Teaching Your Children How to Invest

I had a reader email in the other day with a seemingly simple question:  what is the best way to teach your child to invest?  This got me to thinking quite a bit while walking > 100 holes of golf this weekend (note: I’m not a golfer, but I do like hanging outdoors with friends, having beers, and my god is Bandon and coastal Oregon beautiful. Result – buying my first bag of clubs soon!)  What is the best way to teach someone to invest?

My reader asked for input on this scenario, paraphrased:  

I thought about giving my son, who is headed to college, $10,000 to invest.  At the end of college, he could keep any gains, but would not be responsible if he lost the initial capital.  Thoughts?

Hopefully this would teach your son to be involved and interested in markets.  More than likely it would teach him how to take as much risk with OPM (other people’s money), since he has unlimited upside and no downside.  

If he makes money?  Lesson learned is that he is brilliant, and it is easy to beat the market.  This could lead to overconfidence and bigger losses going forward.  

If he loses some or all of the money, lesson learned is that markets are hard, likely he lost interest and/or started trading options, penny stocks,  futures, or FX, and the real benefit of losing your own money (real physical pain) is mostly lost since the money wasn’t his to start with.  Possibly the main result would be a strained relationship due to the  embarrassment of losing his father’s money.

So, if this process isn’t ideal, what is?  Well, I got to thinking about another idea.  What if instead of letting your child run wild with the money without any guide, you gave him a different project.  Some broad outline below, and I’m looking for feedback on the process, as well as the recommended reads to expand into a white paper or book, so shoot me an email!

1.  Each semester his/her job is to read one book, explain in one page or less the findings, what it teaches, and summarize how to implement the process of the book in the real world.

3.  You contribute $X to his IRA, brokerage account etc.  The child implements the process of the book, and you review statements and chat over the updates at each sit down meeting (2x a year? 4x?)

The big pros of this process is that it teaches the child the process of investing rather than simply focusing on the dollar figure, which after four years will almost be entirely due to luck and the market environment (but more likely overtrading, fees, etc).  Before I reveal my 5-10 books, let me hear yours.  

As an example, The Little Book that Beats the Market would show the investor the benefit of investing in a simple, objective process for picking stocks, the benefits of a 12 month holding period for taxes, removing emotions, etc….whereas a book like the Ivy Portfolio would show the benefits of a global focus, broad asset allocation, but also how a totally different approach like how trendfollowing works….

What books or reads would you suggest?



112 Year Holding Period Not Enough

This is a great chart from Patrick O’Shaughnessy on worst case returns for stocks.  As you can see, the US had pretty good returns for the past 112 years, but even then there was a 20 year period where you still lost money.  In fact, MOST countries had a 30 year period where you could have lost money- ouch!

PS you may as well go ahead and pre-order his book, out in October.  I’ve read it, and it’s great!


Hacking the Top Hedge Funds

Long time readers know that I’ve been publicly writing about tracking the top hedge funds through 13F filings since 2006 (but following them since 2000).  I’m mostly done with book #4 on the topic, and thought it would be fun to share the 25 fund profiles. I’m going to send these out once a week on The Idea Farm for the next few months on Sundays to get some feedback, and hopefully eventually on the blog when the book comes out.  

Any last minute favorites I should include?



“The S&P 500 is a trading system…

…and by the way, not a very good one” -David Harding, Winton (HT: @Covel)

Fun video below



Important News Reminder – GTAA ETF

Below is an email letter we sent to shareholders in June.  While I strive to avoid discussing work related matters on social media such as this blog and Twitter, sometimes it is important as a delivery mechanism to ensure all investors are informed.  Lots of our investors are not on our work email list, and the below news potentially impacts their investments, especially since many are on summer vacation!  The short summary is that we are separating with AdvisorShares and will no longer be running the GTAA ETF as of the end of the day on July, 25th.  

You can find the full letter below from early June:

Cambria Investment Management, LP and AdvisorShares issued notice today that the two parties plan on separating, and Cambria will move on from sub-advising the Cambria Global Tactical ETF (GTAA) pending board and shareholder approval.

Cambria, as a fiduciary, is committed to offering the best possible investment portfolios to our investors. Cambria will be launching the successor to the Cambria Global Tactical ETF (GTAA), the Cambria Global Momentum ETF (GMOM), at a management fee of 0.59% in the coming months.   GMOM is currently subject to an effective registration statement, and we are finalizing the terms of the listing with the NYSE and the SEC.
Cambria has been managing global tactical portfolios since 2007, and together with GMOM we will continue to manage these strategies in separate accounts and private funds.  
Cambria has launched three ETFs under our own sponsorship, including the Cambria Shareholder Yield ETF (SYLD), the Cambria Foreign Shareholder Yield ETF (FYLD), and the Cambria Global Value ETF (GVAL). 
You can find more information on Cambria at www.cambriafunds.com.  Please feel free to email us with any questions.




Buffet’s Favorite Indicator (for Japan)

Two fun charts below comparing mkt cap to GDP in the US and Japan.  Interesting to see they have similar medians, as well as peaks and troughs.  From VectorGrader

(You can also find more info at the World Bank..Would be fun to test the historical performance for developed and emerging mkts based on this indicator.  Not sure how well it would do across the two since emerging likely has much less of economy as public stocks?)



and US



My Talk at Authors@Google

Fun (lonngggg) talk at Google if you have an hour to spare.  This is sort of a nice audio companion to the book Global Value.


Railroad CAPE Ratios – In 1929?

This was a fun paper I sent to The Idea Farm a few weeks ago.  A few tidbits:

Changing Times,Changing Values: A Historical Analysis of Sectors within the US Stock Market 1872-2013


“We plot the CAPE ratio for the overall market as well as for the three sectors Industrials, Utilities, and Railroads
in Figure 4. Note that the CAPE ratio of the three sectors shows a relatively similar pattern across sectors through
time, but there are significant differences. Notably, in the 1929 peak, the Utilities sector stood out, because of a sharp  increase in the numerator of the ratio, and Utilities’ CAPE ratio set the all-time high record in the third quarter of that year with slightly more than 60. In that same quarter, the CAPE ratio for the Industrials sector was high, but much less so, only slightly more than 36. In comparison, the Railroads sector’s CAPE ratio at that time was around 20. The other dramatic peak, in the fourth quarter of 1999, was dominated not by the Utilities sector but by Industrials, when the Industrials sector’s CAPE ratio reached nearly 58 then. In comparison, the CAPE ratio for Railroads at that time varied between somewhat more than 30 and approximately 15 and the ratio for Utilities barely exceeded 30 at its peak. The all-time record low in our sample was set by Railroads, in the second quarter of 1932, with the CAPE ratio dropping below 2.5. During that time, Industrials’s CAPE ratio was also low at close to 6 and Utilities’ CAPE ratio came close to 10. We venture that these broad swings in entire sectors of our economy are not entirely due to changes in rational expectations for the future dividends and earnings, and must mean something for subsequent returns.”

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Valuation and Sentiment, You Say Potato…

I had not seen the website Street Talk Live before, but it has some nice charts.  One was a long term chart of the AAII stock allocations.  Nut surprisingly, but sentiment correlates pretty highly with valuations.  But then again both of those are dominated by the P.  

Below I recreated the chart with valuations on the left axis (CAPE), and stock allocation on the right (AAII).  


This IS the Global Market Portfolio

Any deviations and you’re an active investor…Rounded these numbers from this earlier piece.

40% stocks (20% US, 20% foreign)

20% Corporate Bonds

30% Government Bonds

5% Real Estate

2% each TIPs, emerging bonds, high yield



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