There has been an interesting thread in the media over the last few days that ties in with something I have been theorizing about on this blog for several years now.
The Up and Down Wall Street column in Barron's cited a report from the Bank of International Settlements and came up with;
As Philippa and Doug (from the Liscio Report) sum up the message in the BIS annual, it increasingly looks "like the evermore freewheeling financial environment that we've taken for granted for the last 25 years is behind us." Or, as the Bank declaims "has run its course."
Also in Barron's was an interview with Harold Evensky which was titled Building Portfolios For A World of 2.5% Gains. The only thing I think I need to add to that is that 2.5% is his idea of what real returns will be.
As this has been a concern of mine for a while I obviously read with great interest and wondered whether I might have been on to something with this notion. But then I found this from the FT by Tobias Levkovich making a case (although he takes a very narrow route to this theory that I think misses the forest) for a similar equity environment. I can't recall Tobias being right about anything in this stock market cycle and that he might come to the same conclusion does work against the theory.
Be that as it may I hope that after all this time of my writing about infrastructure, airports, farmland, currencies, hydro funds and on and on you have started to expand your horizons in terms of what you have learned about.
I write about a lot of these alternative type of things, far more than I buy, because I think it is very important to learn as much as possible as opposed to learn about something and then just buy it. There is nothing wrong with learning and then saying no.
I wrote about the plane leasing stocks awhile back, if memory serves I locked onto these when Babcock & Brown Leasing (FLY) debuted. I think it is fair to say my take all along has been I'm interested, they are risky, give them some time and fortunately I never bought as they have all been decimated (including the one that made the best impression on me because it paid no dividend).
I am still interested in them and I do believe that at some point it will make sense to own one that caters to airlines from smaller ascending countries but at this point I'm not sure when that will occur but of course I could continue to be wrong about them.
More content will start to cover these sorts of things as time moves on, as there is recognition by more people that SPY/EFA/IWM will not cut it for helping investors to have enough money when they need it. Bogle and Morningstar notwithstanding, the sooner people grab onto this the better served they will be.
One related update; this past week I tried to buy one of the farmland companies but couldn't get it done. It was a small foreign name, I figured the quote (correctly I might add), padded my limit by a reasonable amount (so based on price it was executable) but Schwab just could not get an execution unless it went to the foreign market which would have made the commission, IMO, exorbitant. Back to the drawing board.
One announcement of sorts is that I am starting to do some writing for a site called greenfaucet that will be mostly about ETFs. I had one article post there the other day and plan to turn one in tomorrow that maybe will post on Monday. I am still with TheStreet.com as well. For now I'm just feeling things out with greenfaucet to see if I have the time to create original content and if the content I create is something they even want.
The picture is from a few winters ago when the propane truck fell in a sinkhole very close to our property.
9 comments:
I think you make a lot of good points. Household debt increased for about 25 years and now that debt expansion is comming to an abrupt halt.
The future seems rather uninspiring for quite a while. Cash still seems like a good thing even if rates are rather low. Hopefully we will see buying opportunities in 3 to 9 months
I like the idea of using a core-satellite approach of building a portfolio. I've been thinking of switching to such a model for a while now from a hotch-potch of investments I own currently.
keeping a collection of stocks makes the task very difficult, IMO.
Sureshk & Roger,
The following is an article that was published by Richard Kang at his blog "thebetabrief.com." Richard is very insightful and advocates the core-satellite approach to investing. The core is the use of passive instruments with the satellite representing active (long/short, hedge, mutual funds, etc.)...
"A couple of weeks ago I was invited by the guys at “The Market Traders” to join in on their weekly roundtable podcast as one of three guest panelists. If you check out their site, you’ll see that they’re big on commodities. Possibly a bit more of a speculative bent to their site with ads that make me think that it’s a place where stock pickers come to congregate. However, I was surprised to find that I wasn’t the only one commenting on ETFs and my fellow panelists didn’t really spend a lot of time discussing specific stocks although a few ETFs were mentioned (not just by me).
We basically comment three times: Once on energy, the second time on the US dollar and finally with thoughts on areas of the market that we like. Some who have followed my writings and have become accustomed to the way I do things might be a bit surprised by my final comments. I basically state in explicit terms how I don’t believe now is a time to think like a traditional asset allocator. I don’t think now is the time to stick to the “60%-equity/40%-fixed income” strategic asset allocation model. Frankly, to have a “buy-hold” mentality all of the time requires a stomach of immense fortitude. (What you are hearing now are people from Vanguard and DFA squirming in their chairs.) Does that mean I’m leaning towards market timing? On the spectrum, I don’t think I’m at the far end which is market timing, but I’m certainly not at the buy-hold end. I’d like to think that the “strategic asset allocation” process which I think is so important (cool with that Vanguard/DFA?) should, in this environment as well as others, be allowed to deviate in two ways:
1. Allow for some tactical asset allocation. That may mean allowing min/max constraints for asset classes to deviate even more from “home” or what may be defined as the policy allocation. That may also mean allowing the asset allocation shifts (rebalancing, delaying implementation of cash equitization, etc.) to happen a little more frequently than normal. This allowance for tactical decisions could actually mean several things but generally I’m saying that I believe some allowance for deviation from standard asset allocation protocols is warranted.
2. Allow for exposure beyond the traditional asset mix. This means to make sure that alternative investment exposures are in place. Is it too late today for gold, oil, agriculture and other commodities that seem to be getting all the attention these days? They’re volatile (and I believe, getting more volatile) but their diversification properties are undeniable. Caveat: I’m talking about exposure to the commodities via ETFs, ETNs or derivatives, not indirect exposure via equities (like gold producers). I don’t think it’s too late to get into infrastructure and other inflation hedging asset classes and the only question is how much of these alternative asset classes is warranted as a buffer to the core of traditional asset classes (stocks/bonds/cash)?
