Airport Blogging

So I landed from Hilo into Honolulu and have quite a while till my flight, scored an exit row seat to Phoenix though...woo hoo.

A question came in that is similar to other questions that I wanted to address. The reader wants to know what eight ETFs I would use to make a complete portfolio and how would I weight the eight.

Asking and answering this type of question is a bad idea for both parties on many levels. Why he wanted eight? No clue, which speaks to the problematic nature of this question.

The willingness to take free input from a total stranger about what to invest in seems like a horrible idea to me. The person asking may not really know too much about what I try to do, I certainly know nothing about this person.

This is a dangerous recipe. It is like taking a the only portfolio you will ever need published in Money Magazine and then implementing it. Is it for a 30 year old or a 70 year old. Gun slinger or widow? Do I, the advise giver, really know what I am doing ( my two hecklers will tell you no), is the person receiving the free advise capable of understanding the portfolio that they are about to implement on their own?

Do not take free, generic advice about investing. I write this blog to share thought process. I cringe when someone comments about having followed my "advice" regardless of the outcome because I have no idea if they truly grasped the concept.

Staying in touch with the currency market is important to how I manage money. I know what I know and there are plenty of folks who know much much more than me just as I know more than some other people.

My understanding of the market allows me to feel comfortable with holding long-ish term positions. I am not comfortable trying to make a few pips during breakfast. I read some commentary from people who do trade for pips because I can learn but that is not my trade. apply this line of thinking to anything I write about that you are not comfortable doing.
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Nick Knacks

This is a YTD chart of the US dollar index. It appears to be down quite a bit. I don't think I would describe it as a crash but it certainly is noticeable.

I am not in the panic-in-the-street crowd that says the dollar will crash. The decline this year, and further back really, has been somewhat orderly and does not appear to be the source of the biggest problems we face; sub-prime, liquidity and GDP growth.

It could be argued that the weak currency has been enough of a lift for the multi-nationals to help GDP not be weaker.

Obviously, if this is even correct, I am not describing a healthy situation but it is not calamitous either and for now I think whatever it devolves into, it won't become calamitous.

There are investment implications however. Weak growth, for example may not be a calamity but it may not get you to where you need to be either. I pick on EFA a lot but it is better than no foreign equity exposure. To be clear I don't think is a great choice, especially with all the other options available but it should do well if foreign continues to beat domestic. Let me be clear because someone will add 1+1 and not get 2; better than nothing but worse than just about everything else.

under ticker In case you missed it Wisdom Tree is launching a small cap emerging market dividend ETFDGS that, according to an email I received, should start trading on Tuesday. The fund is heaviest in Taiwan 23%, South Africa 14%, South Korea 12%, Thailand 11% and Malaysia 10%. Sector-wise it favors capital goods 12%, materials 12% and transportation 12%. Interestingly the fund is light on telecom. Telecom is usually a good way to access emerging markets but the big phone company in most of these places is a big cap not a small cap.

The index underlying the fund yields 4.44% less the 0.63% fee means the yield checks in at 3.81% to start.

If you missed it, there has been an avalanche of commodity ETFs that have come lately. I am supposed to have an article about the Rogers, as in Jimmy, Commodity Index product line out sometime on Tuesday on TSCM, the free site, for anyone who cares.

I am headed back to Arizona on Tuesday as well after a two week stint in the islands. When we got hear the house was empty, save for a DSL modem.

We spent almost the entire time going back and forth to Home Depot, Walmart and people's house's we were buying second (or third?) hand stuff from on Craig's List.

We had to hang blinds/curtains on nine windows/sliging glass doors fix a leak in the roof around a vent, wait in the dark for the power to get turned on on the first night and crawl through a window that thankfully was not closed properly due to a defective dead bolt that we have since replaced.

Next time should be more relaxing. Joellyn is staying another two weeks; as I leave her parents arrive...read into that whatever you like, lol.

Brett Favre, oh snap!
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The Right Lazy?

A reader left a comment professing a lack of comfort with country selection and wonders about the following lazy portfolio;

• 55% Vanguard FTSE All World Ex-US (VEU)

• 45% iShares Russell 3000 Index Fund (IWV)

The chart compares both funds with the S&P 500 since VEU's inception.

In its short life VEU, the foreign fund, has had a 0.876 correlation to the S&P 500. In the same time period but less surprising IWV has had a 0.975 correlation to the S&P 500.

Further, VEU and IWV have had 0.863 to each other. This is something I have written about many times in the past, all of the diversification benefits of the component countries gets blended away in a broad based product like VEU.

I think it is clear that VEU quacks a lot like EFA. During the last slow decline, at the start of this decade, EFA offered no protection and during the next slow decline I doubt it or VEU will offer protection either. VEU will likely do better than the US market if the dollar stays weak or gets weaker but the diversification benefits seem non existent to me.

IWV yields about the same as the S&P 500 and while the Vanguard website does not provide the yield for IWV it can't be much different than EFA which ETFconnect lists at 1.8%.

I am not opposed to the concept of a lazy portfolio but I don't think all the bases can be covered with four funds, let alone two. I am not sure what the optimal number is but two ain't it.

Another reader asked if buying foreign stocks that trade on the pinks or bulletin boards is reasonable for a do-it-yourselfer. More and more there will be no choice. Many stocks have left the NYSE and I suppose there will be more.

As the reader notes it is the bulletin board where many foreign blue chips trade. Relative to picking individual stocks picking a blue chip from a foreign country is not the riskiest thing you can do even if it trades on the pinks. The companies report their numbers regularly you just need to work a little harder to access them (go to the company's website instead of Yahoo Finance). That one of the four or five largest companies on a foreign exchange is going to be a bellwether company that most of the time will be a proxy for its home market is not that difficult to grasp. Getting the timing right, understanding the market and a company's role in that market are all harder and then figuring how to work it in to your portfolio might be harder still.

Avoiding fraud is not that difficult because it happens so rarely. This says nothing about success to be had but very few stocks go to zero because of fraud and the odds that you would pick one that does are pretty slim.

Needless to say I am thrilled that the Red Sox won the world series again.

My brother Larry said before game one that the Rockies didn't stand a chance for several reasons. While that type of thought makes me shutter he was correct.

I will say that when Bobby Kielty hit that solo home run in the top of the eighth I knew it was because they would need it which made Garret Atkins two run shot in the bottom of the eighth off of Hideki Okajima a little easier to deal with.

It makes no sense, but somehow I just felt it. Either way, pretty cool.
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Sunday Morning Coffee

No real post this morning, we had a long day down south with some friends and did not get home until late.

The first picture was our destination for the day. I used to work with Anitra (on the right). She and her husband Trond (he is from Norway) own an eco resort called Lova Lava Land that they have been working on getting up and running.

