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Ian Ball: Above-Average Capital Allocation Yields Above-Average Results In Mining

Strategies for capital allocation. Where are the bottlenecks in mine efficiency? Beware of excessive share dilution in mining stocks. Companies seeking capital meet potential financiers via the internet. Ian Ball brings us Abitibi Royalty Search, an online platform where mining companies in need of financing can easily submit geological data on their projects for consideration. In the mining sector, above-average capital allocation yields above-average results. The bottleneck in efficiency is in equipment provider innovation. Ian sheds light on our current position in the commodity market cycle, he expects the bottom within 12 months and his investment strategies reflect this. He advises to beware of share dilution in mining companies and not just opt for the cheapies. Ian Ball was appointed president of Abitibi Royalties ( OTC:ATBYF ) in 2014. Ian worked 10.5 years for Rob McEwen, initially at Goldcorp (NYSE: GG ) and then McEwen Mining (NYSE: MUX ). He most recently served as McEwen Mining’s president where he was responsible for overseeing production, construction and exploration activities throughout North and South America. He was responsible for discovering McEwen Mining’s El Gallo 2 project, scheduled to become one of the 15 largest silver mines in the world and building the El Gallo 1 gold mine that is forecasted to produce 75,000 ounces gold in 2015. www.youtube.com/watch Palisade Radio Host, Collin Kettell : Welcome back to another episode of Palisade Radio. This is your host, Collin Kettell. On the line with us today is a new guest to the program. I am very happy to have him. It is Ian Ball, President and CEO of Abitibi Royalties. A lot of people are probably familiar with the name as he has been around in the industry for quite some time and he has worked in the past – and still does to this day – with Rob McEwen. Ian, welcome to the program. President and CEO, Abitibi Royalties, Ian Ball: Thank you for having me today. CK: Yeah, as we were talking before the interview here, you went through your background that got you into mining. I thought I had started young, but you were saying that your background in mining went all the way back to when you were five years old. If you do not mind just giving a brief overview of that story again, it would be great. IB: Yeah, I would be delighted to. I grew up with mining because my parents were investors in mostly junior mining companies, and they had me looking at mining stocks at the age of five. There is always a discussion around the dinner room table on gold mining, exploration success, and the amount of wealth that it could generate on the back of discovery, so it has always been very intriguing for me. As I sort of went through school, I became very intrigued also in terms of how different mining companies were run and it seemed to me it was quite clear that the best mining company in terms of its management, in terms of its assets was Goldcorp. This was back in 2002, 2003. I was very fortunate to have met Rob McEwen at that time and then have him offer me a job to go and work there. CK: And so from therein you became the president of McEwen Mining, if you can give a brief overview of your time there and what you are doing now. IB: Sure. Well, after Goldcorp, because if you think back to 2005, Goldcorp merged with Wheaton River and the head office was then subsequently moved to Vancouver. Rob stepped down as CEO, which was always his intention. We went out and started a small company called US Gold which then became McEwen Mining. I had started at US Gold and slowly started to move into the exploration’s operational side and started in Mexico with a small exploration budget. We were fortunate enough to make a reasonable size silver discovery that now has almost a construction permit and is scheduled to be one of the fifteen largest silver mines in the world. On the back of that headed up a team that built what is now McEwen Mining, the main operating act of the El Gallo 1 Mine in Mexico. With those two successes then being promoted to president of McEwen Mining and that will have to be about ten years. CK: Great! So now you are working with Abitibi Royalty. I think a lot of our listeners have seen many of the press releases you guys have been doing, what you are calling a royalty search over the past few months. But, essentially, if you kind of outline the concept for potential shareholders behind how you guys see making money. It is quite a unique business model that I do not think has been executed on before. IB: Well, we look at Abitibi as having almost like a number of divisions inside of a company. Number 1 is the royalty search. If you think of any job of the CEO, it is allocation of capital. In a mining company, we have done an absolutely horrible job of allocating capital. When I was working at Goldcorp and then McEwen Mining, what