Airport Blogging

So I landed from Hilo into Honolulu and have quite a while till my flight, scored an exit row seat to Phoenix though…woo hoo.

A question came in that is similar to other questions that I wanted to address. The reader wants to know what eight ETFs I would use to make a complete portfolio and how would I weight the eight.

Asking and answering this type of question is a bad idea for both parties on many levels. Why he wanted eight? No clue, which speaks to the problematic nature of this question.

The willingness to take free input from a total stranger about what to invest in seems like a horrible idea to me. The person asking may not really know too much about what I try to do, I certainly know nothing about this person.

This is a dangerous recipe. It is like taking a the only portfolio you will ever need published in Money Magazine and then implementing it. Is it for a 30 year old or a 70 year old. Gun slinger or widow? Do I, the advise giver, really know what I am doing ( my two hecklers will tell you no), is the person receiving the free advise capable of understanding the portfolio that they are about to implement on their own?

Do not take free, generic advice about investing. I write this blog to share thought process. I cringe when someone comments about having followed my “advice” regardless of the outcome because I have no idea if they truly grasped the concept.

Staying in touch with the currency market is important to how I manage money. I know what I know and there are plenty of folks who know much much more than me just as I know more than some other people.

My understanding of the market allows me to feel comfortable with holding long-ish term positions. I am not comfortable trying to make a few pips during breakfast. I read some commentary from people who do trade for pips because I can learn but that is not my trade. apply this line of thinking to anything I write about that you are not comfortable doing.

22 Comments

  1. Thanks for the thoughtful posts. I have linked to your blog from my site Top10Traders.com – it is a site that ranks the best traders by portfolio return.

    A new ETF, symbol IIV, that shorts China, is coming out in November. Do you think the top in Chinese stocks is near?

    Barry Robbins

    Reply
  2. Barry.
    Who’s to say what the top is? But there might be a bubble that is about to burst. Or at least a correction coming soon. But how soon nobody knows.

    Here are some takes on China:

    http://tinyurl.com/2w7s4w

    http://tinyurl.com/2oyp9c

    Reply
  3. BTW Roger…
    I was wondering what is going to happen when you get back to the states and find out it’s Thursday.
    Are to going to skip the Wednesday date and go right to Thursday or what? 😉

    Jack

    Reply
  4. Check out PGJ. I bought it a few months ago and I’ve been really happy. While China’s double digit quarterly growth may be coming to an end I think we have a while before you can stop finding amazing deals internationally. 2008 Olympics CHINA!!!!

    Reply
  5. Here is my thinking about portfolio construction. Start with “one” core position which can be a global balanced fund or etf. If you are happy with the results(better 1,3 and 5 year returns than the S&P 500 at about 60% the volatility) then one fund is enough. If you want extra exposure to emerging markets, China then add incremental 5-10% of those to spike the return(and increased volatility). At a certain point your portfolio volatility may begin to cause you to lose sleep. Congradulations! you have reached your personal threshold of risk tolerance and that is the portfolio for you.

    Reply
  6. Yesterday, Monday October 29, “gjg49” wrote…
    “a few weeks ago someone commented on an alternative long/short fund run by someone associated with the u of wisconsin–similar to hussman but with a seemingly monotonically increasing unit value through the summer downdraft. can anyone please give me the “ticker” for that fund?? thanks in advance to whoever does so.
    –gjg49”

    Well, that was me, and the open ended type fund is called “Nakoma Absolute Return” with the ticker-NARFX. Nakoma is different from the Hussman fund, since the beginning of April, Nakoma is up 10%, while Hussman’s fund is up 2%.

    For more on the Nakoma fund, read David Snowball’s comments, here:

    http://www.fundalarm.com/nakom01.htm

    By the way, the fund has reasonable expenses for a portfolio that shorts, and has only 39 million in assets. This means their managers aren’t pigs and the fund is nimble.

    Nakoma has been around since December 15 of last year, check out it’s Yahoo chart, here:

    http://tinyurl.com/3dyxae

    Note how smooth Nakoma is, compared to the poorer performing Hussman Fund.

    Reply
  7. I noticed that NARFX is 0% in both energy and utilities. And Taser Int. is their 2nd highest holding. The funds highest weighing is in healthcare at 26.38%.

    Their expense ratio is a high 2.39%. Hussman’s is 1.11%.

    http://tinyurl.com/yudpoc

    It also looks like they have a high turnover since they are currently 60% in cash.

    http://finance.google.com/finance?q=narfx

    I personally wouldn’t put more than 5-10% of my portfolio in such a fund. (Actually 0% because of expenses and turnover, but that’s my call)

    Reply
  8. Speaking of Hussman, Nakoma and TFS market neutral funds, I begin to wonder if size of a fund affects the performance. Hussman had a sparkling record until it became bloated. TFS was “the” fund in market neutral catagory for the first tow years. I own NARFX but I need to watch out if the low volatility persists in the future. Like stocks, actively managed funds need constant watching. I guess nothing stays the same.