At the same time we visited, they were hosting their first guests, a threesome doing something very interesting. They are on a 50 states in 52 weeks trip to seek out and create
awareness of green/eco issues. Hawaii is state number 18.

You can check out their site at Yert.com to see what their are doing and check out their weekly videos.

As I understood it Mark was the catalyst, he got in touch with Ben through the Stanford alumni network and Ben's wife Julie wanted to participate too. Good luck guys.

On our way to visit with everyone we stopped at Punalu'u Black Sand Beach. We hung out for a couple of hours and saw four turtles in all.

Check back tomorrow for normal stock market blogging.
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The Big Picture For The Week Of October 28, 2007

A good question came in asking about how I weight foreign equities into accounts, how to choose what to own and where US multinationals fit in.

Before I figure where I want to be domestic/foreign I first assess what weighting I want to give to each of the big ten S&P 500 sectors. This is usually based on my perception of where we are in the stock market cycle and the economic cycle. Our point in these cycles contributes to how much foreign I want to own. The first number derived for foreign is sort of fuzzy. As I start to fill out each of the sectors, knowing I want roughly 1/3 or roughly 1/2 or whatever in foreign. As I go along I fine tune the number.

On another sheet of metaphoric paper I assess the merits of other investment destinations, think about how much to weight to these countries and what is the best way to work them into the portfolio.

Most of the foreign countries I own only have a 2-3% weight but England as an example is a little heavier. I was asked about this on a panel I participated in last June in NYC. One of the other panelists owned iShares Sweden (EWD). I specifically mentioned preferring a Swedish industrial stock over the ETF.

I have liked Sweden for several macro reasons for a long time but the problem that I see with EWD is its heavy weighting in Ericsson (ERIC). It's weighting now is 16% but I believe it was closer to 20% before ERIC got recently crushed. I did not like ERIC, further what I knew about Sweden lead me to decide it was not a place I wanted to add volatility to the portfolio. Contrast that with Brazil, a country where I did want to add volatility.

So in going down the list of countries (Australia, Ireland, Norway and so on) I try to figure out the best way to capture each of them stock or product, if a stock what sector?

At the same time, I need to seed in domestic companies into each sector too. So there needs to be a blending of things like yield and volatility as I fill out each sector. There will tend to be more choices with domestic names.

That a domestic stock might be a multinational plays no role whatsoever in my topdown thinking. It can matter when I get to the bottom up stock picking but a US company, the way I view the world, is simply not a proxy for foreign anything.

It can make for a better company and could be the deciding factor in choosing between two stocks. A few years ago that Caterpillar (CAT) sells a lot of equipment in China lead me to choose it over Deere (DE). This turned out to be the right call for most of the time I have owned it but CAT has lagged recently. CAT, no matter how many units it sells in China, is not a proxy for China, IMO, but it obviously benefits from China, so too might it get hurt if China ever implodes.

Some of the gaps, like knowing I did not want exposure to Ericsson, come from the reading I do, this takes up most of my work time. The process outlined above requires learning about a lot of countries, currencies, companies, commodities and then monitoring all that.

I mentioned Kazakhstan the other day. Some exposure at some point in the future seems plausible. I started learning about it maybe a year ago, I follow it but it might be several years, if ever, before I step in there. Ditto Egypt.

I do not know how common my approach is but I feel that it makes my job easier. A mediocre stock in a very hot market adds a lot to a portfolio.

This is my full time job. I realize do-it-yourselfers may not have the time to do all the topdown work described here and I haven't really even touched on the bottom up that also needs to be done.

Friday after the close Joellyn and I hung up some blinds in our living room. While were doing this I had Fox Business on the tube and Happy Hour came on...."hey its Happy Hour!" Wow. After about five minutes Joellyn asked if we could put on Kudlow instead, lol.
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Time To Head On Out Of Dodge?

I think I have read in five different places that Jimmy Rogers is moving all of his assets out of US dollars. He is said to favor Chinese yuan, Japanese yen and Swiss francs.

No doubt you are also aware he favors a whole myriad of commodities too.

The argument that says the US is doomed is very popular is some circles and always sounds smart and plausible.

I think this theory is correct directionally but not correct in terms of magnitude.

I think the dollar will get weaker but not collapse in such a manner that life as we know it changes.

I think interest rates will be generally higher but not high like in 1981. Most of the current rates across the curve are very low by historical standards. I believe they will just head back up to normal or maybe a touch higher. This would crowd some people out of getting a mortgage and slow things down but again would not be ruinous.

I think US equities will return less than the average 10% we all read about. If the US market averages 6% per year a US based investor will either need to save more, invest abroad or both. This necessitates more research/learning not waiting in line at a soup kitchen.

I do believe the US is doomed argument is worth studying and understanding. First of all it could turn out to be right. If it turns out to be correct directionally regardless of magnitude I think it will be people like Jim Rogers that we can learn from about what the problems are and how to mitigate them.

I have tried to explore other countries and asset classes on this blog and utilize some of these locations/investment products in accounts that I manage. I would expect to go further down this road for clients as this decade starts to wind down. My weighting to foreign has been in the mid thirties for several years now, I have mentioned several time that I expect to get closer to 50% in the next few years.

A lot can happen between here and there but the idea is to look down the road and think a little bit about how the US markets might evolve, how that impacts you and what you might do if things deteriorate by some amount in the US.
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In Search Of...

One theme to my writing about ETFs has been that new products would empower do-it-yourselfers to better manage things like volatility and correlation or to seek out more absolute return ideas.

I found this article at FT.com about a company called First State Investments that will make an institutional fund that will own the rights to every song ever written (obvious hyperbole) and receive royalties when these songs are played commercially.

Maybe this is like the David Bowie Bonds from a few years ago?

The rights last for 70 years past the death of the artist. The fund will be an income stream and as I read the article, a pretty healthy income stream.

This is not a retail product and I have no idea about the investment merits of the fund but the idea is intriguing. I can't imagine economic or stock market cycles having much impact on the demand for Cyndi Lauper music, obviously I have no idea if she is one of the artists in the fund's stable.

I have written a few times in the past about seeking out absolute or quasi-absolute return ideas and I think there is room for the concept in diversified portfolios. Along the idea of an endowment fund (but on a much simpler scale) 55% equities, 5% commodities, 5% REITs, 5% foreign currency, 20% fixed income and 10% absolute strategies seems manageable. Being able to diversify that within that 10% amongst things that although pursuing the same goal do in completely different realms makes the space potentially more compelling.

A music royalty fund certainly would be different.

I continue to believe that retail investors will have access to more innovation they can implement for themselves. This has happened already and will continue.

After the close on Wednesday we took a drive south to see what was there. We ended up in a town/area called Kapoho. There are several "tunnels" like the one above, some great views of the ocean and some very neat houses. The town seemed to be mostly between mile markers 15 and 20 on highway 137. Near mile marker 22 lava flowed over the road at some point. Yikes.