become Rob’s primary themes is that if you do the average you should expect to get the average result. Most mining companies view the same as everybody else. That is why it is mostly we are all in the same position. When I look at the world in terms of mining, oftentimes it is not large sums of capital that generate the highest return; usually it is small sums deployed in a different fashion. We looked at it and said, well, it is a tough market right now. There are a lot of prospectors and junior mining companies that are having a difficult time in terms of financial position. They cannot pay the claim fees that are coming due and, therefore, they are going to have to drop the properties. Then I say, well, would we be willing to pay the property taxes on their behalf, in doing so getting back a royalty? We have also asked that should the properties be sold we would also get 15% of the net proceeds. But we are looking for properties that have certain characteristic. They have to be near a mine site. They have to have good geology and they have to have science and mineralization through previous exploration. I thought if we could build up a portfolio of 25 to 30 of these, we might walk away with two that end up being successful. Today, we have 70+ submissions. We completed eight transactions and we are continuing to review submissions as they come in. We have been pretty happy with what we spent. Today, I think for the first eight we spent $90,000. CK: I want to dig in a little bit deeper on this model behind paying for the claims fees and in turn getting a royalty and some upside on the project. The purest form of speculating in the mining sector is picking up or staking projects and holding them from the cheap point of a bear market into the craze that comes into a bull market, and that is essentially what you guys are doing. I mean I have looked at some of the press releases coming out and the costs to cover these claims fees are quite low and you are ending up with a substantial royalty. But for our listeners that are not as familiar, what is the value of the royalty? I mean some of these assets are not going to become a mine, and even if two of them do it, it is going to be a long time out. If you can explain how these things become valuable just through a bull market emerging that would be great. IB: Well, if you look at some of the royalties that we acquire, couple of them are 200 meters away from an operating mine. They are very, very close. A lot of the geology indicates that the mineralization may trend over where we have the royalty. You are right where even if there is a discovery it could be some time before you see cash flow. But if you look at the industry in the history of mining, the history of royalties, the best royalty ever purchased was by Franco-Nevada (NYSE: FNV ) in the early to mid-’80s on the Goldstrike mine, and that was when Barrick (NYSE: ABX ) then subsequently made the large discovery just like Goldstrike. If you look at Franco, it was not so much the cash flow that was the driver of their share price; it was the exploration success in knowing that cash flows were coming in the future. I think that this way, if the exploration company has a good drill hole, their share price starts to increase because you are building the underlying value. We suspected the same thing would happen initially here as any of these properties was to have a resource, and the value would have continually be increased as they get closer to production. The thing that we like most about these is that they are all right near a mine site and these are not in an area that has no infrastructure. They are 200 meters away, 500 meters away, a kilometer away from where usually substantial mines are operating. CK: For the benefit of our audience, Ian, can you explain how royalty is tied to a project? When a royalty goes away? How it sticks with the projects as long as the project remains in good standing, etc.? IB: Yeah. In that sense, it is a good question because royalties, in terms of their legal standing, they do vary by jurisdiction. You have to know the underlying rules that are applicable. Ontario, for example, in Canada is different than in Quebec. It might seem strange that you are on the same country but one is common law, one is civil law. The rules do change. One thing that we are building into our agreement is saying that once the claims come due again we are putting in a clause that we will be willing to pay the claim fees again for a higher royalty. That is where we can maintain if we like the property that it shows it stays in good standing and does not go to any default status. CK: Okay, thank you for the clarification there. I want to shift gears a little bit and talk to you about the industry that we are in which is, oftentimes, as you pointed out, mismanaged, money is misallocated. Much of your career was started at Goldcorp, and you said that at the time it was extremely innovative, shareholder-friendly. Of course, there