Blogging has been light due to a heavy travel schedule, but it should pick back up. I’m headed to the Value Investing Congress in Pasadena if anyone is around this week…
Some cool recent milestones:
Launch of two private Cambria Funds
500th blog post
25,000 downloads for my paper, putting it in the top 10 all time on the SSRN!
Some videos of yours truly:
A Framework for Risk Based Fund Manager Comp
Finally a Convertible Bond ETF is here
Great post with lots of charts on hedge funds.
Back in May 2007 I penned a list of ETFs I’d like to see. Amazing to see that many holes have been filled:
My original list
1. Foreign Small Cap
2. Foreign Bonds, Emerging Bonds
3. Municipal Bonds
5. Convertible Arbitrage
6. Value Hedge Fund of Funds (tracking the 13Fs)
7. Activist Fund of Funds (ditto)
8. Dogs of the Dow with Net Payout Yield (Wisdom Tree but with Payout Yield weighted instead of dividend yield)
9. U.S. Listed Hedge Funds and FOFs
1. Emerging markets non-free (all the countries that cannot exchange local currency for dollars like Sudan and Iran).
3. Individual commodities ala LSE
4. Disease (Diabetes, etc)
5. Country ETF’s by market cap, style
6. Emerging Value, Small Cap
7. Emerging Real Estate
8. Lots of individual country suggestions (Vietnam)
9. Lots of leveraged suggestions for asset classes (AGG, GSP)
Let’s say you knew nothing about investing, and someone presented you with the following choices. Over the past 36 years there are two asset classes, and their return statistics are :
1973-2008 Asset Class A
Sharpe 6% : 0.21
Asset Class B
Sharpe 6% : 0.30
Most investors would choose asset class B due to the similar returns as A, but with much less volatility and drawdown. Obviously, asset class A is stocks and B is bonds. The problem with this analysis is a big bias in the period chosen – one of largely declining interest rates and two big bear markets in stocks. If you take the results back further to 1900, the results are a little different. Here stocks handily outperform bonds, albeit with much more risk.
There are lots of observations to be made here (the cyclical nature of returns, the importance of the period chosen, path dependency, what works in the past doesn’t mean it will work in the future etc) but the main point I wanted to highlight here was just how much risk a 60/40 portfolio has (60% stocks, 40% bonds). An investor putting 40% of his portfolio in bonds would still have been subject to a nasty 60% decline in the value of his portfolio. This doubles the roughly 30% drawdown investors faced with a 60/40 portfolio in February. How many investors do you think have a 60/40 allocation and are willing to absorb a 30% loss, let alone a 60% loss? Timing helps on the risk management front, but that is largely due to decreasing the risk in the equity allocation.
What’s your stock’s O-Score?
And if it is as nice where you are as it is where I am today, quit reading this and go play! Or at least take a copy of my book and read it outside. . .