Did you catch Carl Yastrzemski announcing the lineup for game one, holy cow, Yaz!
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A Favorite Old Song From My Youth

Tom Petty's song Write Down was a favorite from before I was interested in the stock market.

Say there ain't no use in pretending,

Your accounting gives you away,

Something on your books is feeling like I do,

We said all there is to say,

WRITE DOWN!

Go ahead and write it off,

WRITE DOWN!

Take me through the earnings season

WRITE DOWN!

Shareholders will understand,

WRITE DOWN!

It alright.

Ahem.

The day's problems appear to be stemming from two sectors that have been troubled, financials and tech.

I have been writing about being underweight financials until the yield curve normalizes. Tech is maybe a little more of a guess to be underweight because it is struggled for so many years but I believe there will be more problems for both before this cycle ends. In managing volatility of your portfolio the idea is not zero weight in either one but simply to be underweight.
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Gear It Down?

Is it time to go chill out on the back porch with an iced libation (iced mocha for me)?

This will be easily misconstrued. The current bull market has had a good (probably not great by historical standards however) and long run.

There have been a few bumps of varying magnitude that have come and gone and there may be more bumps to come if the cycle continues to go.

Since the bottom in fall 2002 the S&P 500 is up about 90% which is not a lot compared to past bull markets but the five year run is historically long in the tooth.

If you had emotional problems during the past couple of dips (or more than the last couple) this might be a good time to ratchet down the beta of your portfolio.

This is not an attempt to call a top but a call for you to look in the mirror to determine what you can handle or more correctly cannot handle. If the cycle being long in the tooth resonates with you and you learned in August that you had too much volatility then I would say it is better to make a tweak when your emotions are not that high.

If this is something you decide to pursue you don't need to do much to change the characteristic of your portfolio. To be clear, blowing out a bunch of longs is NOT what I am talking about. Assuming you have a diversified portfolio free of lopsided bets, simply reducing a sector you believe is volatile by 20-25% (so raising 2-4% more cash) would go a long way to what I am talking about.

Tweaking a couple of sectors could be enough to noticeably change the volatility of the entire portfolio.

I have no trade to make along these lines as I have already done this. Heckles that have amused everyone notwithstanding, my goal was to reduce volatility in case the market got its phreak on which is what happened and I have been thrilled with the result. The thing here is to think about this (so decide what is right for you) at a time when the market is not making you overly nervous.

There is always room for this type of introspection and occasionally you should act. You can decide for yourself if now is one of those times.
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Costco

We rented a truck and drove to Kona to get stuff at Costco. The house was completely empty when we bought it. We got a bunch of stuff over the weekend at garage sales but for some stuff it made sense to get brand new. Most amusing on the trip is that there is a Starbucks in Waimea, a neat little town that was just written up in one of the outdoor magazines as a great place to live.

Aaany-hoo... I really thought the market was going to get crushed on Monday, not crash crushed but maybe something like that 3.5% day we had a few months ago. I was really certain about this.

Of course that was very wrong. I did not do any trades to try to game this, that is not what I do. There are several points this makes, however.

Little dips come and go all the time, maybe they will come a little more frequently over the next couple of years than they have in the last few years, and getting this right on a regular basis is unlikely. Little dips means down a little and if you are an investor, as opposed to a trader, you need to be able to withstand down a little when it comes.

I would define down a little as 10% or less. If 10% sounds like a lot, I would urge you to get a Stock Trader's Almanac to see how frequently dips of this size come because 10% is not a lot, all the comments that came to this blog in the summer notwithstanding.

Although I do not subscribe to this approach an argument based on the numbers can be made that one should not try to trade 30% declines. Again that is not for me but the numbers lend some credence to the idea.

The next point to make is that if you are 50 or 60 or any other age where you expect to live a long time, and I would say a healthy 80 year old needs to plan long term, the market's action over the next few months will very rarely matter. This is one thing I sort of agree with Jack Bogle about (any heckles for my disagreeing with him on anything noted). Down a lot is a very rare occurrence. While I do believe in trying to protect against it, I am cognizant it does not happen very often which is why my process for getting defensive starts with a mild tweaking.

The last point is that despite what anyone thinks at any time for any reason they can be wrong. There were plenty of reasons for the market to fall on Monday and it just didn't.
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Kazakhstan

As I read this report from Jyske Bank Kazakhstan has a sovereign wealth fund from taxes collected from exporting oil that is worth $18 billion.

It appears that the fund is more about maintaining stability for the country than for investing but it will probably morph into an investment vehicle if resource prices remain high.

Kazakhstan has a lot of gold, silver, natural gas and uranium reserves. The country has a trade surplus, a current account deficit and GDP growth has been en fuego.

Jyske believe that the extent to which the country relies on FDI makes the banks especially vulnerable to a liquidity event.

I believe there are a few Kazakh companies listed in London. I have no position but have been interested/following the country for a while. This is a good example of a country that will become more relevant to the global economy, it makes sense to think that its stock market would benefit but just because it makes sense doesn't have to make it so.

I would expect any participation here to be a very wild ride.
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Why Not Buy An OEF?

A question came in a few days ago from a reader who said he was not comfortable knowing which foreign countries to own or how to access any countries he might think he wants to own. He reasonably asked why not just buy a couple of actively managed OEFs and let experts do the work for you.

It should be obvious that any choice you make will have pros and cons. I would think weighing the pros and cons of whatever you choose would be a priority so you know the drawbacks. This is not to say you shouldn't buy an active fund just because I don't but to realize no choice is perfect.

The reader mentioned owning, I believe, three actively managed foreign funds. There are several drawbacks. The first one to mention is sector makeup. What if all three had overweighted the financials going into the dip during the summer? The funds would have been hit harder than an index fund or maybe a mix of common stocks (depending on the mix). Further, what if in addition to overweighting financials, all three had Northern Rock at an 8% weighting.

I concede the chances of the above are remote but not impossible and more generally problems with overlap in accounts with a bunch of actively managed OEFs happens all the time.

If you use an indexed product you know how much exposure you have to a given sector at all times and you know what the exposure will be, approximately, six months from now.

That brings up another issue which is that a fund manager is just like anyone else. He will get some right and get some others wrong. Chances are he is where he is because he is right more often then not but a manager being wrong at exactly the worst time possible doesn't seem like a stretch to me.

From the top down I want to control the sector weightings, country weightings, the yield, volatility, cap size and style very precisely as I imagine most top down managers would want to. The more actively managed products you use the tougher that becomes.

You need to weigh out for yourself the right way to access all the market segments you want to own drilling down as narrow as you are comfortable with. Obviously I go narrow but that may not be right for you for a whole bunch of different reasons.