was what I believe was referred to as the “Challenge” which was that first online exploration challenge that was a huge success and has now been replicated a few different times. Can you talk about the use of technology and the internet in how you have gone ahead and worked in the mining sector? IB: Well, I think the internet has a lot of uses in terms of its reach to connect people, to bring in new ideas. You did see it with the Goldcorp Challenge. You have to remember that was back in 2000 when the internet really was at the early stage and what you are able to do today versus then has obviously been drastically increased, so there is more we can be doing on the internet. If you think about it other companies have tried it and there is always success. Barrick would be an example where they had a challenge on metallurgy. This was in 2006 where they put up a prize of $10,000,000 I believe it was. But I think the problem there was they did not have an internal champion to keep pushing it ahead. I think without that a lot of these initiatives end up failing where I think Rob was a very good example where he came up with the idea, was the internal champion, and continued to push it so it became a success. I think that is the key. We have tried to use the internet saying that rather than trying to talk to people individually about what claims they want to have in good standing. We have created an online platform where you can submit all your technical data online and you will have an answer within 48 hours. I think that is a much more efficient process. Those are just two examples. In terms of innovation technology as a whole, right now we are seeing a lot of cost cuts in the industry. But it is just cutting cost; it is not innovation. The two should not be confused. To give you an example, two years ago, I went down to the Caterpillar (NYSE: CAT ) factory in Illinois and my question was why are we not developing an electric coal truck? Because according to the work that I had done, mining cost would go from – and this is in Mexico because this is where I was primarily working at the time. Mining cost would go from $2 a ton to $1 a ton if you can move from a diesel to an electric haul truck. I thought, “Okay, well, that would drastically impact the economics of a mining operation.” Caterpillar’s response was, “We do not do electric. We only care about expanding the hours on a diesel engine.” That is the wrong mindset for the mining industry. I think we need to push the suppliers to work harder on the innovation side. CK: Well, that is very interesting. Well, Ian, at 34 years old, you have ridden a couple cycles up and down. I want to talk about where we are at right now in the cycle. I think action speak louder than words. Certainly with you picking up assets under Abitibi and other projects you are working on, it would indicate that you think we are near a bottom. How do you see things developing over the next couple of years? Are we close? Is the bottom behind us? IB: Well, a couple of things. You are right and we launched the royalty search on the back of a very difficult time in the market. Four years ago, when we could not have done the royalty search idea because there was a lot of capital available, the other thing that we have done to sort of show that we think it is the good time to be buying is that we are one of the few companies that have launched share buyback program. Rather than issuing shares, we are buying back our shares currently. The other thing is I agreed to take all my salary in shares versus taking it in cash. That is also my belief that the share prices are going to go up, not down. In terms of where we are in the market, I think kind of pick a spot or a price in terms of where’s a bottom, I think that is a very difficult thing to do. I sort of try to look at it in terms of where are we are in the cycle. This might sound like I am looking at myself a lot as a buffer but I think we are in the bottom twenty to bottom third of this downward trend. If you look at the technicals, which I know, I am not a big believer in technicals, but if you look at the charts you would assume that gold is going to go to a thousand. It is probably going to overshoot a thousand as it typically always overshoots support to some degree. Whether it is $975, $950, $925, I think gold is going to go there somewhere in the next twelve months. Knowing that is very difficult to do deals and markets can turn around quickly. We have looked at it and see we are in the bottom third of the market that is safe enough for us to start deploying our capital, share buyback, asset acquisitions. We think in the next twelve months, we will probably see the bottom, but we do not know where that would be or we do not know how quickly we would recover from there or whether it sort of just tread water for some time. CK: What do your past experiences in bull markets tell you about the type of gains will be made for investors? Obviously, it depends on