    Reply
  9. anon 8:49 and gjg49

    Try this, run the chart again and add COAGX to it.

    Its a long/short fund whose manager was (according to M’star) too early in shorting Builders and Martgage Cos. but is now reaping the benefits. (Rocket Science -anyone?)

    Long term it lags the S&P by 1% with 60% of the volatility.

    If you are into Pension fund type allocation it might be a good asset class diversifier.

    Full Disclosure: I own some, but I am poor at picking stocks and funds, and even worse at timing trades.

    OG

    Reply
  10. Nicoma Absolute Return’s position in Taster Inc is 3.32% of the fund’s holding as of 31st of August. Not a big position. And they are up 106% this year (thru August) on that stock. Their expense ratio is not too high at 2.39%, considering this includes their shorting expenses, and considering their very small size.

    Reply
  11. interesting… i am going to be up in Madison in couple of weeks to close on a real-estate deal so i will stop by their offices.

    Just a note that Hussman is not a long-short market neutral fund. It is currently long but hedged because he (Hussman) believes that the market environment is not favorable. The reason for the hedge is not to gain absolute return but to “smooth the ride”, much like Roger owning SDS. Hussman simply is using puts and futures instead.

    It is not a valid comparison against the other funds mentioned in the comments.
    The reason Hussman did well initially was that he was bearish in a bear market. The reason he is currently lagging is that he is bearish in a bull market.

    Go Packers!!

    Reply
  12. As I understand, when HSGFX is 100% hedged, its performance reflects the differences between his stock selection and the broad benchmarks he used for hedging(S&P 500 and Russell 2000). I would say his recent underformance is due mainly to his stock selection, to a lesser degree to his hedging. I have notice many value funds(HSGFX included) are behind their growth counterparts. Oakmark select is in the same book being consisting mostly with value stocks.

    Reply
  13. Anon 10:06.
    I’m not as impressed as you that Taser is up so much this year. My point was that for such a top holding the stock was a gamble in a mutual fund. What’s next, 4% in SIRI hoping for the merger with XM?

    Most mutual fund managers would have allocated less than 1% in such a stock. What’s going to happen to the fund when their next big gamble turns us craps? Look at any mutual fund prospectus. A 3.32% holding in any stock is high. And the P/E and P/B is about twice as high as SPY.

    And I don’t see why you defend such a high expense based on the size of the fund. NARFX is up 12.35%. SPY is up 9.14% YTD with a 1.88 yield. NARFX has no dividend and the expenses are over 2% more than that of SPY which only tracks the benchmark S&P 500. That puts NARFX at about a 4% dog beginning every year compared to a simple ETF like SPY. Good luck with it because you will need it every year.

    My point being that NARFX has barely kept up with the S&P 500 what with the TASER gamble doing well. And I wonder if their performance factors in their exorbitant expenses? Not to mention the tax liability of all that trading that has them in 60% cash.

    Jack S

    Reply
  14. I forgot to include this chart that shows that staring out a 4% dog to either the DOW or S&P 500 is not a good idea.

    http://tinyurl.com/2wrxcx

    You would wind up 5% under the performance of the DOW and 2% under the S&P 500 in less than a year if this year is what you want to go on for a comparison. Not counting the high trade tax burden of NARFX.

    I will say that NARFX did seem to smooth out the ride. But it really lagged the market when it was doing well. But of course it beat the pants off of HSGFX.

    http://tinyurl.com/2omxqv

    I don’t see how the beta is going to be low for NARFX when the dust clears though what with it’s high P/E & P/B. Maybe I’m wrong here.

    Maybe Sami can ask them that question when he visits their office. And while he’s at it he can ask them what their next big gamble stock is going to be.

    Reply
  15. Top countries in the global competitiveness index:

    http://tinyurl.com/3c47fx

    I see she likes Denmark, Sweden and Finland. I wonder what Roger thinks of her analysis?

    Reply
  16. i will try to keep that in mind. On a personal side note, i took MBA classes at UW-Madison while i was doing my Ph.D. there and the folks running the graduate business school (the fund’s adviser hailing from there) are pretty darn smart.

    I am not going to defend the fund as I never heard of them before but I would say that the TASR position is not a big issue. If it started as a 1.5% position and it gained 106% then it would’ve ended up being around 3.2% of the portfolio.
    That’s completely different than putting 3.2% of your portfolio in a gamble stock that had just run up 100%.