One last note on this is that I would not describe the above mentioned use of indexed products as passive. In smaller accounts where I have fewer holdings and use sector ETFs I actively manage, as best as I can without having 45 holdings, to work in all of things mentioned above. This is something anyone can do if they have/want to spend the time to allocate an account this way. I think of passive as what the DFA guys do.

That picture is Dustin Pedroia hitting an important 7th inning home run helping the Red Sox overcome a 3 game to 1 deficit and make it in to the world series. As a fan I never gave up when they were down but having such a big hole to dig out of made it tough.
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Sunday Morning Coffee

Long time readers will know that I am a lifelong Red Sox fan. JD Drew's first inning grand slam in game six reminded me of something related to portfolio construction. Drew had a disappointing first year in a big five year contract. Every time he has come up in the post season I have said the same thing to Joellyn; he will do one big thing and that will be it. The grand slam was it.

The Sox have held him for months now, he had added less than expected to the overall result and then came through big, very big, in one instance. It may be months before he does anything big again.

Anyone owning individual stocks could probably apply the above description to a couple of stocks owned. I have several that fit this bill including a couple of big cap healthcare stocks. Each of the health stocks have had their post season grand slam moments; one in the fourth quarter of 2005 when it went up 20% and the other this past summer when it went up a little as the market was puking down.

As the months go on and they do nothing price wise they do each kick off a small dividend.

I don't believe either of these stocks are bad companies, I think the issue is more top down. Most of big pharma has struggled more often than not in the last few years. As I believe in maintaining a diversified portfolio I hold on to the names. While there is no way to know if JD Drew will ever do anything important again on the field, big cap pharma will do something important in the portfolio again even if I am totally wrong as to when that happens.

This sets up a point I have made before. You don't have to be so narrowly correct when you maintain a diversified portfolio. If you only own six of the big ten S&P 500 sectors you really have to be right about those six. If you are correct you will probably get great returns but you have more riding on your opinions which makes the job more difficult.

Amusing item; I mentioned the Directv guy coming this past Thursday. Our Directv box at home is from 2004 so I didn't know this but now Directv set top boxes have a pop up on the screen when the phone rings telling you who is calling.
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The Big Picture For The Week Of October 21, 2007

A few random observation from this past week;

My not very original idea about Fox Business Channel marking a top seems to be right on track. Although since the channel had been in the works for years I'm not sure whether they really are marking a top, if that is how the market plays out from here. Speaking of, I think it was Adam who mentioned Cody Willard's show from a bar. I was without TV until yesterday so I did not know what he meant until I saw a minute of Cody and Rebeca Gomez (is it Gomez?) hosting a show from a bar. I had hearty chuckle over that one.

Speaking of without TV; I feel like I am missing information without stock market television but the three days I did not have it (it got installed yesterday just after the close) I was able to work through my usual reading a whole lot faster. The reason I find stock market TV useful is the reporting of information that might be moving the market. People (me included) jump on CNBC personalities for coming to the wrong conclusion or asking the wrong questions, but I don't really care about their opinions. They will likely report something long before I find it on the Internet so it is background 90% of the time.

In our short time, so far, in Hilo we see that a lot of people are leaving after a year or two of being here, maybe a little longer. Our plan is to be here two weeks per quarter. Hawaii seems like a place where there can be too much of a good thing. Something that can probably apply to other parts of life.

Like investing in emerging markets. Friday's puke down was a perfect example of what I had been talking about earlier in the week. Regardless of the reason, Friday was a panic down and emerging markets went down much more despite all those articles out there about how overweight managers are because emerging should be less immune to a US slow down.

For the time being emerging market stocks do not offer any protection from fast declines. I do believe that some emerging and frontier markets are fundamentally immune to our economic problems but getting them will require going narrower than EEM. TomK offered a well reasoned counter opinion to my thoughts on moderation. While he is correct the ride will be wilder than many can tolerate.

The hit on Friday was attributed to many things, who knows what right here but I have tried to stress that big liquidity events are unlikely to resolve themselves in six weeks as some had thought. I had several posts noting that I was surprised by the duration of the rally off the bottom. A fast snapback of some magnitude was very predictable and while I was right about that at first I was wrong about it lasting as long as it did.

However this current dip sorts itself out, I would expect another fast decline within the next couple of months. Big liquidity events are serious, not life altering, not something that hasn't happened before, not something that the market can't recover from, no, the worst case, IMO is something normal, that has happened before and that will be recovered from in a normal time period.
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I don't understand your emerging market portfolio strategy

So says a reader who does not understand how I can have no China, he says I have cost my clients dearly.

From the top down, emerging markets is an asset class that has a place in diversified portfolios. Generally speaking, equalweight is somewhere in the neighborhood of 7-8%.

The first step is to assess whether you think overweight, equalweight or underweight is the best posture. Emerging markets have been white hot for several years now. Money is pouring in very aggressively chasing the great returns.

When I started this site three years ago I was overweight the space as it was a less popular trade back then. More recently I have chosen to be closer to equalweight because of the huge run and the popularity of the trade. It just seems late to be overweight. If emerging markets double from here in the next 12 months and equalweight would participate very nicely.

From a more bottoms up approach PE ratios are much higher than they used to be. I have seen estimates ranging from 15-18 times earnings. A few years ago PE ratios were in the single digits as a means of compensation for the risk taken. PE ratios are not necessarily helpful to predict what comes next but in terms of valuation they have become much more expensive. This is the type of thing that could reasonably evolve slowly over time but the trend in emerging market PEs has not been slow.

So once the over/equal/under decision has been made (and to be clear for me now the answer is equal-ish) you need to decide what you think is the best way to capture the space. Emerging markets are more volatile than domestic stocks. When you add emerging you are adding volatility. Given my belief that the move is long in the tooth I don't want to add a lot of volatility relative to emerging.

This leads me to the most common positioning amongst clients which is one broad-based ETF and one stock from Brazil (some clients have one or two other items depending on the circumstance of that client). The broad based ETF is up 50% YTD (a little better than roughly the roughly 40% that EEM is up) and the common stock from Brazil is up about 130% YTD.

The one Brazil stock is up more than iShares China (FXI) which is up just under 100% YTD, Sinopec (SNP) up just under 100% YTD, Petrochina (PTR) up 80%, China Mobile (CHL) up about the same as my Brazilian stock. No doubt there are smaller Chinese stocks that are up more than 130% but I do believe the reader's notion that I have cost my clients dearly has been refuted.

If I had held onto a Chinese stock instead of the Brazilian name it would have been at the same weight as the Brazilian name.

