Channel Drive 
Santa Barbara, CA 93108

How to get there

Click for directions



Tuesday, June 03, 2014 1:00 PM – 3:15 PM

The WealthFront and Betterment Allocations

Lots of people have been commenting on the rise of the robo-advisors.  In general I think their development is a positive for individual investors.  

(Note to investors: You can lookup any RIA online and see their fee structure and assets under management at the SEC website or at BrightScope.  If any numbers below are incorrect please feel free to reach out.)

 Here is a good article from the NY Times, and another from Abnormal Returns.  I have long criticized advisors that charge high fees for managing buy and hold money for clients.  People charge way, way too much for delivering way, way too little.  Here is a quote from a 2012 article:

Investors shouldn’t pay much for buy and hold portfolios.  Honestly they shouldn’t pay anything on top of the <0.30% in fees one would pay for a portfolio of indexed ETFs or mutual funds (we detailed a few of these in our book The Ivy Portfolio).  Now, if you have a killer advisor that is doing tax harvesting and/or adding alpha that is different but not the topic of this post…

Anything more than 0.5% or so on top of fund fees is either paid a) out of ignorance, which is not always the investor’s fault or b) as a tax for being irresponsible.  For the latter I mean a fee to keep you out of your own way of chasing returns and doing something stupid, much in the same way someone pays Weight Watchers or any other diet advice program when you know what you should be doing (eat less, exercise more).  Some broad generalizations here but trying to get to the data below.  That fee is worth a lot if you cannot keep out of the way of your own emotions, and the evidence is massive in favor of that being the case….

…I left out the really high fee advisors where the fee is variable by advisor since it is hard to make generalizations there other than that it is a dying model and you’re a predator if you’re charging 2% commissions and or 2%+ fees for doing nothing.  I pulled most data from the SEC. 

 My company has never managed buy and hold portfolios for that reason – you shouldn’t be paying much if anything for a service that takes 5 minutes per year.  We outlined a handful of buy and hold portfolios in my book The Ivy Portfolio in 2009 as a do-it-yourself choice.  (We have always managed tactical & active portfolios in separate accounts, private hedge funds, and ETFs.  The fee range on those is 0.59% to 0.79%.)

What I failed to grasp is just how many people still want someone to do a basic buy and hold asset allocation for them.  Below is a chart of some of the top robo-advisors as well as traditional indexing shops.  (If I missed any big ones over $300million let me know. I ignored many of the startups as they have not gained much traction yet.)  

As you can see, many still charge very large fees.  What surprised me most was the custodians (Schwab, Fidelity, etc) that charge fees that are way out of line.  According to Vanguard, the industry average managed portfolio is 1.32%.  Kudos for Vanguard moving from 0.7% to 0.3% recently, but Fidelity is bordering on criminal. (Anything below 0.5% in green, above in red.)  Fido, Vanguard, and Schwab are all double dipping – not only are they charging you a feel to do nothing, they charge you on the underlying funds as well!





ch 1

I thought it would be fun to examine the allocations and the historical performance of two of the top robos.  Below are Betterment’s allocations as well as Wealthfront’s.  I had to make a few assumptions since some asset classes didn’t exist back to the 1970s.  I was too lazy to download midcap value so I lumped that in with small value.  Since emerging bonds haven’t been around that long, those are lumped in with foreign treasuries.  TIPs is a synthetic series pre 1997.  

I went through both Betterment and Wealthfront, and below were their allocations for each level of risk for my personality.  As you can see, pretty darn similar allocations with a few minor differences. One excludes real estate, both exclude any commodities.  Both get a pat on the back for (mostly) avoiding home country bias.

(You can perform all of this yourself with our Excel backtester if you are an Idea Farm subscriber too.)  If I’ve missed anything or there are any errors, let me know.  To be expected, they cluster in the Sharpe 0.4 to 0.6 range.  





Below are the returns and equity curves for 1973-2012, click to enlarge.




Equity curves for Betterment allocations, I excluded WF as it would be too cluttered.  Sign up for Idea Farm and test all of your own strats!


Earning 20% from the Beach, & My Presentation From Wine Country

I was giving a speech in the Bahamas (I know, I know, kind of ridiculous), and the nite before the talk was watching the original Die Hard.  For the 1% that have never seen the movie, there is a scene where the bad guy is talking about stealing $600M in bonds and living out his life on the beach, collecting 20% interest.  In addition to being a criminal mastermind, that would have been one of the all time best trades ever…

My point, of course, is just how different the investment opportunity set was when the movie came out vs. now.  Note you don’t see any movies about bad guys stealing a bunch of US TBills anymore!

