Clippings 2017

Recommended reading, economic debates, predictions and opinions.
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Re: Clippings 2017

Post by Park » 03 Dec 2017 13:10

The research regarding retail investors, and how they do when it comes to stock picking, indicates most would be better off using a buy and hold broad market index strategy. Below is a link to a review of a study of how ETF investors do:

https://alphaarchitect.com/2017/08/21/a ... sing-etfs/

"By studying the trading data (provided by a German brokerage house) of a large (6,949) group of individual self-directed investors over the period from 2005-2010, the authors attempt at answering:(1)
Do ETFs provide performance benefits to individual investor portfolios?
If not, what are the reasons?
Does investors’ heterogeneity (specifically, overconfident investors and/or financially unsophisticated ones) impact the results?

The authors look at both raw returns as well as risk adjusted returns (with up to 5 factors in the model). Additionally, they divide the sample into ETFs users (1,080, those who traded an ETF at least one time) and non-ETF users (5,869). Answering the questions above, they find:

NO – ETFs do not improve portfolio performance of ETF users rather, compared to the non-ETFs part of the portfolio, total performance decreases by -1.16% on average (however, investors using ETFs use all products sub-optimally-not just ETFs- see Tables IV and V in the paper)
POOR “TIMING” and “SELECTION” abilities. By using counterfactual portfolio analysis, the authors turn off “timing” and “security selection” behaviors. They find that, out of the -1.16% drop in performance, 0.77% comes from poor timing abilities (and cannot be related to additional trading costs). Similarly, when they compared the results of the total average portfolio with a portfolio invested in a market portfolio buy & hold strategy (proxy for security selection), they find that the majority of underperformance comes from security selection behavior
NO – The authors find that there is no distinct investor group that significantly benefits from ETF use or that experiences significant increase in diversification. Differently, they also find that no group will lose by investing in the right market ETF.
The analysis includes transaction costs.

Investing is difficult, especially timing the entry and exit points as well as the selection of the right instruments. Investors under this analysis emerge as buying and selling ETFs at the “wrong” time or trading the “wrong” ETFs. In the words of the authors: “Ironically, the growth in the number of ETFs that track single industries or countries seems to encourage this damaging behavior.” The suggestion from the authors for “Do it yourself” investors is to stick to a Buy&Hold strategy in a low-cost diversified market instrument."

This study makes me more confident that premia, such as value and momentum, will continue to persist.

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Re: Clippings 2017

Post by Park » 06 Dec 2017 22:02

https://www.factorinvestor.com/blog/201 ... kets-occur

Looks at the PE ratio at the start of US stock bear markets (decline of 20%+) from 1900-2015. There are 14 such markets.

For PE 6-8, 1 bear market
8-10 1
12-14 3
14-16 1
16-18 1
18-20 2
20-22 3
22-24 1
26-28 1

PE doesn't look like it correlates with stock bear markets well.

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Re: Clippings 2017

Post by big easy » 09 Dec 2017 13:02

Not sure if this is the right place but there is a series of Barry Ritholtz interviews with investment gurus such as Burton Makiel, Bill Gross, Patrick O'Shaughnessy, Robert Shiller, Larry Swedroe, Rick Ferri, Meb Faber, Jeremy Siegel, Mohamed El-Erian, Jason Zweig, somebody named Jack Bogle and even Anthony Scaramucci before his Trumpian disgrace (have not listened to that one yet). Over 150 in all, all over an hour long.

https://player.fm/series/masters-in-business-1504411

You can download them by hitting the ... button or just listen to them on the website.
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Re: Clippings 2017

Post by ghariton » 14 Dec 2017 12:31

There's about one job vacancy for each unemployed American.
Unemployment vs vacancies.png
That's pretty close to full employment, even allowing for discouraged workers not in the labour force.