Brazil gets a lot of attention but China gets a lot more and I feel the recent action in those stocks is much more dangerous than what is going on in Brazil. As I believe I mentioned the other day the market caps in some of the Chinese names are huge. What I believe I have done with this decision is get a similar result to the hottest market without being in the hottest market. If China does ever implode maybe Brazil would drop by a smaller amount?

Oh and of course the broad based ETF I use has a little China in it too. I couldn't figure out how to work this in naturally up above but I own CHL for one or two clients.
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Party Like Its 2004

According to a study by Merrill Lynch investors are the optimistic on emerging markets they have been since 2004.

To quote the Bloomberg article where I found this the bullishness is based "on the view stocks from Chile to Vietnam will be least affected by slowing economic growth."

This might be true fundamentally but there is a reasonable argument that says otherwise.

I tend to lean toward there being less of a fundamental link between the US and emerging markets but, assuming this is correct, emerging market stocks will not be immune from fast declines down.

During the last few fast declines down in the US emerging markets have dropped more, of course they have snapped back faster too.

No matter what you think about emerging markets and their fundamentals there is no arguing that the last few panics have hit them harder. To think it won't happen the next time is a tough argument to make.

If the quote above is true we would see this immunity during a slow selloff that leads to a bear market.

Vietnam is still going to put that very young and cheap labor force to work for the betterment of the country regardless of the US economic cycle. Ditto the rest of the Next-11.

Despite my enthusiasm for this segment I have been writing about moderation in the space for a long time now. Putting 20% into emerging sets up for a wild ride, wilder, I believe, than most people want.

Long time readers will know I have held ADRE personally and for a lot of clients for part of their emerging market exposure. In the last 12 months it is up 70%. A 3% weight a year ago would have added 2.1% of return to the total portfolio. The point is not that you should buy this fund, but that a moderate exposure in the right place can add a lot but at the same time a catastrophic drop in this sort of a thing (which is possible) would not decimate the account.
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Settling In

We drove all over the place last night in the rain getting stuff for the house--naturally we got home and thought of all the things we forgot. The good news is the Red Sox are down 3-1.

So the economic data seems like it was crappy (did the the network have Jack Bouroudjian on and did he say it was the best of all possible worlds?) but earnings seem to be carrying the day.

I think an argument could be made why either one (data or earnings) is more important so for now we can just accept that today is starting higher...but it has faded a tad since I first signed on.

Emerging markets appear to be en fuego yet again today lead by the Chinese stocks. At the conference the other day I brought up the fact that the market cap for a lot of the older Chinese stocks that everyone has heard of is huge. Quite a few are over $100 billion which is watch out item. PTR is at $455 billion, CHL (a name I own for literally a couple of people only) is at $392 billion, SNP ( a name I used own across the board) has a number that does not even make sense, several bank are above the figure and that one resource company that just listed in Shanghai is supposedly bigger than BHP (was it called Xenua of Shenua Energy?)

This idea is not to predict anything as I sold China several months ago but to hopefully create some awareness of the water you swim in if you own China. My first purchases of SNP were below $40 several years ago and I sold the last of it just above $100 earlier this year. A few months after my sale SNP is at $172. While I was clearly too early this is a blow off. Maybe it goes to $344 before doing anything else but I think someone is going to end up in tears over this.
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Just In Case...

...The Interweb isn't quite up to speed at the ol' Nusbaum hut I am posting this from the Honolulu airport.

The market had another bad day but I see that INTC and YHOO are up big after hours on earnings but IBM is down a little (thanks for the reminder Leisa!). I did not read the reports but the trading tells me a lot given that I don't own any of the three.

Every sector ETF to the lower right on this page was down. In the portfolio it looks like utilities, Norway and one stock I have from Spain for a lot of clients were the only things that did well, oh and the double short. Gold was down and the dollar was up against everything but the yen and maybe ISK.

I am guessing that INTC and YHOO would be enough for stocks to start higher tomorrow but we'll see.

I had a thought on the plane about patience as it relates to a portfolio you might care about. I have been pleased with my year so far. But when the current quarter started I lagged for a few days and I thought well ok well that's the deal for now. The amount that I lagged by was small and the trend has now reversed. The point is that over the course of just a few days, and this applies to longer periods of time, a lot of the fundamentals of the themes you care about are not going to change a whole lot. For me things like oil, emerging markets (in moderation), some of the countries I believe in are all multi year themes.

Periods of lagging will happen but I do think they are the right place to be. If you have done your homework on the themes you care about and you then lag for a few months with reasonable allocations to those themes, remain patient.

One observation to share from the thing I spoke at yesterday was the the audience seemed eager to learn. I believe most of the folks were in the business in one capacity or another (but I can't be certain) and despite how boring we all must have been the audience seemed engaged and questions were asked.

People who manage money are in the same boat as people who do not manage money; they have more to learn. Learning more is one of the reasons I do what I do. The challenge of learning new things combined navigating current events makes it exciting for me and perhaps intellectually stimulating for you?

Or I am just a big nerd.
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Tuesday Tidbits

EARLY wakeup call to get to the airport this morning.

Yesterday I toggled back and forth between CNBC and FBN. It is probably difficult to make a really different product but there are differences. True to the buildup FBN is trying to do some teaching in their coverage. To the extent that people can actually learn it will be a good thing.

One clever thing they are doing is spreading out the familiar faces across the whole day, whether it is good or bad television (I don't know what I think yet) is does not feel foreign.

While this is not a shot it is reasonable to wonder if a new channel will be looked back on as a top.

The scary dollar bear rhetoric seems to be kicking up a notch on sites like the FT and a couple of other places. That the dollar is oversold right now makes sense. I still expect a weaker dollar over the longer term but for now a much weaker dollar is not in anyone's interest so wholesale dumping of the greenback seems unlikely.

The conference went well, minimal stammering and such.

The circumstance of an early flight today meant I only had time for the two panels I sat on. I met Richard Kang and Tom Lydon (we were on the BRIC panel together) both great guys and I would liked to have spent more time but we had to get up at 4:30 this morning to get to the airport, where I am now.

Unfortunately I don't have much to share. All of the things about sector and foreign that I might offer has been touched on before on this site. Beyond that I'm not sure anything else was truly new either. I think I would have had more to offer if I could have stayed around a little longer.

I believe I mentioned that I have DSL modem at our place already so I should be on the Interweb tomorrow--fingers crossed.

It looks as though the market is hitting some bumps--the Citi news yesterday was not helpful. Although I have been wrong about the market's direction of late a retracement of some measure after a great two months seems plausible.

I'm not going to trade to out nimble a little backslide but expecting it will come should make it a little easier to digest.
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Monday Potpourri

A few things.

A reader comment came in on an old post about John Hussman, the reader was critical of the results Hussman has had.

One unusual thing about Hussman's funds is that you can get a look into his mindset in his weekly commentary.

