For fear of having my own Jerk Store moment (albeit without the animosity)...Back in March I wrote a post questioning David Kotok's Cumberland Advisors being and ETF-only shop. Per his comments in numerous TV appearances they are not ETF-centric they are ETF-only. I did not know this until yesterday but apparently he replied to me a couple of days later in a commentary posted on his site titled "Thank You to Roger Nusbaum, Melissa Lee, Eugenio Moreno." Hey, I'm Roger (silly humor attempt on my part)!
The general tone to my post was ETFs solve a lot of problems but cannot address every single issue, this is a recurring theme here. Kotok leads off with "there is no LEGAL informational advantage with a single stock." He goes on to talk about opinions being potentially wrong and there being consequences when opinions are wrong. He also mentions something near and dear to my thought process that "either you are totally current all of the time on every item concerning a company, in which case you have informational neutrality, or you are missing something for some reason that others have not missed and you are at an informational disadvantage." I take this comment to be about time available to spend and I agree that the manner in which one constructs his portfolio is largely a function of time.
Kotok seems to place more weight on the competitive nature of the information one investor has versus the information that another investor has about the same stock or different stocks in the same industry which is much different than my approach of thinking that if I want exposure to Denmark then what is the single best way I can come up with to do that. And of course my conclusion about the best way to access New Zealand could turn out to be incorrect.
I don't know much about the specifics of how Kotok constructs portfolios. I know they are done at the sector level and I know he is very cognizant on global markets (he has had very specific views on the euro for months for example) but I do not know whether individual countries are used or whether themes are sought out like emerging consumer stocks which are now easy to access in ETFs. My hunch is that one way or another these ideas do make their way into their portfolios.
My original comment back in March was to be surprised that this firm is ETF-only as opposed to ETF-centric or heavy. Kotok seemed to make the case for ETFs in his reply to me as opposed to explaining ETF-only but that is of course subject to interpretation.
In wanting to build the most useful portfolio possible I want to make use of every resource available to me which includes common stocks. Kotok's point about information is correct but I am not sure it is more important than access forgone.
As an example I have been writing about Chinese toll road stocks for several years. The liquidity for now (until Schwab allows direct access to Hong Kong) is such that I am not confident about getting over 100 clients out at once if I had to but I have held Jiangsu Expressway (JEXYY) personally for several years and have had good luck with the price action and the yield. I have come to believe this space is a very good way to access China for reasons I've written about many time before. As far as Kotok's point about information, this is something I have talked about many time before. I would expect that in a given year one of the Chinese toll roads (there are quite a few of them) will be the best performer and that in the next year it would be one of the others. This is not universally true but generally speaking no one stock in a group will be the best one every year for the rest of time.
If in the case of Chinese toll roads the group generally does well and I am at least a mediocre stock picker (not a particularly high bar to set) then the value is added by making the decision that "I need to own a Chinese toll road" not when the particular stock is chosen.
For another country the best solution might be a cement stock, for another maybe an ETF is the best answer. ETFs are a fantastic tool to have at our disposal but there are other tools available as well and for people able to spend the time they should make use of all the resources at their disposal. Marc Faber has talked many times about Thai Tap Water and it has turned out to be a great performer while paying a monstrous yield. There is nothing wrong with assessing multiple options and assessing the best way for you to get into something you think should be owned. Chances are you, investing for yourself, are far less constrained because something only has a dollar volume of $30,000 per day.
Before anyone adds one plus one and gets eleven a portfolio full of names like this is probably a bad idea but one or two at a 2-3% weight will mean you only need to focus on the company not worry about the portfolio being illiquid.
7 comments:
Kotok makes more sense to me especially for individuals. Time is a very precious commodity and ETFs would take less time. Lastly, I really only want to manage 10 to 20 rather liquid holdings and I can do this with etfs.
Not to say a good professional full time investor could not benefit from individual stocks, but does that define your readers?
BTW my performance this decade has far out performed the market.
SEG
that most people, for whatever reason prefer not to use individual stocks makes sense and this includes advisors.
as far as my audience there are (apparently) plenty of people working in the industry who read my stuff. i'm not sure the mix but based on comments and other forms of correspondence there is a decent percentage RIAs and brokers stopping by.
I didn't mean it as an insult (just not agreeing) and I am not particularly concerned about the many professionals who obviously post here. My concern is for many individuals, many who probably do not even post, that would end up more at risk trying to pick foreign or domestic stocks.
I think you have one of the better blogs and I am assuming there are a plethora of individuals who read it.
SEG
no insult taken--it is simply interesting to me that there is that type of traffic here
Ok, he links to you using some sort of aggregator instead of directly to your website? haha.
Also, good lord there's a stock just for a specific Chinese toll road? That's wacky.
Roger: Most ETFs like vti, vwo have a bid ask spread of about 1 cent or 2 cents. But some ETFs like MXI have a bid ask spread of more than 10 cents. Can you tell us why this is happening? Thanks.
Kotoks thesis was that you can't make a wise selection in stocks. He then explains why owning Walmart was important at a level of 5% ( assumption on my part of 50% in each ETF). Owning Walmart would add marginally to the ETF. if it doubled, it would add 2% to the ETF return, which would be hard to find in a portfolio with seven to twelve ETF's. It sounds more like being afraid of making a mistake by picking the lower performing ETf, than wanting to get the best return on investment. I'll be reading his website more tonight to understand his style of investments.
SEG, is your performance from wise moves out when capital preservation paid of, or was it the result of weighting, or selective investing(avoiding financials, for instance). Just curious, don't mean to be nosy. I like to learn from other folks success, and failure.
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