if you are going to the ground level purchasing assets like yourself or if you are buying mid-tiers or majors. But what will you expect over the next few years? IB: Well, it is an interesting question because I just sort of give you an example. If you go back to 1995, this is when Goldcorp made the high grade zone discovery at Red Lake and the shares did very well off the back of that. Then in ’96 we had Bre-X. We then had gold prices starting to decline making significant declines in ’97, and then they ultimately bought, did a double lot then in 1999 and then in 2001. By the time you got to 2001, Goldcorp, despite having arguably the best gold discovery in fifteen years, was back to the same price they were pre-discovery. If you look at it and say – in hindsight it makes sense and here you have a deposit that ends up being five million ounces of gold at 88 grams per ton gold. Think of it. That is almost unheard of. It is unheard of. Then if you have the nerve to buy at the time the gains were phenomenal going from 2001 to 2005, 2006 where the share price ultimately went from $5 in 2001 to $46. Big games can be had with the announcement of a company of reasonable size. I think that now people should be looking at companies that have good assets, good discoveries, that are trading at fractions of what it even cost to discover those deposits. I think there is a few of them out there right now. CK: Yeah, that is great. Well, Ian, at this point, I want to ask you if you have anything to add. Any suggestions for audience, members, and also if you can give us some more information on the companies you are working with where people can find out some more information that would be great. IB: Well, I would say the thing you will come to appreciate over time is that with a lot of these mining companies, you should be looking at the share dilution. I think that is what has been a killer in this industry and that the cost of capital to finance these companies was quite high, and you are looking at companies that are cheap and that is why we buy shares. But do they have any money? How long will that money take them. If they have to do a financing, how many more shares are to be issued plus the warrant? There’s a bit of a cautionary tale to be had there. In terms of other mining companies, I only invest in one and that is Abitibi. I do not invest in any others. There are specific reasons why and I think Abitibi has a good story in terms of its fundamentals. I do think that there are other companies out there that are doing good work, but it is still a bit of a cautionary tale. Right now, you have an opportunity to probably buy a handful of very good companies at a reasonable price rather than trying to buy companies that are just cheap for the sake of being cheap. CK: Okay, well, Ian, thanks so much for coming on the program. Really appreciate it. We will try and get you back on next year maybe in a better market, maybe not. IB: Okay, that sounds good. Thank you for your time today.

Does The Size Premium Apply To Countries?

Summary A size premium has been extensively documented in financial literature and some studies have reported a size premium at the country level as well. Portfolios constructed under max-country weight strategies have achieved higher returns and better risk-adjusted performance as measured by Sharpe ratios, albeit with higher volatilities, compared to the benchmark. Max-country weight strategy suggests a potential robust portfolio construction methodology that could provide diversification benefits and improve the portfolio’s risk-adjusted performance compared to the benchmark. Since 1981, the “size premium,” or the tendency for smaller-capitalization securities to outperform their larger-cap counterparts, has been extensively documented in financial literature in the United States. Some studies have extended this research and reported that the size effect applies for country indices as well. Gerstein Fisher conducted research on the relationship between aggregate country equity market capitalizations and country-level market index returns and explored how a market-cap weighted international portfolio can be improved by limiting the weight of larger countries, such as Japan and the United Kingdom, and redistributing weights to smaller countries. For our study, we examined a capitalization-weighted basket of developed-market country indices (excluding the US) that resembles the MSCI EAFE Index. We used this index as our benchmark, and have reported country component weights of this index in the right-most column of Exhibit 1. We then limited the maximum weight of any one country in the portfolio (ranging from a 10% cap to 15%) and re-distributed that weight to all other countries according to their market capitalizations. If, after the re-allocation, any country exceeded the maximum portfolio weight, we repeated the process and re-allocated the additional weights. Exhibit 1, which provides the average exposures of each