If you read his commentary you know that the focus is returns, versus the broad market, during an entire stock market cycle.

I take his commentary to mean that he expects to lag during rallies and outperform during declines. Since inception, which appears to be in late 2000, his Strategic Growth fund is up 50% (plus, I imagine some dividends that the Yahoo chart does not pick up). In the same time the S&P 500 is up 20%.

If you pick a lot of shorter time periods then the fund does lag. For three years the fund is up 5% and the SPX is up 40%. I think Hussman tells readers to expect a lag when the market is rallying and that is what happens. He says you need to judge his fund based on the entire cycle.

If a manager spells it out like that and then delivers as advertised, I am not sure it makes sense to be frustrated. I have no opinion nor position in the fund. The point here is to know what you are buying before you buy, really know it.

When we were at the North Rim on Friday night I read most of a book that I was pretty impressed with. It was written by Russell Bailyn and its called Navigating The Financial Blogosphere.

Candidly the title doesn't seem to be a great fit because the book was a lot more comprehensive than a bunch of blog reviews, which is what I thought it would be.

The book ranges from how to find a bank at one end of the spectrum to fairly sophisticated financial planning strategies at the other. I don't know if the book covers everything but its pretty thorough, easy to read and I was able to learn a few things. The title pertains to how to utilize the Internet for each of the topics covered, both the blogosphere and more mainstream websites.

Later today I am participating in two panels at a conference in Scottsdale called the IMN World Series of ETFs-West. One panel is about sector investing and the other is about emerging market with a focus on BRIC. The BRIC panel includes fellow bloggers Tom Lydon and Richard Kang. After the shindig the three of us are going to try to get some dinner-kind of a nerd troika, lol.

The morning after the conference Joellyn and I are headed to Hawaii to try to furnish the house. The only thing in there is a DSL modem, we are starting from scratch. Our strategy for getting the basics includes Walmart, Home Depot, several items on Craig's List and at some point in the next week a drive over to Kona to the Costco. I have done what I can to ensure that the Internet will be waiting for me but you never know.

My TSCM article on BWX was published on Friday if anyone is interested. I am working on one about the PowerShares Emerging Market Bond ETF (PCY) that is now trading.

It appears that the Fox Business Channel is number 359 on Directv. I watched a few minutes of it already and saw Eric Bolling and Charles Payne riffing about individual stocks. We'll see.

The picture is from the North Rim, Friday night at sunset.
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Twofer

We got back from the Grand Canyon a couple of hours ago. Getting this close to an elk (we zoomed a bit to get the shot and are not as close as we appear) was pretty nutty. I've never been this close to one despite having been to the canyon quite a few times.

This post will be the big picture post and Sunday morning coffee rolled into one. I don't have access to the computer with the camera for a video as Joellyn has to put the wheels back on the bus for whatever it is her stand-in has done with the spay/neuter program she runs.

I had 47 emails in one email account, another 14 in another and it took about two hours to work through them.

I was away from the market yesterday and just now checked how the portfolio did. I see that it was a good day for both the market and the portfolio.

A few names in the portfolio had a really good day, I'll look for news later. The point is not about good stock picks because in any diversified portfolio there should some stocks that had a great day yesterday it is about portfolio construction and the understanding that a well planned portfolio will work for you more often than not without you getting in the way of it.

While I prefer individual stocks in most instances this same effect of a well designed portfolio working for you is more about sectors, countries, cap size, volatility and themes than the exact stock picks. When the China theme is working everything goes up by some amount. The thing up the most today may not be up the most tomorrow but it will be up.

If you have a knack for picking the best performer within a theme all the better but if you get the theme right, and some of the other things mentioned in the previous paragraph, which is much easier than stock picking IMO, you will have success with your portfolio...if you just let it do it's thing.
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Kicking Back

Its tough to see but Tennessee Tuxedo and Chumley appear to be kicking back in their trading room after a nice trade.

This quick post is about emotion and/or ego.

On Monday I bought a stock across the board, as long term idea, that has moved up a lot. The particulars don't matter. I am quite certain the story has not changed in the last 72 hours and the stock could have just as easily gone down.

When you enter a new position you will sometimes get a big-ish move right way. If that move is up you are not suddenly smarter and if the move was down you are not suddenly dumber.

If you realize that occasionally there will be a big move in a new holding and that it does not mean you are smarter or dumber then you do not need to let emotion about the trade get in the way of your process.
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Grand Canyon

At the close today we are headed up to the canyon for our annual pilgrimage. We will be back Saturday afternoon.

I thought I would just leave a couple of observations before we go.

Do you remember the fear a few months ago borne out of the credit crunch/liquidity/housing/mortgage event from earlier this summer.

The sky-is-falling folks thought this was it. A lot of moderate thinkers thought this was it. My take all along was that at worst it could cause a normal bear market or normal recession. There were many people calling for much worse.

While I am not surprised that the planet has not stopped rotating on it's axis it does seem odd that a recession in the housing market hasn't left more of a mark on the stock market. Either housing does not matter or stocks have it wrong. Can it be that simple? Probably not.

I don't have an answer, just the opinion that this still looms out there is a problem that has not gone away. I am positioned for either outcome.

A point that this serves to make is that you will not always understand why the market is going up, or down, but there does not need to be much consequence if you do not make big bets. A reader comment came in that implied the person got very defensive at the end of 2006. I do not know how big of a bet he made but it was big enough to share his experience in the comments.

A little hedge is not a big bet. There is nothing wrong with applying a little hedge at the wrong time and then lagging a monstrous move up. Missing monstrous becomes problematic because monstrous does not come along that often. I'll define monstrous as 25% or more, you can use your own number.

On Tuesday I added exposure to the euro via the Rydex Euro Trust (FXE) for some clients. The idea that the euro will either share the role of world reserve currency with the US or supplant the US makes a lot of sense to me. The position is small and the mind set is that of aggressive cash not an equity investment.

Have you seen the commercial Evander Holyfield is doing to promote his fight? He is reprising the the role of Apollo Creed in the pool from Rocky IV. Um, I seem to recall that not working out too well for Apollo.
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China Bubble Mania

This is the chart for China Digital TV Holding Company (STV) which IPO'd last Friday as best as I can tell.

The IPO price was $16 and it closed Tuesday at $51.08 up $11.59. The day of the IPO, Friday, it was up 75%.

There have been others, both in the US and Shangai, that have gone similarly berserk.

From the top down this is the same thing that happened during the Internet stock bubble. This is something I have mentioned before a few times, it is a very common pattern. China is most certainly at least a mania. The returns have been huge, the demand is extreme and so to meet that demand there are now a lot of IPOs, and they are all very hot.

So far this is exactly what happened from 1998-2000. I would add that this will happen with just about every mania in the future too.

