The Big Picture For The Week Of September 30, 2007


  1. I enjoy your quarterly update and would appreciate if you continued it next year.

  2. Roger or anyone, It’s not my cup of tea to buy puts, use leverage,…etc. whatever one does to “buy insurance” for a volatile mkt. I always expect to get in trouble doing something I don’t understand. So far, and I have not had a larger than 2% double short position. The one time I did it I covered for a loss and just said, “oh well that ‘s the cost of insurance.” Mostly, my insurance has been to raise cash…generally up to 30% but I have gone much higher on rare occasions. I’m not content with my past practices of using shorts because: good chance of loosing money since the mkt goes up more than down; and should it go down it would take more than even a 4% position to make me feel better. Cash remains the defense of choice….BUT I think that I would gladly pay a mutual mangr up to 2%per year to have a long(cash or close to it)-short fund where there is a good reason to believe that a 20% would help me break even if I was to keep the 80% always invested. My take on the long-short mutual funds is that it’s a gamble that they will have the right shorts chosen when the mkt goes south and that they don’t depreciate the position when the market is rallying. Any suggestions?

    Roger…my computer sound system is temporarily I have not heard your podcast. Great blog…now one of two places I regularly go to for updates. Curious about your ytd return.Since the .spx was about 8% and the amex was about 17% I would guess that you were close to 11% considering also your cash/short positions. Ultimately, it’s the smoothe ride and good sleeping for which I would imagine your clients judge the overall outcome. Perhaps you have a verbal characterization of this.

  3. First things first, no one should do what they don’t know, are not comfortable with or just don’t believe in.

    The underlying context is that the market still averages 10%-ish per year including bear markets. An investor who buys an index fund and just hold it for a long time is going to capture the market, save for the fee.

    All of this subject relates to trying to smooth things out when things get bumpy. You may not need to do this at all, no idea.

    Be careful with the 130/30 OEFs, a lot of them got smacked this summer just as much, if not more than the SPX.

    You won’t like my “suggestion” but I think you need to study some of the simpler products out there to the extent you care to learn. Its ok if you don’t buy any insurance.

  4. I love your blogs, really. Am wondering if your videos might be enhanced by a wardrobe upgrade. Call me superficial but a money manager in T-shirts doesn’t quite fit the image. Please don’t take offense, clothing style should not matter, but it does.

    Rick–I dont have an account but wanted to give a name.

  5. Keep the T shirts !!!

  6. Models this week:

    Timing Model = 4.5%
    100% long

    Global Allocation of long positions

    MSCI EAFE Index 30%
    MCCI Emerging Markets Index 30%
    Russell 3000 Index – U.S. 40%

    U.S Sector ranks

    U.S. Oil & Gas 5.5
    Composite Internet 4.5
    U.S. Oil Equipment, Services & Distribution 4.5
    U.S. Semiconductor 3.5
    U.S. Telecommunications 3.0
    Precious Metals 3.0
    U.S. Basic Materials 3.0
    U.S. Technology 3.0

    Top Intl. ETFs

    FTSE/Xinhua China 25 Index Fund 3
    MSCI South Korea Index Fund 3
    MSCI Brazil Index Fund 3
    MSCI Emerging Markets Index Fund 3
    MSCI Hong Kong Index Fund 3
    MSCI Pacific ex-Japan Index Fund 3
    S&P Latin America 40 Index Fund 3
    MSCI Australia Index Fund 3
    MSCI Singapore Index Fund 3

    Strategy 3

    EAFE 14.3%
    Emerging Markets 14.3%
    Money Markets 14.3%
    Industrial Materials 14.3%
    Agriculture 14.3%
    Precious Metals Precious Metals 14.3%
    U.S. Large Cap 14.3%
    U.S. Small Cap 0.0%
    U.S. Long Bonds 0.0%
    U.S. REITs 0.0%

  7. instead of buying insurance you can invest in non/low correlated assets.
    I am not in the “double short S&P” camp as in my mind inverse-correlation is not the same as low correlation! Especially when you benchmark is the S&P.

    Instead you can spread your allocation among things like RYMFX, EDD, DBV, DBA, PFP in addition to your traditional equity allocation.
    Most (or all) of those names have been mentioned on this blog before.
    They all should give you returns comparable to the market (or better) over the long run.
    Most importantly they shouldn’t go down as much as the market during a bear market.
    You may want to read up on Endowment style investing. The dude at has some good posts on the subject.