country in the various country-capped portfolios, and the benchmark over the sample period from January 1997 to July 2015 shows that this process generally reduced the weight of the two largest countries, Japan and the United Kingdom, and added the most weight to the larger of the smaller countries – France, Germany, Switzerland and Australia – resulting in a more even distribution of country weights in the modified portfolio. (click to enlarge) Exhibit 2 reports the performance of our strategy on a cumulative and annualized basis relative to the benchmark; Exhibit 3 shows results on a cumulative basis over time. As shown in both of these exhibits, all of the capped approaches have achieved modestly better cumulative and annualized returns compared to the benchmark over the period from January 1997 to July 2015. Note that this outperformance is achieved with higher volatilities (as measured by annualized standard deviations). The highest volatility (18.45%) is observed for the portfolio applying a 10% country-weight limit and the lowest (17.92%) for the portfolio applying a 15% country-weight limit, compared to 17.14% for the benchmark. Despite the higher volatilities, all capped approaches delivered better risk-adjusted performance as measured by Sharpe ratios (ranging from 0.345 to 0.373), compared to the Sharpe ratio of the benchmark (0.304). (click to enlarge) (click to enlarge) Without further research, we can only speculate about what causes the “small country effect.” The higher return may be explained by the tilts towards the value factor: we have assigned greater-than-market weights to stocks with high fundamentals relative to price and less-than-market weights to stocks with low fundamentals relative to price at the country level in the form of country max limits since smaller countries tend to have higher growth potential and less expensive equity markets. For example, Japan, a country with a relatively low dividend yield, sees its weight in the country-capped portfolios decrease by a range of 9% to 14% with respect to the benchmark. There is a trade-off associated with tilting toward small countries, however, by using this technique. The increased volatilities indicate that small markets are riskier than larger ones. But the increase in volatility is limited since by applying a max-country weight strategy we limit the portfolio’s exposure to any single country, thus enhancing portfolio diversification and lowering concentration risk. Overall, a max-country weight strategy suggests a potential robust portfolio construction methodology that could improve the portfolio’s risk-adjusted performance, as shown by increased Sharpe ratios compared to the benchmark. For more detail and the full results of our study, we invite you to read our research paper, Country Size Premiums and Global Equity Portfolio Structure . Conclusion Our research points to a possible methodology to better structure a multi-country portfolio: varying allocations to different countries based on their equity market capitalizations. As we show, re-distributing some of the weight of larger countries to smaller countries can improve an international stock portfolio’s risk-adjusted performance.

No, Jesse Had It Right: Owning Stocks Today Has An Unattractive Risk/Reward Profile

My rebuttal to Terrier’s rebuttal. Terrier seems to believe that timing the market is not possible, but beating the market through stock picking is very much possible. Many bulls look at one market over one long stretch of time and believe they’re all clear for 10+ year periods… nope. Terrier Investing posted a rebuttal this morning to Jesse Felder’s original piece : “Owning Stocks Today is Risking Dollars to Make Pennies.” Terrier makes three points in his rebuttal. To quote: Well, according to Jesse, it means stocks are so wildly overvalued that your potential return over the next ten years is miniscule, and your potential downside is massive. I posit this is: A) alarmist and statistically inaccurate; B) overly narrow in its definition of risk; and C) treats “stocks” as some monolithic entity” Each of Terrier’s points are problematic; I’ll handle them one by one. Before I do, however, let me say that Terrier makes many sensible claims in his rebuttal. I dispute his line of reasoning here, mainly because he uses three arguments that I think undergird many bulls’ logic, whether they realize it or not. Someone like Terrier who explicitly makes assumptions is in my view on much firmer soil than the many bulls who are implicitly making the identical assumptions. If Terrier sees reason to modify his explicit a priori, he can. Bulls that are actually sheep have no such explicit framework against which they can base a reasonable shift to their investment thesis. With those disclaimers out of the way, I will now address the problems that I see with Terrier’s arguments. A) Alarmist and statistically inaccurate (sorry to quote so much of Terrier’s piece, but I want to address what he DID say, not