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11 comments:
I want to comment on your approach to building a portfolio from the bottom up. I agree that it takes a great deal of work, but it can be done with a combination of 40-50 stocks or ETFs. This can replicate the overall market by adding together the equivalent of the elements of the S&P.
However, why not short-cut some of the process by buying a broad-based ETF to cover much (jhalf?) of your total equity investment and overweighting those segments you favor by buying stocks of ETFs? That might yield a portfolio with 15-20 stocks/ETFs. For many people, that is a lot easier and probably wouldn't yield a much different return over time. The only real downside is that you can't avoid some sectors you might want to avoid (e.g., housing right now) because these sectors are part of the broad ETF. But, it seems that for many people, this is an easier route.
Norm G.
Japan is a lot worse than a worst case scenario in my mind. Yes I do think you are very complacent if you subscribe to the belief that US stocks will repeat the 80's and 90's in the coming decades.
I have pointed to household debt levels and I know people have been predicting the death of the American consumer for over a decade. I have respected there comments but chosen to ignore them until now.
Debt is higher than it has ever been (they always said that but it is true)
But now we are facing the worst housing decline and foreclosure rate since the great depression (not that I expect a depression - I am not even totally sure we will have a recession).
When was the last time the Government proposed a bail out of American households because of excessive indebtedness? That is what these proposed mortgage bail outs proposed by both parties amounts to.
I am not a dooms day believer. I just think the ever expanding debt US households have racked up since 1980 has hit a breaking point. If it has not hit a breaking point than why do they need a federal bail out and their mortgages worked out (reduced) with there lenders? If you want to fool yourself and say it is only subprime than go ahead. Of course it is subprime. By definition prime borrower's have low debt levels and pay on time. It will always be the subprime borrower where the problem occurrs.
Enormous increase in debt year after year has fueled a beautiful bubble in stocks and now real estate. I am not predicting the end of the world, but I am sure earnings growth rates for corporations will suck going forward for many years when compared to the 80's and 90's.
I do predict a bear market in the short to medium term (thus sell everything). Predicting a bear market is not predicting the end of the world. Longer term I predict uninspiring growth rates for US stocks. Not the end of the world but I would look elsewhere to make any money.
I also think foreign equities will tank in the short to medium term. There is going to be a lot of correlation in equities this year and next year. After that we finally reach a point where we seem to agree. Foreign equities will out perform for the next several decades, but I sold them in early July as well.
Another way out of the Household debt issue is 70's style inflation. But that actually took from 68 to 82 if memory serves me correctly and would be worse than the slow growth the Fed should provide if they do things correctly.
Roger,
One of your best. Doomsayers have compelling theories but they lack actionable plans, other than become a turtle. A mindset of moderation allows for more divergent thinking. Never fall in love with a stock or scenario. I think china's mkt, so far, supports your view. The frontier mkts are finally going to foster a middle class. The spread of capitalism is the biggest impact of the collapse of the iron curtain. W is too fixated on "democracy" to recognize this...but that's another topic. Is your analogy to Japan original, no matter, a great choice.
Anon.
You are crazy if you think housing problems for a 100k who bought more than they could afford is going to cause a crash in the entire market. The debt level may be higher than it has ever been but no one I know is in trouble financially. You have to remember that many people have their house payed off and have seven figure retirements to spend. No problems in my neck of the woods but you obviously are scared straight. Let the fools who are flipping houses lose everything for all I care. If a few hundred thousand people lose their homes then they will just start renting again. This is blown out of proportion by people like you. I am sure you have been 100% cash since the early nineties. How did that work out? Badly of course because you are to negative.
Besides, The market could triple before we get any large pullback.
Great video Roger...I found this
in a newsgroup...any truth to this?
''Think all is well and that the "Sub-prime" mess has been controlled and is now passe:
Barclays admits borrowing hundreds of millions at Bank's emergency rate
· 'Technical breakdown' in clearing system blamed
· Pound falls as news swirls around money markets
Ashley Seager, Larry Elliott and Julia Kollewe
Friday August 31, 2007
The Guardian
Barclays has been forced to borrow hundreds of millions of pounds from the Bank of England's emergency lending facility for the second time in a fortnight, it was revealed last night.
In a hurried and emotive statement after London's markets had closed, Barclays attempted to calm fears that it faces a cash crisis. Rumours had circulated all day that Barclays was forced to go to the Bank of England after the central bank said it had lent £1.6bn at its penal rate of 6.75%. It is thought that Barclays borrowed the entire amount."
Norm G
what you note is absolutely valid but really anything that some can live with for themselves is valid. As I have a certain amount of time I prefer one way, everyone else has varying amounts of time for this and so should prefer other ways; all good.
to 8:51, I obviously hope you are right about Japan. I will just agree with you that I am whistling past the grave yard, you are clearly missing my point.
Barclays (client holding)? I might be missing something but this was on FT Alphaville long b4 Friday.
Banks often face much bigger scares that this. I think this will turn out to be nothing based on how I read the balance sheet but if I am wrong, the portfolio weighting is such that I won't ruin any clients which is the most important thing.
Good post Roger.
I believe there are many investment strategies that can produce exceptional gains relative to risk. Your strategy is just one imo. It works for you, but it probably wouldn't for me (I don't have the time to do the fundamental analysis).
The problem I see most often is investors can't stick with a single strategy longer than a couple years. They try one thing, than they move on to something else when they begin to underperform.
I really like the idea of strategy diversification. I allocate my investments between 2 strategies and I'm working on the third. This concept has a huge psychological benefit in that at least one of my strategies are likely to be working well at any given time. My focus moves from watching short term returns/losses to the mechanics of executing the strategy efficiently.
The famous story of the Turtle Traders is an excellent case study. The traders who chucked their emotions and self-percieved intellect and followed the strategy religiously did the best. My favorite analogy is I would rather fly with a pilot who uses their instuments vs. their gut instinct.
Tom K
I hear what you are saying about the time to do fundie work on that many stocks but I find it interesting that you do have time for 3 different strategies.
There must be a perception issue here, there is always a perception issue, but I wonder what the time diff really is.
I think we've stumbled onto a white paper here, lol.
I would be interested in a list of great American companys and what people think are there foreign counter parts. Any takers
Roger,
Strategy 1 (my lazy portfolio) literally takes less than 8 hours a year - to adjust allocation and rebalance.
Strategy 2 (my TAA strategy) consumes no more than 3 hours a week (that includes placing trades). There's really no analysis because it's 100% mechanical.
Strategy 3 - so far not fully baked, but my guess is it will consume approximately 2-3 hours a month.
I am very conscious of the time I spend managing my investments. So is my wife :-)
I read a few blogs and online publications (maybe a half hour a day) and a few books every year, but I'm definitely not a big consumer of financial news. Many years ago I used to drive about 10 miles every Saturday to pick up a copy of Barron's, watch W$W religiously and read/watch a ton of financial news, but I found it to be counter-productive to my investing.
And every year when I read yet another study reporting the vast majority of fund managers (many with PhDs in Finance) under perform the S&P 500, I decided there had to be a better way.
Mechanical investment strategies are boring. Buy and hold investing is even more boring. What's exciting is reading the research and discovering insights or anomalies that can improve returns and reduce risk.
"There must be a perception issue here, there is always a perception issue, but I wonder what the time diff really is."
To anon at 3:32 - Every time is different and they get straightened out.
Larry
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