Clippings 2012

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Park
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Re: Clippings 2012

Post by Park » 28 Nov 2012 21:13

http://hussmanfunds.com/wmc/wmc121126.htm

Due to my limited keyboarding skills, I can't transfer the relevant figure unfortunately. The conclusion from the first figure in the link above is that the US stock market is moderately overpriced, whether one looks at price/book, price/revenue, price/dividend or PE10. Based on those metrics, the US stock market is at a similar valuation to what it was just prior to the start of the 1965-1982 bear market.

If I want to increase my US stock exposure, perhaps I should be buying individual US value stocks? :)

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Re: Clippings 2012

Post by ig17 » 28 Nov 2012 21:23

Park wrote:The following comes from Table 1. The first column gives the annualized before tax return from 1979 to 2009; the second column gives the annualized after tax return from 1979 to 2009 using historical tax rates at the time; the third column gives the annualized after tax return from 1979 to 2009 using 2009 tax rates. Those 2009 tax rates are the same as the present 2012 tax rates.

Code: Select all

Russell 1000 (large/mid cap)         11.18% 9.61% 10.41%
Russell 1000 Value                   11.81% 8.96% 10.24%
Russell 1000 Growth                  10.16% 8.88% 9.49%

Russell 2000 (small cap)             10.24% 7.69% 8.62%
Russell 2000 Value                   12.43% 8.86% 10.08%
Russell 2000 Growth                  7.49%  5.60% 6.32%
Park,

Morningstar.com tracks Tax Cost Ratios of US-based ETFs.

Value ETFs are indeed less tax-efficient, but the disadvantage is smaller than quoted in the paper you linked. Morningstar must be using a different set of assumptions.

Code: Select all

Tax Cost Ratio

                                   1-Yr   3-Yr   5-Yr   10-Yr
iShares Russell 1000        IWB    0.30   0.28   0.30   0.43
iShares Russell 1000 Value  IWD    0.35   0.34   0.37   0.55

iShares Russell 2000        IWM    0.41   0.33   0.33   0.34
iShares Russell 2000 Value  IWN    0.52   0.44   0.44   0.47

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Re: Clippings 2012

Post by Shakespeare » 28 Nov 2012 23:17

The value advantage in Canada is larger than in the US. Also, a big cap in Canada is a mid cap at most in the US.
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Re: Clippings 2012

Post by Park » 29 Nov 2012 01:05

Park wrote:http://www.mebanefaber.com/wp-content/u ... kowitz.pdf

Above is a link to a paper published by two people from AQR and Booth School of Business.

The following comes from Table 1. The first column gives the annualized before tax return from 1979 to 2009; the second column gives the annualized after tax return from 1979 to 2009 using historical tax rates at the time; the third column gives the annualized after tax return from 1979 to 2009 using 2009 tax rates. Those 2009 tax rates are the same as the present 2012 tax rates.

Code: Select all

Russell 1000 (large/mid cap)         11.18% 9.61% 10.41%
Russell 1000 Value                   11.81% 8.96% 10.24%
Russell 1000 Growth                  10.16% 8.88% 9.49%

Russell 2000 (small cap)             10.24% 7.69% 8.62%
Russell 2000 Value                   12.43% 8.86% 10.08%
Russell 2000 Growth                  7.49%  5.60% 6.32%
Large/midcap blend outperformed small cap blend on both a pretax basis (0.94%), a historical tax basis (1.92%) and a 2009 tax basis (1.79%). The large/midcap outperformance, relative to small cap, is due to the period (1979-2009) where the data comes from. But the data does show that taxes make obtaining the small cap premium more dificult.

Small cap value outperformed small cap blend on a pretax basis (2.19%), a historical tax basis (1.17%) and a 2009 tax basis (1.46%). If you do want increased small cap exposure in a taxable account, seriously consider a small cap value fund over a small cap blend fund.

Large/midcap value underperformed small cap value on a pretax basis (-0.62%), but outperformed on a historical tax basis (0.10%) and a 2009 tax basis (0.16%). As market cap decreases, the value premium increases; you can see that in the pretax data. But obtaining the greater value premium in small caps is difficult on an posttax basis. You lost about 0.70% of the greater value premium in small caps going from pretax to posttax.

This data ignores the probable greater transaction costs associated with the small cap and value premium. Once again, Canadians in the top marginal tax rate would pay higher taxes than those used to calculate the 2009 tax basis, so the 2009 tax basis data probably overestimates the small and value premia.