All along I have never said China was bubble because I believe that is the wrong term. For all I know the Chinese market may drop 50% like the S&P 500 or 75% like the Nasdaq but the difference, I believe, will be that it does not take every market down with it in the same manner as happened in 2000.

Because of what happened so recently in 2000 I just do not believe that a China plummet, if it happens, will be the all encompassing bloodbath that we had at the start of the decade.

The recent action in the home building stocks supports this notion. Year to date Toll Brothers (TOL) is down 30%, Centex (CTX) and Lennar (LEN) are each down 50% and Beazer (BZH) is down 80% yet the stock market has had a very good year so far. There has been a lot of content in the last couple of years saying how important this group yet it has imploded as bad as the S&P 500 seven years ago and the broader market seems not to care.

So I believe it will be with Chinese stocks if they ever implode. Maybe someone will leave a well reasoned comment explaining why China is different and fundamentally that may be true but for now there are similarities to the Internet days.

As a follow up to yesterday's post it seems clear that readers want a re-hash of the old portfolio.

Just kidding.

We are headed over to Hawaii next Tuesday, this seems like a good project for a long plane ride. I hope to have something up within the next week and a half.
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Ticker Sense Dissection

Declan Fallon has a post up that dissects the TickerSense Poll that I participate in. According to Declan's work I have been very wrong in this poll--not disagreeing, I have responded bearish every time and the market is up a lot since the poll started.

Amusingly and oddly too there was a little chatter in the comments of this post about why I have been wrong and whether I will switch to bullish. The whole thing brings up the opportunity to talk a little about managing expectations.

I believe part of the job of managing money, this applies to managing your own money too, is seeking out and understanding the realistic things that threaten your returns. To repeat "The Greatest Story Never Told" poses no threat to your money.

I always respond bearish to the poll. I know Adam Warner always responds neutral. Neither one of us cares about being right which probably means we do a disservice to the poll.

As a matter of philosophy being right or wrong about the next 30 days (the next 90 days for that matter) does nothing toward the long term reason for investing. Mistakes get made by panicking at the wrong time and dumping a lot of stock. Conditioning yourself to be ready for declines should result in less panic.

The time to be more concerned is in a decline that others are not worried about; aka slow declines. Slow declines come far less frequently than fast declines.

I have written on this blog and said to clients countless times that I expect a correction/decline and would be thrilled to be wrong.

The bigger macro is that we all need to stay close to the market over long periods of time, being right in a poll, or in a quote, or talking to friends about what the market will do over some short period of time means nothing. I will go bullish on the poll after the next bear market. If that does not happen until SPX 2000 then I will be wrong for the next 450 SPX points but won't miss the run.

The question to ask yourself is would you rather be right or have a larger portfolio?
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Sunday Morning Coffee

Well its not as cold as this picture (taken off our porch a couple of winters ago) but it was 34 out when we woke up and had to get a fire going.

I have been exchanging emails with my nephew (my oldest brother's middle child) who just graduated college and is in the process of sorting out what to do next.

You can't try to give too much advice because you alienate the person and because part of being in your early 20's is learning by making your own mistakes.

The best piece of advice I ever received was when I was 18 was "your 20's are for horsing around, you don't need to worry about making money until your 30's and 40's." This has probably changed over time to not needing to worry about money until you are 35 but you get the idea.

When you manage your portfolio there are certain mistakes you are going to make as well. I think the most common ones pertain to hubris. At some point, and this has happened to everyone, you think you know more than you actually do and then something blows up on you.

The goal is simple; have enough money when you need it. The way to get there is simple and you know what it is; save properly and stay diversified. Everyone knows these things but it is easy to stray away from diversification.

Just like a 22 year old sometimes need to learn what too much credit card debt is (not an issue for my nephew) an investor sometimes need to get burned putting half his money into a lottery ticket.

Forgetting the science of it for now, a truly diversified portfolio will mean something is always going up and something is always going down. That blend should get you where you need to be if you also save properly.
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The Big Picture For The Week Of October 7, 2007

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Big Swing

By now you know the employment report printed a normal number this morning and that the last two months were revised up a lot, wiping away the 4000 job contraction reported last month.

When the negative number printed I offered the possibility that it could be subject to revision and obviously that was the case. The point to bringing it up now is this required no keen insight. The nature of certain data series is that they are volatile, employment reports go to the front of the line on this.

Big moves outside the trend are often revised. While the stock market's reaction makes for a nice day the revision should not be such a huge shock. On the day of that last report I had another post saying that if the negative number caused a panic it would snap back. Really that number was more of a bottom than anything else and we have had a good month in between.

The thing to take away is that this will repeat often. A scary number knocks the market down, the market recovers some amount, and then the number gets revised.
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This Might Be Useful

I have written about annuities a few times. I am not a big fan of them, among other reasons they are wildly expensive. There are other issues too but I have said before that anyone I know who has an annuity seems to take great comfort from it.

You might have heard about some new funds called Income Replacement Funds that on first glance resemble annuities.

The basic idea is that if you want an income stream for 15 years, you would buy the fund dated for 2022. If you put in $100,000 the fund would pay you $637 per month to start out, the payment would go up slowly every year based on inflation and performance (no guarantee as best as I can tell which makes it different than an annuity) and at the end of the 15 years your principal will be exhausted. You can sell the fund anytime you want.

The 15 year example generates a 7.6% income in year one which is obviously more than the safer 4% discussed many time in past posts. The difference is that with these funds there will be no principal at the end.

A possible application might be for a 60 year old who wants to get off the 50 hour treadmill. Assume he has a $1,000,000 portfolio and makes $10,000 a month but lives below his means (which is a key ingredient to most creative retirement ideas). $200,000 into a ten year fund (actually eleven years because the funds are dated even years only) would start out paying $1596 per month. He would be able to add in social security a couple of years later. That combined with some well planned part time work ideas until age 70 would allow the other $800,000 to grow without paying an income. Assuming ten years and 7% (so below average) annual returns the remaining $800,000 would just about double by the time the Income Replacement Fund exhausts.

It would be easy to pick my idea apart and there are obviously other strategies for these funds but the main takeaway for me for now is that it is a source of a relatively secure income without the expense and restrictions of an insurance product.

You can visit their web site for more info as I am sure there are a few more moving parts than I have outlined. Whether this turns out to be a great thing or a mediocre thing it seems to open the door for copy cat ideas that could be a little better than this one.
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New Frontiers

I have written about emerging markets plenty of times and frontier markets quite a few times. I believe emerging markets have a place in diversified portfolio and frontier markets should be there for quite a few folks. I wrote about the N-11 in this context in January.

We are moving closer to some sort of US listed exchange traded product. I found this on IndexUniverse about an MSCI Index that also mentions the an S&P frontier market index.