  8. I haven’t been able to calculate Q3 yet but I’m up 19% ytd (that’s a combination of my TAA and Buy & Hold portfolios). My record-keeping has slipped a bit lately.

    I don’t know why I even look at this stuff because I feel periods of less than 10 years are almost meaningless.

    On a related note, my wife’s friend stopped by yesterday asking for advice on how to allocate the settlement of a life insurance policy she just received from her ex-husband’s recent death (a deadbeat jerk btw). After covering the basics (paying off her debts, establishing a robust emergency account, estimating a monthly budget, and putting 50% down on a new but modest condo), she’ll have a good sum (relative to her meager income) left over to start a retirement account.

    I tried to gauge her risk tolerance and asked if she had any interest in investing/following the markets, checking her returns, etc. and she replied “no”. I told her “good, you’ll be better off than most people if you stay disinterested”.

    I gave her a a quick investing 101 but I could tell she just wanted to be told what to do – I suggested a diversified Merriman-like portfolio (30% U.S equities, 30% Intl equities, 10% REITs, 30% bonds) and gradually shifting more to fixed income and high yield securities as the years pass. If she can put aside 15% of her gross income yearly until retirement, re-balancing her portfolio every year or two, and never check quarterly statements, she’ll be in good shape imo.

  9. I’m glad to see more references recently to endowment-style portfolio construction. I, too, have been reading all the relevant articles and am starting to conclude that it’s just another fancy name for asset allocation.

    As Roger preaches, uncorrelated assets (commodities, real estate, int’l equities) can reduce volatility and contribute to outperformance in the long run. Ditto for bonds, timing, and rebalancing.

    We’re not going to have access to the hedge fund deals that have been driving their outperformance lately, though some ETFs will surely come to market just when it’s too late.

    I like the simplicity of endowment style portfolios (sorry Roger, concentrated positions!) and sure can’t argue with their results, but I just don’t see anything really unusual here.

    I’d love to hear what others think.


  10. tomk,
    I posted this earlier and will try to run this by again re mebane’s endowment style portfolio with simple timing. Is your impression that his method requires going to cash for that particular asset class if it crosses below the 200dma? And, if so, your strategy three strikes me as a very clever variant where the cash gets put to work in assets more healthy, and then re-distributed back when the patient/asset recovers. Mebane may have a great .pdf if he ran a back test on your model. I’m one reader who would really like to see the results. Congrats on your ytd performance/jasper

  11. Jasper–I’m not tomk(!) but I believe that your understanding of Mebane’s timing model is correct. Personally, I have a difficult time reinvesting back into the same asset that I’ve sold. My cash usually migrates to another investment, then another, before the original investment recrosses the 200 dma. Just my nature, I guess.

  12. technically speaking Endowment style does not allow for market timing.
    An endowment is open-ended and thus manages risk and not return.

    The main difference between traditional “asset allocation” and “endowment style” is the mix of assets.
    For example, a traditional asset allocation would be 80/20 stocks/bonds or throws large cap vs. small cap into the mix.
    A creative allocation may throw gold/silver in there.
    An Endowment would allocate to things such as Lumber, Foreign debt denominated in local currency, Private equity, Hedge Funds, Managed Futures, etc… The actual equity/bond portion of the mix would be much lower than a traditional asset allocation model.

    Contrary to many of the anonymous comments found on this blog Mebane does show that intelligent timing can enhance your returns and reduce your risks.

    However i disagree with Mebane’s assessment that what he does is “endowment style”.

    What he does is a variation of what is discussed in the “Hedge Fund Edge” book i mentioned before. The book discusses allocation based on the Austrian Liquidity Cycle and uses market timing to reduce risk.
    The basic idea is to find the economies that are setup for the most growth due to liquidity expansion and then use market timing to capture the bulk of the ensuing trend.
    by the way Mebane’s paper is a must read for anybody interested in reducing risk via market timing.

  13. Sami is right – endowments don’t typically use mechanical timng systems. Mebane’s white paper was simply a study of a popular timing system using asset classes most endowments use. I don’t believe he was implying endowments use timing systems like this.

  14. Mebane has posted the latest monthly timing signals and market returns by asset class on his blog at World Beta.

  15. Sami.
    I thought that “intelligent (market) timing” was an oxymoron.

    Shouldn’t it be called educated guessing at best instead since only God knows the future?

  16. you thought wrong.


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The Big Picture For The Week Of September 30, 2007

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