Tag Archives: feeds

Our Growing World

Photo Credit: Ejaz Asi In general, I tend not to go in for macro themes. Why? I tend to get them wrong, and I think most investors also get them wrong, or at least, don’t get them right consistently. I do have one macro theme, and it has served me well for a long time, though not over the past two years. I was using the theme as early as 2000, but finally articulated it in 2006. At that time, I was running my equity strategy for my employer, as well as in my personal account. They used it for their profit sharing plan and endowment. They liked it because it was different from what the firm did to make money, which was mostly off of financial companies, both public and private. They didn’t want employees to worry that their accrued profit sharing bonuses would be in jeopardy if the firm’s ordinary businesses got into trouble. In general, a good idea. At the end of the year, I needed to give a presentation to all of the employees on how I had been managing their money. Because my strategies had been working well, it would be an easy presentation to make… but as I looked at the prior year presentation, I felt that I needed to say more. It was at that moment that the macro theme that I had been working with became clear to me, and I called it: Our Growing World. The idea is this: in a post-Cold War world where most economies have accepted the basic idea of Capitalism to varying degrees, there should be growth, and that growth should create a growing middle class globally. This middle class would be less well-off than what we presently see in America and Western Europe, at least initially, but would manifest itself in a lot of demand for food, energy, and a variety of commodities and machinery as the middle class grew. Now, I never committed everything to this theme, ever. Maybe one-third of the portfolio was influenced by it, on average. Most of what I do was and still is more influenced by my industry models, and by bottom-up stock-picking. That said, the theme has a cyclical bias, and cyclicals have been kicked lately. I still think the theme is valid, but will have to wait for overinvestment and overproduction in certain industries to get rationalized globally. Were this only a US problem, it might be easier to deal with because we’re far more willing to let things fail, and let the bankruptcy process sort these matters out. Governments in the rest of the world tend to interfere more, particularly if it is to protect a company that is a “national champion.” But the rationalization will take place, and so until then in cyclical industries I try to own financially strong companies that are cheap. They will survive until the cycle turns, and make good money after that. That said, the billion dollar question remains – when will the cycle turn? More next time, when I write about my industry model. Disclosure: None

Moby-Markets

“Thar she blows!” “Where away?” “Three points off the lee bow, sir.” “Raise up your wheel. Steady!” Illustration: I.W. Taber. Source: Wikipedia It’s easy to become obsessed. Melville’s famous novel Moby-Dick describes Captain Ahab’s obsession with a giant albino sperm whale. On a previous voyage, the white whale had bitten off Ahab’s leg, leaving him with a prosthesis. Ahab goes on a mission of revenge, casting his spell over the rest of the crew. His fanaticism robs him of all caution. In the end, Moby-Dick destroys the ship and drags Ahab to the bottom. When you’ve suffered a loss in the market, the best thing to do is to put it behind you. Sometimes it’s because the nature of the economy has changed. Sometimes there was an unexpected development – new management, or some external factor. Sometimes you simply miscalculated. Whatever the reason, it’s important to understand that markets are forward-looking. They take current circumstances and future expectations and try to discount all the expected cash-flows to a present value. That’s what market prices represent. Click to enlarge S&P 500 for the last 2 years. Source: Bloomberg So when they move significantly, it’s because the outlook is different. A stock doesn’t know that you own it, and it certainly doesn’t care what the price was when you bought it. Investors can get obsessed with “getting out even.” But that’s a mistake. The only reason to worry about where you bought a stock is to manage your tax-liability. In the midst of the conflict, Ahab was given a final chance to give up his fanatical quest, but he rejects this – to his doom. Investors need to be sure they’re thinking and planning rationally – and not obsessively.

Comparing Portfolio Performance (1973 To 2015)

I’ve finally managed to gather enough portfolio performance data to put together this year’s portfolio comparison edition. I was able to add 2014 and 2015 data. Last year’s post is here . You can use last year’s post and the Portfolios page for portfolio definitions. I’ll present the comparison of the portfolios in a few ways. I also added a few new fields this year. I added the last 3-yr, 5-yr, and 10-yr performance for each portfolio and performance in the last bull market and last bull/bear market cycle. Now, on to the data. First, let’s present the data in its most traditional way, by sorting the portfolios in terms of performance over the full time period, 1973 through 2015. There is a lot of data in these images so click on the image to make it easier to see. Click to enlarge A few notes on this presentation. Performance, CAGR, is highlighted in light orange. The most common, ‘traditional’ benchmarks, are highlighted in light blue. The portfolios in yellow are some of the popular buy and hold allocations where I had to create or simulate the last 2 years of performance data based on their allocations. This method is pretty accurate since they’re passive portfolios but still the data is not exact and does not come from a standard source. So, what’s the main message here? Quant and TAA portfolios provide the highest performance over the entire time period. The Bernstein portfolio is the highest ranked buy and hold portfolio on the list at #12. Now on to risk-adjusted performance. Risk-adjusted performance is a much better metric in choosing portfolios. Here I present the portfolios sorted by the Sortino ratio, which doesn’t penalize portfolios for upside volatility, instead of the more traditional Sharpe ratio. Click to enlarge In risk-adjusted terms, quant and TAA portfolios are also at the top of the list. The highest ranked buy and hold portfolio is the Risk Parity portfolio at #9. Risk-adjusted metrics like the Sortino ratio are particularly important for investors in the withdrawal stage of their life. Higher risk-adjusted returns is highly correlated with higher SWRs in retirement. Great, but many investors ask, ‘what have you done for me lately’? Maybe markets have changed, maybe what worked in the past doesn’t work anymore, etc… Many investors use recent performance, especially since the start of the most recent bull market in 2009 to make portfolio comparisons. This is a mistake. You should at least look at the most recent bull/bear market cycle in addition to the full history. Below are the portfolios sorted by performance since the start of the last, in this case, the bear/bull cycle, which started in 2007. Click to enlarge Nothing surprising or new here. Quant and TAA portfolios have led the pack in the last full market cycle. The highest performing buy and hold portfolio, the 70/30 US stock bind portfolio, comes in at #9 with the vast outperformance of US markets over pretty much anything else in that time. There you go. Tons of data to make all kinds of comparisons. Go crazy. These are my favorite 3 ways to look at portfolio performance.