The tilt toward small and/or value obtainable in funds is so small that taxes (and costs?) overwhelm the premia. IMO, I think if one wants to obtain either premia, one should seriously consider stock picking. By stock picking, you can obtain a much stronger tilt towards small and/or value. For example, XIC has 250 stocks. Buy the top 10% of stocks that you consider to be the most value in nature. Such a value tilt might be able to overcome the hurdle of increased taxes.

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Re: Clippings 2012

Post by Shakespeare » 29 Nov 2012 08:53

You are again assuming US results apply to Canada.
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Re: Clippings 2012

Post by Peculiar_Investor » 29 Nov 2012 09:41

How does this discussion relate to Multifactor Investing - A comprehensive tutorial, if at all?
Imagefiniki, the Canadian financial wiki New editors wanted and welcomed, please help collaborate and improve the wiki.

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Re: Clippings 2012

Post by Park » 29 Nov 2012 09:44

Shakespeare wrote:You are again assuming US results apply to Canada.
You are correct in your assumption. I would very much like to see comparable aftertax Canadian data, but I'm not aware of any.

ClosetIndexer did an excellent analysis of Canadian stocks, and found that Canadian stocks have a significant small tilt and a slight value tilt compared to global stocks.

viewtopic.php?f=29&t=115313

ClosetIndexer did another excellent Fama French analysis of Canadian total market stocks funds, Canadian value index funds and Canadian small cap index funds.

viewtopic.php?f=29&t=115299

This is what ClosetIndexer had to say about the 2 Canadian value index funds:

"we're looking at about a 0.4% annualized premium, given the best case estimate of factor loadings, and assuming that the factors are captured perfectly, with no negative alpha beyond MER. (IMO after analyzing quite a few similar funds in the US and internationally, these assumptions are very unlikely!) A worst-case estimate of the factor loadings, looking at the XCV data above since 2010, would be more like -0.3, 0.2, which had a historical risk-adjusted premium of only 0.13%. So after costs in that case we'd actually be behind by 0.15%. And that's all before taxes. These value funds have a higher yield, so in a taxable account, forget about any theoretical premium, however tiny."

I still stand by my contention that to get the value premium in Canadian stocks for a taxable account, you have to stock pick. My conclusion is similar for US stocks. As for stocks outside Canada/USA, one might consider single country index funds, where valuations are low.

There are few low cost value funds, that invest in Canadian or US stocks, which have a long term record of outperforming low cost total stock market funds. So if someone told me that my stock picking recommendation is wrong, I wouldn't disagree with them. For the more knowledgeable investor who is willing to spend the extra time, will minimize costs and remain disciplined, it might work. OTOH, it might not.

As for investing in single country index funds, an excellent counterargument is that it will result in the assumption of considerable diversifiable risk, which goes unrewarded.

So a recommendation to stick to plain vanilla indexing is very reasonable. I would be concerned about valuations in the US stock market though.
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Re: Clippings 2012

Post by Shakespeare » 29 Nov 2012 09:52

I still stand by my contention that to get the value premium in Canadian stocks for a taxable account, you have to stock pick.
Probable. I'm not sure an ETF would work and active funds have to overcome their MER. OTOH, Beating the TSX (BTSX) - finiki, the Canadian financial Wiki has a respectable advantage over the (various) indexes although the S&P60 portion of the record is only a few years old.
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Re: Clippings 2012

Post by Bylo Selhi » 30 Nov 2012 10:24

The dirty tricks of the investing trade
Most of us understand basic caveats, such as avoiding mutual funds with an excessive annual management expense ratio. But there are many other ways to get stung, so you have to be constantly on your guard.

One hedge fund manager I know says that when he worked at a large, long-only fund (i.e. it didn’t allow short selling or leverage), “I literally didn’t care what my fund was doing. I had a spreadsheet on my desk that showed how I was doing compared to my competition, because that dictated my bonus.” He could be down 25 per cent, but if competing funds were down 30 per cent, he was still rewarded for outperformance.

Here’s another mathematical quirk: A manager can wipe out hundreds of millions of dollars of value and still enjoy a sterling investment track record. How?...
Sedulously eschew obfuscatory hyperverbosity and prolixity.