what he didn’t): What is the actual likelihood of stocks resulting in a significantly negative 10-year return? Here’s a link to a nice document providing this data from 1926 through 2013 in both tabular and graphical format. Summarily, there were only a very few rolling 10-year periods when investing in the S&P 500 would have resulted in losses in nominal terms. Specifically, you would have had to invest right before the Great Depression or in the late 1990s – two of the larger bubbles of all time. Looking at one market over one stretch of time, even a long stretch, does not give you a statistically robust sense of what that market can do over any 7-15 year timeframe. I’ll grant you that it’s better than a sharp stick in the eye, but the data can easily mislead. I wonder what the German stock market would have looked like over the first half of the twentieth century. After enduring two world wars, a bout of hyperinflation, and political dismemberment, I don’t believe that German stocks performed too well over that meaningfully long timeframe. The German stock market was at the time (and still is) a well-developed market. I wonder what fraction of those 10-year periods had sizeable losses. Whoever said that can’t be us? From an Investopedia article on history of stocks and bonds: At the same time, many other economies suffered great losses. For example, according to Phillipe Jorion and William N. Goetzmann in their article “Global Stock Markets In The Twentieth Century” (1999), the Japanese stock market saw a 95% decline in real returns between 1944 and 1949. The German market also suffered devastating losses. In this context, the U.S. market’s success seems to be an exception, which the previous lack of data for other countries may have obscured. (emphasis added) Japan 1986 to present?…let’s not look there I’m guessing. (click to enlarge) How about the US stock market from 1891-1974? There were many poor return stretches over that time frame, especially when viewed on a real return basis. That’s a long stretch in our own market; how do the total return statistics bear out? While I’ll grant that the percentage of positive ten-year returns would likely still be high, the final results would be substantially more lackluster, particularly for investors who did not reinvest all of the dividends over the entire horizon with no tax implications. In fact, depending on your starting and ending points, you can find periods of negative real returns over a fifty-year time frame if you don’t include complete dividend reinvestment over the entire 50+ horizon. To see that this is the case, check out Political Calculation’s S&P calculator . Enter some periods that end in 1974 or 1983 for instance. I’m not trying to cherry pick here; I am demonstrating that there certainly are periods for even the longest of practical time horizons where equity returns are quite unattractive. There are two other, larger reasons why past may not be prologue for S&P returns. And I’ll address these points alongside Terrier’s point B: B: Risk as volatility, not as permanent loss of capital Moreover, there is more than one definition of “risking dollars” – assuming you have a ten-year or greater time horizon and need to invest to fund long-term liabilities (kids’ college funds, retirement, etc.), then earning near-zero returns by investing exclusively in bonds is just as much of a risk as potential volatility from investing in stocks. Risk, in this context, means you won’t meet your financial goals – and if you don’t invest in any stocks, it’s very hard to see how you will generate sufficient returns with yields on fixed income where they are. Some clarification here first. Terrier goes on to say that he believes that the market as a whole is on the expensive side (which leads to his point C), so he’s not some brainless stock market cheerleader. To that same end, Felder never explicitly says that nobody should have any equity exposure. (As for me, I have plenty of equity exposure: I’m short SPX.) Terrier’s second point essentially makes an assumption: risk as volatility vs. risk as probability of permanent capital loss. If risk is merely volatility – stocks whipping around for short and maybe even violent bursts, only to recover over a reasonably quick timeframe and make new highs – then I believe that he is correct. In his defense, he doesn’t suggest going “all-in” on equities, and even recommends having a decent cash pile. The issue is that Terrier’s problematic analysis from his first point (stocks rarely have negative nominal 10-year returns) leads him to the next conclusion that equity risk is actually only volatility, not capital impairment. This is where Terrier and I truly part company. Many long-only investors believe that strong long-run SPX returns happen mostly as a simple function of time; they’re somehow owed these returns for weathering volatility. I find it amusing that these same long-only bulls don’t feel like Brazilian investors are owed strong