    As for Beta, my guess is that the Beta for the fund will be high, but adding a small position to a diversified portfolio may reduce the volatility of your overall portfolio.
    I am invested in a small Hedge Fund, that also happens to be out of Wisconsin, that is concentrated and has very high month-to-month volatility. But it is only 2% of my portfolio and was up big in august while i got killed on my small caps holdings.

    Reply
  17. From a purely black box viewpoint, NARFX has many unique features: 1. The drop in August was only 0.3% vs 9.3% of S&P 500. 2. It appears to have little correlation to the general market. 3. Its positions are mainly micro caps and it does contain Russell 2000 puts for hedging. I guess what intrigues me is how does it achieve such low volatility and it did not blow up as many other market neutral funds did in August(TFSMX, SWHEX, for examples). BTW, the expense ratio does not matter as the return is reported after expenses.

    Reply
  18. Rog baby,

    you fumbled an easy question…

    you get an F for today…

    8 ETFs could very easily construct a well diversified portfolio of the major asset classes….

    Reply
  19. Heckler baby. (A direct reference to your maturity level in this case)

    Roger didn’t even post a blog page today so how did he get “an F for today” from you? DUH!!

    Anon 4:40.
    I do agree with you that the almost straight line in NARFX’s chart is intriguing. And if you don’t mind the added expenses it could be a fund to add to portfolio or for a defensive position.

    Hussman’s funds charge a 1% redemption fee for selling out before 6 months. Does NARFX have anything like that?
    Jack S.

    Reply
  20. Regarding the lazy portfolio ideas, I have concluded that there are many ways the cat can be skinned.
    It is rather like football strategies. A coach can
    win with a great offense or a great defense or a good offense and defense, or just might find himself in
    a poor division and look good by comparison.

    At this point, when I can pick a few Brett Favre or Tom Brady level fund managers, I would be silly not
    to take advantage of their records and experience.
    There are eight or ten managers who are in another stratosphere (CGMFX,FAIRX,BRKA, etc.) so
    why not let a mix of five or six of those no load
    winners manage 80-90% of my portfolio, and then
    “play” with the rest knowing that I have at least an
    80% statistical odds of underperforming the market.

    The “play” money” is where I can continue to learn
    how to be a better trader (most say the learning curve is at least five years) without losing sleep at night. An example of this is when I watched CMI
    go down 14% several days ago on what I thought was a good earnings report. I am now up 10% in less than a week. That was my best short trade in a while, but those superstar managers do it every day. Just my thoughts, as I realize that I am at a pretty significant disadvantage as a “practice squad” portfolio manager. Glad you enjoyed Hawaii,Rog.
    Scoot

    Reply
  21. I’ve just glanced thru the Nakoma Absolute Return (NARFX) prospectus, it has no redemption or trading fee. This is somewhat surprising, since so many no load funds have these obnoxious fees.

    But then it does make sense, why charge a trading fee on a fund that’s trying to be a low volatility vehicle? Who would try to trade such a fund?

    Reply
  22. Correction on black box analysis of NARFX. I was wrong on its portfolio makup and the use of hedging. These refer to Pinnacle Value (PVFIX), another low volatility fund. I will be thrilled if my portfolio gives such low volatility and with comparable returns as NARFX and PVFIX.

    Reply

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Airport Blogging

So I landed from Hilo into Honolulu and have quite a while till my flight, scored an exit row seat to Phoenix though…woo hoo.

A question came in that is similar to other questions that I wanted to address. The reader wants to know what eight ETFs I would use to make a complete portfolio and how would I weight the eight.

Asking and answering this type of question is a bad idea for both parties on many levels. Why he wanted eight? No clue, which speaks to the problematic nature of this question.

The willingness to take free input from a total stranger about what to invest in seems like a horrible idea to me. The person asking may not really know too much about what I try to do, I certainly know nothing about this person.

This is a dangerous recipe. It is like taking a the only portfolio you will ever need published in Money Magazine and then implementing it. Is it for a 30 year old or a 70 year old. Gun slinger or widow? Do I, the advise giver, really know what I am doing ( my two hecklers will tell you no), is the person receiving the free advise capable of understanding the portfolio that they are about to implement on their own?

Do not take free, generic advice about investing. I write this blog to share thought process. I cringe when someone comments about having followed my “advice” regardless of the outcome because I have no idea if they truly grasped the concept.

Staying in touch with the currency market is important to how I manage money. I know what I know and there are plenty of folks who know much much more than me just as I know more than some other people.

My understanding of the market allows me to feel comfortable with holding long-ish term positions. I am not comfortable trying to make a few pips during breakfast. I read some commentary from people who do trade for pips because I can learn but that is not my trade. apply this line of thinking to anything I write about that you are not comfortable doing.

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