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Re: Clippings 2017

Post by CROCKD » 16 Dec 2017 16:54

How to get away with stealing millions, a slap on the wrist (if that) repeat and rinse. Even if any of these guys serve any jail time (rare), they would get more time behind bars for beating up someone on the street outside their fake offices. And it seems the money is never recovered.
Easy money: How fraudsters can make millions off Canadian investors
"The bad guys get better at hiding the money, they get better at spending the money, they get better at moving the money offshore," said Jeff Kehoe, director of enforcement for the OSC. "The cost for us to chase money around the globe is very expensive."
Of course they prey on gullible (and greedy?) people who should know better.
"there's a sucker born every minute" - wrongly attributed to P.T.Barnum

EDIT
I just realized the G&M article is behind the paywall.
You can read it here on PressReader Easy Money
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Re: Clippings 2017

Post by AltaRed » 16 Dec 2017 17:47

The justice system continues to believe white collar crime is 'victimless'. Really...really, f*cked up in my opinion.
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Re: Clippings 2017

Post by brucecohen » 17 Dec 2017 09:19

Money manager/markets writer Barry Ritholz in Bloomberg View:
It is that time of year, when the financial industry engages in its annual ritual of making forecasts, which is usually little more than the prelude to looking foolish. Titles like “Outlook for 2018, “What to expect in the new year,” or some variation thereof litter the landscape. Over the years, it has been my distinct privilege (and truth be told, pleasure) to point out how silly this process is.

On this topic, I am thrilled to welcome some new company. Some of the bigger firms and mainstream economists have recognized that this sort of game is no longer worth the effort. Perhaps no one is better placed to recognize the absurdity of the annual forecasting binge than UBS global chief economist, Paul Donovan. In a note to clients this week, he exhorts his economic brethren to stop the ridiculous prognostications, and instead, provide meaningful value to clients.

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Re: Clippings 2017

Post by ghariton » 17 Dec 2017 12:39

brucecohen wrote:
17 Dec 2017 09:19
In a note to clients this week, he exhorts his economic brethren to stop the ridiculous prognostications, and instead, provide meaningful value to clients.
And what form would that value take, pray tell?

In my experience, economists can add value when addressing a specific client's specific problems. Generalized advice tends to miss important details.

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The plural of anecdote is NOT data.

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Re: Clippings 2017

Post by ghariton » 26 Dec 2017 13:44

Is a bond bust more likely than an equity sell-off?
The major drumbeat of asset class overvaluation has focused on equities, but perhaps a scarier place to invest is holding long duration bonds. Both asset classes may be overvalued, but a close look at the economic fundamentals may suggest that greater concern should be with bonds.
From time to time I feel an irresistible urge to go to 100% equities. When I do, I lie down until the urge passes.

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The plural of anecdote is NOT data.

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Re: Clippings 2017

Post by longinvest » 26 Dec 2017 14:10

ghariton wrote:
26 Dec 2017 13:44
Is a bond bust more likely than an equity sell-off?
The major drumbeat of asset class overvaluation has focused on equities, but perhaps a scarier place to invest is holding long duration bonds. Both asset classes may be overvalued, but a close look at the economic fundamentals may suggest that greater concern should be with bonds.
From time to time I feel an irresistible urge to go to 100% equities. When I do, I lie down until the urge passes.

George
Real-return bonds (RRBs) have a long duration, yet they're the least scary of Canadian investments. Actually, I would love to see an RRB sell off; I would just buy more*!

* Not timing the market or anything; just bringing back my RRB holdings to their 25% of portfolio target. In other words, I would just rebalance my portfolio.
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Re: Clippings 2017

Post by ghariton » 26 Dec 2017 14:33

longinvest wrote:
26 Dec 2017 14:10
Actually, I would love to see an RRB sell off; I would just buy more*!
Yes. That's what I did in November 2008, when real rates ofreturn on RRBs spiked to some 2.5 %. I had a long term target for the amount of RRBs I wanted to hold, and I reached the target that fall instead of several years later.

As discussed previously, real return bonds make excellent sense to me. Nominal bonds do not. Why take an inflation risk when I can buy protection for fifty basis points?

George
The plural of anecdote is NOT data.

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Drawbacks of Equal Weighted Funds

Post by Park » 26 Dec 2017 14:58

https://www.marketwatch.com/story/these ... 2017-12-26

"Equal-weighted indices give more weight to small-cap stocks than do cap-weighted indices, and, accordingly, less weight to large-cap stocks. So equal-weighted index funds will tend to come out on top during periods in which small-caps outperform large-caps. They will lag when the opposite is the case...