long-run returns, or that Greek or Russian or Japanese or South African equity investors are owed long-run returns. This amounts to a personally dangerous form of financial jingoism. Let me make it clear: IF sustained poor equity returns can happen to Brazil (the world’s seventh largest economy), then they can happen for the US. See, investors today aren’t looking at the Greek market and shrugging it off as a temporary bout of volatility. Ditto the other markets mentioned above. Investors correctly see these declines for what they are: semi-permanent capital loss. That is to say that even a strong bounce and even full dividend reinvestment will not bring a buy-and-hold index investor who purchased in, say 2010, back to even for years to come. Bears like Felder and myself believe that S&P balance sheets, investor margin positioning, GDP growth trends, and equity valuations in light of a slowing global economy put the S&P 500 at risk of a vigorous fall that will NOT be recovered anytime soon. (click to enlarge) (click to enlarge) Source: FactSet Why should we expect S&P returns that approximate history when a) GDP growth (global or US) is nothing like what it has been in the past, b) corporate balance sheets are not very healthy and c) valuations for the broad market are MORE expensive for almost every decile than at the March 2000 peak? To conclude, Terrier states: Risk, in this context, means you won’t meet your financial goals – and if you don’t invest in any stocks, it’s very hard to see how you will generate sufficient returns with yields on fixed income where they are. Well, what if the S&P falls – a LOT – and does not recover? Meeting one’s financial goals goes from being difficult to completely impossible. I believe such an outcome needs to be given a very meaningful weight. Terrier’s last point is that we don’t have a stock market, but a market of stocks: Finally, point C: I think it’s unfair to treat “stocks” as a monolithic entity – as if you either own the S&P 500 (NYSEARCA: SPY ) or you do not, and there’s no other alternative. Even if you believe the market as a whole is overvalued, like I do, that doesn’t mean every single component of the market is overvalued. Terrier goes on to say that one can do research and find a basket of stocks that will beat the market. Which is basically saying that Terrier doesn’t believe that investors can beat the market via market timing (“Not owning the market is risking dollars to make pennies”), but that they can beat the market through security selection. I completely disagree. Look at all the “smart beta” ETFs and actively managed mutual funds that are essentially continuously fully invested. How many of those pros beat the market? Not too many. I’m not saying that it cannot be done, but I see no reason – whatsoever – why market outperformance through the security selection channel is so much easier to consistently achieve than market outperformance via the market timing channel. But my objection to Terrier’s point C goes well beyond this first point: In 2013, the most heavily-shorted stocks were some of the best performers . It tends to be sophisticated investors that short companies. Full disclosure: I have never in my life shorted an individual name, and so I claim absolutely no expertise on this process. These securities specialists had their you-know-what’s handed to them, because it was a bad idea to be short any stock in the S&P during 2013. Similarly, it was a bad idea to be long any stock in the S&P between March 2008-March 2009. When “the market” gets crazy (up or down), security selection absolutely will not save you… period. At that point, the macro takes over, and the micro gets buried. That doesn’t mean that security selection cannot help you (assuming that you can in fact do it AND stick to your discipline): better to lose 33% than 40% or 60% instead of 75%… but you still won’t be happy with your strongly negative returns. In conclusion, Terrier states in his point A (in context of negative 10-year returns): Specifically, you would have had to invest right before the Great Depression or in the late 1990s – two of the larger bubbles of all time. My stance, and I believe Felder’s as well (though I’ll let him speak for himself), is precisely that today’s market IS one of those great bubbles. James Paulsen of Wells Capital Management produced the chart below to compare P/Es of the S&P for each 5-percentile increment for year-end 2014 vs. June 2000. The overvaluation of the broad markets is far more severe than it was in 2000, and so when the bottom falls out, there may not be too many great places to hide from the merciless reaping that ensues. Permanent capital impairment from any and all long US equity exposure needs to be treated not as a fringe case, but as THE base case. In that world, long investors really indeed are risking dollars that they won’t recover for years in order to pick up those juicy 3-5% yields or hope for the continuation of a stretched and tired bull.