Buy-hold philosophies for multi-asset class exposures made a lot of sense for anyone from the period of 1980 to now. The only major hit was 2000-2002. The big question I ask myself is whether we are still in this secular up market or did that end one year ago. In other words, are we in a sideways or down market that has the potential to be anything as bad as the 2000-2002 bear market? My sense is that for broad regional market exposures like the S&P 500 the answer is likely to be yes. However, for various sectors and foreign exposures, I feel confident the answer will be no. We’ve come out of an environment where nearly everything did well fueled by a world of cheap money. That doesn’t mean that the pendulum will swing causing nearly everything to plummet.
A very important consideration is also the role of private equity and hedge funds given my comments above on the importance of alternative investments. I can’t stress this enough: As much as I am a fan of passive instruments, I’ve never said that one should completely disregard active management. Is it hard to pick the successful managers ahead of time? Yup. Do they cost a lot. More than ETFs and mutual funds but if you’re finding non-correlated returns, they should cost more. The key question in today environment is what proportion of your portfolio do you want to allocate to market risk and how much to manager risk?
That one takes a bit of time to sink in once you really think about it.
Then you have to ask yourself, is it possible that regardless of which way I choose, it’s likely that the result will be very similar? In other words, you put all your money in one of two possible portfolios: All ETFs or all hedge funds … and the result is both go up or both go down! Of course it’s possible that these portfolios go in opposite directions but that’s what we would expect and that’s why we assume the active-passive proportion decision is important. But if they go the same way, then we’re likely to lose faith in what we were promised by someone. The passive route promises very little. The returns are what the markets provide. It’s the active route that promises quite a bit more … sometime more than what was provided. The real bummer is allocating significantly to private equity and hedge funds hoping that they will provide a buffer to the traditional core portfolio of more liquid positions but not reaching that result. In other words over-promising and under-delivering.
Today’s deleveraged environment provides opportunities but an ever changing landscape for investors travelling the PE/HF path, some good and some bad. We hear of pension funds allocating more and more to many alternative asset classes and strategies. I wonder if they are pleased or disappointed with their results. Are the fees worth it? Are managers providing alpha? Is the illiquidity constraint more than they bargained for? Were they too late in making asset mix shifts? Have they improved their asset/liability situation?
Everyone is talking about credit problems (mortgage, auto, credit card) and the various tentacles of the US economy that are breaking down. My sense is that it could be as dire as some are stating but the press is likely doing a decent job of sensationalizing the story. But what about the pension landscape? Low interest rates plus negative market returns of the past 12 months are bringing us back to the asset/liabiility mismatch situation we first saw during the market slide of 2000-2002. Are these funds doing so well with their portfolio returns that the relatively low interest rate environment is not causing havoc to their books? Is this yet another cause for concern for the US financial “infrastructure” landscape? So many questions and I only wish I could provide simple yes or no answers. Then asset allocation would be like ordering a pizza.
Despite the volatility we expect to find in international markets and especially in the so-called “developing and frontier markets” (I’m very much not liking those names anymore) there are so many reasons not to have anything but minimal exposure to the US whether it be equities, fixed income or dollars. Fareed Zakaria’s commonly cited view that one must notice it’s not “the fall of the US” but “the rise of the rest” is important. It’s important for investors because there’s a parallel to a shift in asset allocation that will surely happen … and it’s already started. Just how much is an appropriate allocation to the emerging markets? Defining what is or is not an emerging market or frontier market or even developed market would help in answering this. But just as important, I believe that the simple move away from “home biased portfolios”, driven by an acknowledgment that intelligent/selective global diversification, is a necessary move in what is likely no longer a simple long-term up market. Diversification may not be what it used to be, but along with compound interest, it’s one of the very few free lunches we investors have.
Put another way, imagine you are one of the sovereign wealth funds that the press and politicians seem to enjoy commenting on these days. Recent allocations of these funds to western financial conglomerates (investment banks in need of capital and quickly) is a move to use some of their US dollars to buy relatively cheap assets that will provide some yield (surely negotiated to be better than what others are getting) as well as a buffer to their home grown commodity exposures. I spend a lot of time thinking about what else is on their shopping list to diversify themselves away from existing commodity and US dollar related risks. It’s the same exercise any investor should have with their portfolio and the positions held within it.
Goodness, those are very deep thoughts. Richard sounds like he's wound pretty tight. My approach is perhaps naive--Buy stuff you think is going to go up. Be patient and give it some time to work. If it does, take some profits. If it goes down, sell it and keep some dry powder to fight again. Diversify. Eat right. Have friends. Work out. Buy a dog (or a cat if you're married.)
anon 12:22
A very interesting comment/ "quote" that makes a number of valid points. Over time, one thing I've noticed among the various blogs I read on a regualr basis, often the comments posted are as, or more valuable, as the orginal post.
jan
Sell Italian bonds. Italian public debt has reached a record high at 1646,7 billion euros.It is worse than 1992 when the country went very near to declare default(insolvency)
Prediction:
http://www.youtube.com/watch?v=JuEpZaiKdAw
(attempt at humor)
have a good day:-)
I am in discussion groups on Investor Village that are for Norwegian stocks related to oil-shipping-drilling.
We avidly compare our traders when it comes to divi distribution time. Schwab is on the bottom of the list for happy campers. I buy and sell easily with ETrade. DSSPF, SDRLF, GDOCF, ITKSF.
I know a girl who chose her dog over her fiancee. Crazy. And I've sat sad and jealous when some dog got hugs and attention. Cats, yes. Better, a goldfish.
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