Cap-weighted funds are making momentum bets because their portfolio allocation to a stock automatically grows as it performs particularly well — and falls if the stock is a poor performer. Equal-weighted index funds make just the opposite bets, since they constantly are selling stocks that have performed well in order to buy more of stocks that have performed poorly.

These funds have greater transaction costs because of the frequent rebalancing needed to bring each stock’s allocation back to equal weighting...No rebalancing transactions are required by a cap-weighted fund...

equal-weighted index funds will be trying to buy and sell the same stocks at more or less the same time, they can be expected to receive more competition and higher market-trading impact on their trades...

they are expected to outperform when the market is rising. Just the opposite will be the case when the market heads south...

Since the March 2009 U.S. market bottom, the ETF that represents the equal-weighted version of the S&P 500 (the Guggenheim S&P 500 Equal Weight ETF RSP, +0.12% ) has beaten the cap-weighted version (SPDR S&P 500 ETF Trust SPY, -0.15% ) by more than two percentage points per year..

from October 2007 to March 2009, the equal-weight S&P 500 ETF lagged the cap-weighted version by 3.6 annualized percentage points...

the higher expense ratios that equal-weighted index funds often charge."

When the article mentions contrarian, it really is saying that equal weighted funds have a value tilt.

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Re: Drawbacks of Equal Weighted Funds

Post by ghariton » 26 Dec 2017 15:47

Park wrote:
26 Dec 2017 14:58
When the article mentions contrarian, it really is saying that equal weighted funds have a value tilt.
It seems to me that they have a small (or smaller) cap tilt. Small cap is one of the Fama-French factors, independent of value.

Of course there is nothing magical about equal weights. If one does believe that market cap indexes overweight large cap stocks, simply mix in a helping of IWM and perhaps a pinch of MDY.

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Re: Drawbacks of Equal Weighted Funds

Post by adrian2 » 26 Dec 2017 16:30

Park wrote:
26 Dec 2017 14:58
https://www.marketwatch.com/story/these ... 2017-12-26

"Cap-weighted funds are making momentum bets because their portfolio allocation to a stock automatically grows as it performs particularly well — and falls if the stock is a poor performer. "
That's a huge fallacy. Cap-weighted funds are making no momentum bets.

Cap-weighted funds are the only type of funds that can be scaled - 90% of investors can make the same type of investment without favouring one security vs. others.

90% of investors all putting their money into equal weighted funds would cause gigantic distortions.
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Re: Clippings 2017

Post by Park » 26 Dec 2017 17:04

I agree that market cap indexing is momentum neutral. But relative to equal weighting, it is going long on momentum.

Equal weighting gives a tilt towards small cap, but it also gives a tilt to value. Some stocks are overpriced, and some stocks are underpriced. With market cap weighting, you'll tend to own more of the overpriced stocks and less of the underpriced stocks. With equal weighting, you've eliminated the connection between price and weighting. Since market cap weighting is neutral when it comes to value, equal weighting results in a value tilt relative to market cap weighting.

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Re: Clippings 2017

Post by adrian2 » 26 Dec 2017 17:54

Park wrote:
26 Dec 2017 17:04
I agree that market cap indexing is momentum neutral. But relative to equal weighting, it is going long on momentum.
That's like saying a negative number is less than zero, therefore, relative to a negative number, zero is a positive number.

https://math.stackexchange.com/question ... r-negative
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Re: Clippings 2017

Post by longinvest » 26 Dec 2017 18:06

adrian2 wrote:
26 Dec 2017 17:54
Park wrote:
26 Dec 2017 17:04
I agree that market cap indexing is momentum neutral. But relative to equal weighting, it is going long on momentum.
That's like saying a negative number is less than zero, therefore, relative to a negative number, zero is a positive number.
:lol:
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Re: Clippings 2017

Post by Park » 26 Dec 2017 18:35

longinvest wrote:
26 Dec 2017 18:06
adrian2 wrote:
26 Dec 2017 17:54
Park wrote:
26 Dec 2017 17:04
I agree that market cap indexing is momentum neutral. But relative to equal weighting, it is going long on momentum.
That's like saying a negative number is less than zero, therefore, relative to a negative number, zero is a positive number.
:lol:
+1

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Re: Clippings 2017

Post by Park » 26 Dec 2017 18:43

ghariton wrote:
26 Dec 2017 14:33
longinvest wrote:
26 Dec 2017 14:10
Actually, I would love to see an RRB sell off; I would just buy more*!
Yes. That's what I did in November 2008, when real rates ofreturn on RRBs spiked to some 2.5 %. I had a long term target for the amount of RRBs I wanted to hold, and I reached the target that fall instead of several years later.