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Re: Clippings 2012

Post by ghariton » 02 Dec 2012 20:10

If you really want something to worry about...
The U.S. birth rate dipped in 2011 to the lowest ever recorded, led by a plunge in births to immigrant women since the onset of the Great Recession.

The overall U.S. birth rate, which is the annual number of births per 1,000 women in the prime childbearing ages of 15 to 44, declined 8% from 2007 to 2010. The birth rate for U.S.-born women decreased 6% during these years, but the birth rate for foreign-born women plunged 14%—more than it had declined over the entire 1990-2007 period.1 The birth rate for Mexican immigrant women fell even more, by 23%.

Final 2011 data are not available, but according to preliminary data from the National Center for Health Statistics, the overall birth rate in 2011 was 63.2 per 1,000 women of childbearing age. That rate is the lowest since at least 1920
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Re: Clippings 2012

Post by kcowan » 04 Dec 2012 12:57

Turkey’s broadcasting regulator is fining a television channel over the Simpsons
http://www.reuters.com/article/2012/12/ ... MG20121203
52,951 turkish lira ($30,000) over the episode of the hit U.S. animated TV series, whose scenes include the devil asking God to make him a coffee
Blasphemous! Maybe an apple tea would have slipped through?
For the fun of it...Keith

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Re: Clippings 2012

Post by Park » 06 Dec 2012 20:15

Mebane Faber has an interesting graph on his November 30 blog in the link below

http://www.mebanefaber.com/

It correlates US PE10 with negative stock market return over 3 year periods. Once you get to a PE10 of less than 11, there has never been a negative 3 year return.

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Re: Clippings 2012

Post by ig17 » 06 Dec 2012 20:52

Park wrote:Mebane Faber has an interesting graph on his November 30 blog in the link below
Here it is...

Image
Park wrote:It correlates US PE10 with negative stock market return over 3 year periods. Once you get to a PE10 of less than 11, there has never been a negative 3 year return.
Great. There are two ways we can get PE10 of less than 11. 50% correction, or stellar earnings growth.

BTW, he took the idea of the graph from this paper by James Montier:

The 13th Labour of Hercules: Capital Preservation in the Age of Financial Repression

It's quite a depressing read.

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Re: Clippings 2012

Post by Park » 07 Dec 2012 01:14

I agree, it is depressing.

Mebane Faber has a post from November 8 giving PE10s for the stock markets of 39 countries; the PE10s range from 2.36 (Greece) to 34.0 (Columbia). The order from the top is Columbia (34.0), Peru (32.41), Indonesia (25.83), Chile (21.43), USA (20.98)...Canada 18.8.

http://www.mebanefaber.com/page/2/

Unfortunately, my limited keyboarding skills preclude me from presenting the figure. My conclusion is that, if one ignores the USA (that's a very major exception), stock market valuations aren't that bad. Japan has a PE10 of 13.36! Based on PE10 data alone, if one invested in world stock markets and excluded the USA, I think you would do reasonably well over the next 10 years.

However, if someone accused me of market timing with that statement, I wouldn't argue with them. And an excellent argument can be made that the PE10 in America is higher than in Europe because earnings growth will be higher in America.

For a value investor, it would be reasonable to not invest in the USA and decrease Canadian exposure. But for whatever reason, value investing is easier in theory than in practice. So a market cap allocation strategy for foreign investing is the best option.

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Re: Clippings 2012

Post by Park » 07 Dec 2012 20:25

The following isn't a clipping, but I thought it was worth sharing. I don't want to start a new thread, so I put it here.

I'm reading Value Investing by James Montier; the following is from page 331.

"I constructed a very simple DDM model for the S&P500 in aggregate. Figure 32.7 shows the proportion of value that is contributed in the first three years, the next five years, and the long-term. The first three years contribute a mere 10% of the total value. The next five years are slightly more important, representing some 15% of total value. However, the long-term provides far and away the greatest contribution to value, accounting for some 75% of the total value."

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Re: Clippings 2012

Post by ig17 » 07 Dec 2012 22:24

Park wrote:Mebane Faber has a post from November 8 giving PE10s for the stock markets of 39 countries. <snip>

My conclusion is that, if one ignores the USA (that's a very major exception), stock market valuations aren't that bad. Japan has a PE10 of 13.36! Based on PE10 data alone, if one invested in world stock markets and excluded the USA, I think you would do reasonably well over the next 10 years.
Correlations go to 1 in a crisis, as people dump risky assets. If expensive US market crashes, the rest of the world will likely follow (reasonable valuations be damned).