This is going to happen in a more accessible way. I have disclosed exposure to Vietnam, not so easy to access, and there will be more. I think in addition to funds there will be individual stocks available too.

Emerging markets have been hot for several years and despite Michael Kahn's warning of a correction (which I am not disagreeing with) they will be attractive to US based investors for a while to come.

The point to make for now is one of moderation. I believe I first disclosed owning the Vietnam Opportunity Fund (VTOPF and VOF.L) a little over a year ago. I actually first bought it in the spring of 2006 at around $2.48. I disclosed selling half of it in a video post from January at $4.73. For the very few people I bought it for I only allocated 1-1.5% to it. A 1% allocation to something that goes up 90% adds a lot to a diversified portfolio. Granted it won't make you rich but it adds meaningfully to your result without taking a huge risk.

I think this sort of smaller exposure makes sense for a lot of people where frontier markets are concerned. I have discussed moderation with regular emerging markets more times than I can link to but during the selloff this summer a lot of emerging market things were 20% or so. When these events happen, a lot of comments come in from people who learn the hard way they had too much.

Did you catch any of the Red Sox/Angels game last night on TBS? While I am glad the Red Sox won, its going to be a long post season with Ted Robinson and Steve Stone doing the games.
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Rocket Science

Two comments came in yesterday that were of a similar vein. They were both from do-it-yourselfers expressing some level of frustration. One comment noted that most managers lag the market as do most individuals and the other commenter said that the harder he tries, the worse he does. Reader number one is considering the lazy route and reader number two said it might be a good idea to buy stocks like Johnson & Johnson (client holding) and never sell.

So a fair bit of frustration expressed by these folks. It might have just been venting or maybe they really are entertaining some big changes.

Beating the market seems to be a priority for a lot of people who only have one client. If you manage your own portfolio you are dealing with the long term pressure to have enough money when you need it. You probably don't think about it except when the market is correcting but it's there and let's face it, having enough money strikes at the very core of a lot of people's fear and motivation. When you add in the more palpable, but less important, pressure of beating the market you compound the emotions that make the task more difficult.

If you plan to retire in 2017 what do you really need from your portfolio today? You need to feel like you are on a path that will allow your portfolio to generate X dollars per month in ten years. You do not need to beat the market by any amount.

The market averages 10% per year and if you have been investing long enough to know you can only average 7% then when you use one of those investment calculators online or make a financial plan you should use 7% in your calculation and not 10%. In this circumstance you should also plan on saving more.

I have written a zillion times that over long periods of time people should expect to lag the market some years and beat it others. This seems fairly obvious so worrying about lagging the market seems unnecessary, furthermore no one looks back at a failed financial plan and says"ooh, if only I'd beaten the market back when I was 44."

If you are where your financial plan calls for you to be right now, or even ahead of your plan, does your relative return matter at all? Having enough money, or not, is about planning. Too much concern over beating the market is about ego. The sooner you can realize this the better off you will be.

One last point that we have not even touched on is risk adjusted returns. A little over a year ago a recurring theme on this site was building a portfolio that captured 80% the market's return with only half the volatility. This turned out to be a very popular concept among readers and it is a very valid goal, especially for people who save properly making beating the market even less relevant.
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Strength or Weakness

A reader commented on yesterday's post, paraphrasing David Swensen, that "selling into weakness (ie panicking) is the biggest sin." I can't vouch for Swensen's belief but assuming the reader is correct...

What about selling your losers and letting your winners run? Did William O'Neill come up with the 8% stop order? I'm thinking he had something sound in mind. Isn't every stop that has ever been executed been a sale on weakness?

On the other hand "no one ever went broke taking profits." We should buy when there is blood in the streets, we should buy when stocks are on sale.

Either camp (sell strength or sell weakness) can cherry pick thousands of examples to make their case but there is no way to know which is right except in hindsight. If a stock goes from $30 to $20 in a panic what it does next would just be a guess. If it goes to $10 then selling at $20 was the correct trade and if it goes right back to $30 a $20 sale was the wrong trade. Both examples exist.

Some people seem to be militantly devoted to one or the other and I have never understood this. The people who use 8% stops on everything got whipsawed hard this summer.

Can anyone say that the person who "panicked" out of the market during the first week of 2001 at the low of 1274 (this can been seen better by clicking on the chart) made a bad decision? Sure they would have done better to sell a week later but that misses the forest for the trees.

Either method can be articulately defended and either one can be easily refuted with plenty of examples.

I have sold into both weakness and strength and have been right with both methods and wrong with both. Going forward I will sell with both methods and again will be both right and wrong with each one. If you choose just one method you will get some right and some wrong, ditto if you go with both.

So is there a right answer? I don't think so. I have written many times about not being married to either side and that works for me. You obviously have to do what works for you, more specifically what lets you sleep at night.
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Endowment Investing

A question came in about university endowment fund investing and how to emulate those funds. Mebane Faber has done far more work on this and if this is something you care about you do need to visit his site. There were also some other great reader comments that came in on this subject over the weekend as well.

The two endowments that get the most attention are Harvard and Yale. Some of the other prominent ones I have heard of include University of Virginia and Rice University.

The fund that has had the best returns, by far, but gets almost no attention, is the endowment at Grand Lakes University, pictured on the left. You probably know about their diving team but no one talks about the endowment.

Seriously, trying to emulate an endowment seems less than ideal to me. This is not about their results but more about our access. By now everyone knows Jack Meyer (the chief at Harvard Management before Mohammed El-Arian) did very well buying timber land. Timber has a low correlation to US equities and the supply and demand characteristics have been favorable more often than not.

I believe in the idea enough that I own Plum Creek Timber (PCL) for quite a few clients. Claymore has a timber stock ETF coming fairly soon that I will write about for TSCM and depending on what's under the hood I might swap, we'll see. My belief in the idea notwithstanding, I don't really think of PCL as being similar to owning acreage in New Zealand like Harvard was able to do (not sure if they still own any).

Further, I would not think of any of the open ended 130/30 OEFs as being the same as a long short hedge fund either. If you have any interest in buying a 130/30 fund take a look at a lot of them on a chart. Plenty of them did very poorly. Some of the other hedge fund strategies they might employ probably aren't available, conceptually, in an exchange traded product.

As far as private equity goes, I do not think of the private equity ETFs, there are two now, or the component stocks in those ETFs as being the same thing as a private equity fund. Someone could probably argue they are close but I just don't think they capture it.

These areas comprise most of the endowments. Regular old stocks and bonds will be the vast majority of your investment portfolio, not so with the endowments though.

Just because our portfolios will not look like a college endowment does not mean we can't learn a lot anytime David Swensen or the like gets interviewed or writes an article. This same sentiment probably applies to all the luminaries in the field, but I just don't think our portfolios will look like theirs, Mebane's great work notwithstanding.
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