As discussed previously, real return bonds make excellent sense to me. Nominal bonds do not. Why take an inflation risk when I can buy protection for fifty basis points?

George
There are those much more erudite than me, who emphasize the importance of inflation indexed bonds in a portfolio. But in Canada, there aren't many inflation indexed bonds, and those that exist are long duration. Liquidity is an issue.

In a tax advantaged account, you'll hedge out the inflation risk. But in a taxable account, you've lost the inflation hedge.

A 2.5% real return on an RRB is good. But right now, RRBs have 0.56% real return. It's a high price to pay for an inflation hedge.

Stocks are claims on real assets, and other than the short term, tend to keep up with inflation. They also have the potential to do better than inflation and are more tax friendly than bonds.

As mentioned in the last paragraph, don't expect stocks to keep up with inflation over the next 5 years. For that, I would use cash and short term fixed income. HISAs and short term GICs are my plan.

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Re: Clippings 2017

Post by longinvest » 26 Dec 2017 18:54

Park wrote:
26 Dec 2017 18:43
There are those much more erudite than me, who emphasize the importance of inflation indexed bonds in a portfolio. But in Canada, there aren't many inflation indexed bonds, and those that exist are long duration. Liquidity is an issue.

In a tax advantaged account, you'll hedge out the inflation risk. But in a taxable account, you've lost the inflation hedge.

A 2.5% real return on an RRB is good. But right now, RRBs have 0.56% real return. It's a high price to pay for an inflation hedge.

Stocks are claims on real assets, and other than the short term, tend to keep up with inflation. They also have the potential to do better than inflation and are more tax friendly than bonds.

As mentioned in the last paragraph, don't expect stocks to keep up with inflation over the next 5 years. For that, I would use cash and short term fixed income. HISAs and short term GICs are my plan.
RRBs are safer than all the alternatives mentioned in this post. They are written contracts, backed by the Canadian government, to pay specific amounts on specific days, in the future, indexed to whatever the CPI will happen to be on those days.

Yes, taxes will have to be paid. But, taxes will also have to be paid on any interest received from alternatives such as cash, GICs, and short-term nominal bonds. As for stocks, they could outperform or underperform; we just don't know. There's no promise, on any common stock certificate, to pay specific amounts of money on specific future days, or to return some capital on any specific day in the future.

Good luck with your bets!
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Re: Clippings 2017

Post by Park » 26 Dec 2017 19:26

Quote from James Montier:

"one of the great institutional constraints that we suffer is, of course, that everybody obsesses about short-term performance. If you could buy a set of stocks today and bury them for five years, you'd be laughing. But the trouble is there's very few institutions who can behave in that fashion."

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Re: Clippings 2017

Post by longinvest » 26 Dec 2017 19:30

Park wrote:
26 Dec 2017 19:26
Quote from James Montier:

"one of the great institutional constraints that we suffer is, of course, that everybody obsesses about short-term performance. If you could buy a set of stocks today and bury them for five years, you'd be laughing. But the trouble is there's very few institutions who can behave in that fashion."
Where's the promise, on my stock certificates, that their 5-year total return will always be higher than other investments? Maybe I should ask a Japanese domestic stock investor...

By the way, the appeal to authority (James Montier, in this case) doesn't make the argument true. See: https://en.wikipedia.org/wiki/Argument_from_authority
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Re: Clippings 2017

Post by Park » 26 Dec 2017 19:44

James Montier:

'the primary determinant of your long-term returns is the valuation environment that you purchase in... so buying when markets are expensive is a bad idea, buy in markets when they are cheap, provided you are patient, is actually a long-term good idea."