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Re: Clippings 2012

Post by ghariton » 09 Dec 2012 01:25

GARP:
A top government economist has concluded that the high-speed trading firms that have come to dominate the nation's financial markets are taking significant profits from traditional investors.

The chief economist at the Commodity Futures Trading Commission, Andrei Kirilenko, reports in a coming study that high-frequency traders make an average profit of as much as $5.05 each time they go up against small traders buying and selling one of the most widely used financial contracts.

The agency has not endorsed Kirilenko's findings, which are still receiving peer review, and they are already encountering some resistance from academics. But Bart Chilton, one of five CFTC commissioners, says that what the study shows is that high- frequency traders are really the new middleman in exchange trading, and they're taking some of the cream off the top.

<snip>

The study notes that there are different types of high-frequency traders, some of which are more aggressive in initiating trades and some of which are passive, simply taking the other side of existing offers in the market.

The researchers found that more aggressive traders accounted for the largest share of trading volume and made the biggest profits. The most aggressive scored an average profit of $1.92 for every futures contract they traded with big institutional investors, and made an average $3.49 with a smaller, retail investor. Passive traders, on the other hand, saw a small loss on each contract traded with institutional investors, but they made a bigger profit against retail investors, of $5.05 a contract.

Large investors can trade thousands of contracts at once to bet on future shifts in the S&P 500 index. The average aggressive high- speed trader made a daily profit of $45,267 in a month in 2010 analyzed by the study.
If the presence of these guys is costing me a maximum of $5 a trade, I'm not sure why I should worry very much. My effective commision would be $15 instead of $10. In return, these guys act as market-makers, and market-makers have always profited from the ask-bid spread. Plus which, these guys are providing excellent liquidity on the stocks I tend to buy. Market oders are filled in seconds instead of hours, as in the old days. And spreads tend to be very tight.

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Re: Clippings 2012

Post by newguy » 09 Dec 2012 09:17

ghariton wrote:If the presence of these guys is costing me a maximum of $5 a trade, I'm not sure why I should worry very much. My effective commision would be $15 instead of $10.
:shock: What? I didn't know you traded the ES. Anyway you can get commissions as low as $2 per side.

Don't confuse small trader with retail. I bet they're getting less than a cent per share from retail, which could still add up to $5 anyways.

newguy

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Re: Clippings 2012

Post by ghariton » 09 Dec 2012 12:33

newguy wrote::shock: What? I didn't know you traded the ES.
I don't. That's why my figure was high. ($9.99 per trade is what TDW charges me for the four or five trades per year I execute.
Don't confuse small trader with retail. I bet they're getting less than a cent per share from retail, which could still add up to $5 anyways.
I think you're right. Thank you.

I should get out and trade some more.

Anyhow my point remains. I don't see HFTs as doing me an harm. They are probably much less harmful to me than the old-time market-makers. I would leave them alone.

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Re: Clippings 2012

Post by newguy » 09 Dec 2012 12:44

ghariton wrote:Anyhow my point remains. I don't see HFTs as doing me an harm. They are probably much less harmful to me than the old-time market-makers. I would leave them alone.
I should have pointed that the $5.05 was based on a $70,000 contract so it's not that big a deal.

newguy

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Re: Clippings 2012

Post by Park » 15 Dec 2012 12:52

finance.yahoo.com/news/u-stocks-look-below-225900664.html

Article from Jason Zweig on the outlook for US stocks.

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Re: Clippings 2012

Post by Park » 15 Dec 2012 13:51

http://papers.ssrn.com/sol3/papers.cfm? ... id=2179188

A comparison of value index funds (RAFI, Vanguard, Wisdom Tree, DFA)

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Re: Clippings 2012

Post by Park » 17 Dec 2012 16:43


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Re: Clippings 2012

Post by Park » 20 Dec 2012 09:12

http://www.thinkfn.com/ficheiros/JPUSFa ... ceBook.pdf


Above is a link to JP Morgan's equivalent of "What Works On Wall Street". It's 233 pages and it's free.

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Re: Clippings 2012

Post by Park » 24 Dec 2012 08:10

http://news.morningstar.com/articlenet/ ... 160956.xml

Research Affiliates predictions for stock and bond markets for 2013.

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