Transcript and clip below, followed by my recent talk at the Wine Country Conference. (Thanks to all my Tweeps for finding the video and quote…)

Hans Gruber: When they touch down, we’ll blow the roof, they’ll spend a month sifting through rubble, and by the time they figure out what went wrong, we’ll be sitting on a beach, earning twenty percent.” 




Here is a 45 minute speech to the Wine Country Conference.  Consider donating to this year’s cause, the Autism Society of America…



Excel Quant Backtester, & Down on the Farm

Note: Many do not realize a subscription to The Idea Farm includes a tactical Excel backtester with data back to the 1970s…it’s pretty cool and we will update with 2013 data soon…

Between publishing two books and launching some new funds, unfortunately the last few months I have not had as much time to write on the blog. This summer I will be devoting lots more time to the blog, as well as cranking on a few new interesting pieces.  That, and making a couple BIG announcements in the next few weeks so stay tuned… 

A good deal of my content in the meantime has migrated to Twitter and The Idea Farm.  Below are a few cool charts we’ve featured from Idea Farm pubs in the past few months….



Source: Sitka




Source: Erb




Source: OSAM

macro trader

Source: The Macro Trader

Home Bias, Everywhere

Here is another great screenshot from JP Morgan, where it shows a big bias that even institutional investors have all over the world…


Screen Shot 2014-05-26 at 1.59.33 PM

Skin in the Game – My Portfolio

Next time you sit down with your advisor, ask him or her a simple question:  

How do you invest your own money?

Don’t settle for a simple “well, uh, I have some stocks and bonds, and, umm, some CDs”…ask them specifically what their allocation percentages are, and what funds they use etc.  Many find it very uncomfortable to disclose and many will refuse to do so!

As far as fund managers, many managers don’t even invest in their own funds.  (Here are a few articles on how little managers invest in their own funds herehere, and here.)

In addition, many commentators are willing to provide you with plenty of advice but just try getting them to disclose how they invest their own money – impossible!  How many commentators can you identify that invest in their own funds and are transparent with where they invest? They are happy to give you advice, but forbid they tell you how they invest!  A client asked me the other day how I invested my own money, and I thought that was an interesting idea to just go ahead and write it up. 

This post really has no meaning to you in the sense that you should invest in the best possible way for your situation and your risk tolerances and goals.  How I invest should really have no bearing on how you invest, other than knowing a manager has “skin in the game”.  That sounds basic but it is true.  Anyways, I thought I would outline my portfolio below to let you tag along with how I think about the world and investing with my own personal money.

By far the largest percentage of my portfolio is ownership in my company Cambria Investment Management LP, in the ballpark of 50-95% of my net worth depending on how you value the company. Other illiquid investments include ownership of The Idea Farm, a small passive equity stake in AlphaClone, a share in our family farmland in Kansas, and a share in family real estate and land.

Since Cambria alone dominates my net worth, the actual investable portion is smaller but certainly meaningful.  My horizon is very long term and I have a high risk tolerance.  

Of my investable portion, all of it is invested in our funds and strategies.  Below, in order of size:

Global Tactical private fund, Global Value ETF, and equal amounts of the Shareholder Yield ETF and the Foreign Shareholder Yield ETF.  All of my cash flows simply funnel into these four investments on a periodic basis.  As you can see, my holdings are dominated by foreign stocks, portfolios that can and do have the ability to move to cash (and have a high exposure to real assets), and stocks returning lots of cash to investors.  I am least exposed to traditional bonds but for me they are not that attractive for my time horizon and goals.

If you don’t believe me, or want to see how much your manager is invested in his own funds, the filings are public so go take a look!

So, next time you are chatting with your advisor or broker, or hear someone giving lots of advice at a conference, ask them one simple question: “What do you do with your money?”

Books in the Mail (or Pre-Ordered)

Travel: Boston Paris London NYC

I will be in Boston Monday and Tuesday for the IMCA conference:


Then off to Paris and giving a talk in London:


Then a few days in Europe (undecided where just yet, any suggestions?)

then in NYC May 19-22…come say hello!

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