For someone with a 10-20 year time horizon, I would agree with the above. Risk is buying overpriced investment products.

About Longinvest's comments regarding the certainty that stocks" 5 year total returns will always be higher than other investments, there is no certainty. But why would company owners borrow money if they didn't think they were going to make money on what they borrowed? That can happen for a short time. But if it happens long term, company owners won't borrow money and borrower returns will decline.

As for good luck with my bets, my bet is on capitalism. If I lose that bet over the long term, I think written contracts from the Canadian government may be more risky than presently perceived.

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Re: Clippings 2017

Post by ghariton » 26 Dec 2017 20:01

Park wrote:
26 Dec 2017 18:43
But in Canada, there aren't many inflation indexed bonds, and those that exist are long duration.
The issue isn't so much that RRBs are long duration. After all, the 2021 matures in less than four years. Rather, the problem is that maturities are spaced five years apart. In withdrawal stage, that means using something else, like a nominal bond, for an average of some two and a half years. That's an inflation risk I can live with.
Liquidity is an issue.
RRBs are less liquid than the corresponding nominal government bonds. But I have found that brokers have a very good inventory and will quote a price quite readily. It's true that the bid-ask spread is bigger than I like, reaching up to 3 per cent. But since I hold RRBs to maturity -- they are a way of accumulating a nest egg, not of funding day-to-day living expenses -- then I only have to pay half the spread, or 1.5 per cent. Amortized over ten years, say, that's fifteen basis points. Not too bad.
In a tax advantaged account, you'll hedge out the inflation risk. But in a taxable account, you've lost the inflation hedge.
RRBs are an effective inflation hedge in both types of account. But I wouldn't hold them in a non-registered account because income from inflation indexing is taxable as accrued, and that means that I would be prepaying some taxes. That and the administrative hassle of keeping the requisite records.
A 2.5% real return on an RRB is good. But right now, RRBs have 0.56% real return. It's a high price to pay for an inflation hedge.
Interest rates are low all around. But last week's inflation report shows a year-over-year increase of 2.1 per cent. If that is a good forecast of inflation over the next few years -- and some here have argued that it is, because it is very close to the Bank of Canada's target -- then that RRB has a nominal return of 2.66 per cent. The nominal return on a comparable nominal bond is 2.25 per cent. So I'm expecting the RRB to do better -- and I get "free" insurance against unexpected inflation, thrown in as a bonus.
Stocks are claims on real assets, and other than the short term, tend to keep up with inflation. They also have the potential to do better than inflation and are more tax friendly than bonds.
Indeed. But they are also more risky than bonds. That's why few of us hold 100 per cent equity portfolios. For me, the point of holding bonds is not to increase returns, but rather to reduce risk.
As mentioned in the last paragraph, don't expect stocks to keep up with inflation over the next 5 years. For that, I would use cash and short term fixed income. HISAs and short term GICs are my plan.
During long periods of time after World War II, Canadian short term treasuries yielded negative real returns. If unanticipated inflation were to materialize, I would expect that to happen again. Yes, liquidity can serve as partial protection against inflation. But why not purchase inflation protection directly, if that is what you want?

George
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Re: Clippings 2017

Post by ghariton » 26 Dec 2017 20:13

Park wrote:
26 Dec 2017 19:44
But why would company owners borrow money if they didn't think they were going to make money on what they borrowed? That can happen for a short time.
Alas, for publicly traded companies with no controlling block, it is not the owners' decision. Rather, it is a management decision. And that can be a problem. The thinking can go something like this.

Hmmm. The company isn't doing so well. Let's borrow a pile of money and invest in this project that Charles Ponzi has proposed to us. If it succeeds, the company will be very profitable and we will get big bonuses. If the project fails, well, we might lose our jobs, but the way things are going, we might lose them anyway. As for the loss, it will be out of the equity owners' pockets, not ours.

Commonly known as an agency problem, this time between management and shareholders. Take big risks. If they work out, management wins. If they don't work out, shareholders lose. Other agency problems set bondholders against equity owners, with similar distortions.

George
The plural of anecdote is NOT data.

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