Montier On Portfolio Construction

James Montier, via Barry Ritholtz, knocked it out of the park with a lengthy commentary that explains why benchmarking is the wrong way go, picks apart various strategies including Yale’s, offers some interesting numbers and gives an opinion about how to think about portfolio construction. There are some things he mentions that I agree with, and implement, and other things I don’t agree with. The first idea I wanted to comment on was Montier’s belief that benchmarking is a bad way to navigate through with a portfolio. He feels that benchmarking results in “mis-measurement of risk and indifference to valuation.” He goes on in great detail why he feels this way and backs it up with some numbers and some logic. Benchmarking, like anything, has pluses and minuses. The building block here, IMO, is that equities have averaged 9 or 10% in annual returns over long periods of time. A normal and suitable allocation and a healthy savings rate gives people a decent shot of having enough money. This building block is being question after a very long round trip to nowhere for the US equity market and quite a few other major markets. Of course while we were on a long round trip to nowhere there were many other foreign markets that had very good decades. While I have been consistent in doubting whether the US will have “normal” returns I have been just as consistent in saying there will be plenty of countries that will have “normal” returns and there are ETFs to cover many of them. A big theme throughout the commentary is that risk and...

Montier On Portfolio Construction

James Montier, via Barry Ritholtz, knocked it out of the park with a lengthy commentary that explains why benchmarking is the wrong way go, picks apart various strategies including Yale’s, offers some interesting numbers and gives an opinion about how to think about portfolio construction. There are some things he mentions that I agree with, and implement, and other things I don’t agree with. The first idea I wanted to comment on was Montier’s belief that benchmarking is a bad way to navigate through with a portfolio. He feels that benchmarking results in “mis-measurement of risk and indifference to valuation.” He goes on in great detail why he feels this way and backs it up with some numbers and some logic. Benchmarking, like anything, has pluses and minuses. The building block here, IMO, is that equities have averaged 9 or 10% in annual returns over long periods of time. A normal and suitable allocation and a healthy savings rate gives people a decent shot of having enough money. This building block is being question after a very long round trip to nowhere for the US equity market and quite a few other major markets. Of course while we were on a long round trip to nowhere there were many other foreign markets that had very good decades. While I have been consistent in doubting whether the US will have “normal” returns I have been just as consistent in saying there will be plenty of countries that will have “normal” returns and there are ETFs to cover many of them. A big theme throughout the commentary is that risk and...

Sunday Morning Coffee

Ray Dalio was the feature interview in Barron’s this week. Below I highlight a few especially useful points made. The boundaries of the old highs and the boundaries of the lows in the stock market and in the economy will be with us for a long time. We are entering a period of time in which relations will be more challenging for the U.S. and China. It isn’t healthy that the two biggest countries in the world have a very big debtor-creditor relationship. There is going to be a tendency by both countries to blame each other and be antagonistic. Our portfolio is mostly skewed to Treasury bonds, gold and emerging-market currencies, especially Asian currencies. We also hold commodity assets that are limited in supply and that high-growth emerging countries need. I want to minimize my exposure to the major developed countries’ currencies — the U.S. dollar, the euro, the British pound and the...

Sunday Morning Coffee

Ray Dalio was the feature interview in Barron’s this week. Below I highlight a few especially useful points made. The boundaries of the old highs and the boundaries of the lows in the stock market and in the economy will be with us for a long time. We are entering a period of time in which relations will be more challenging for the U.S. and China. It isn’t healthy that the two biggest countries in the world have a very big debtor-creditor relationship. There is going to be a tendency by both countries to blame each other and be antagonistic. Our portfolio is mostly skewed to Treasury bonds, gold and emerging-market currencies, especially Asian currencies. We also hold commodity assets that are limited in supply and that high-growth emerging countries need. I want to minimize my exposure to the major developed countries’ currencies — the U.S. dollar, the euro, the British pound and the...

The Big Picture for the Week of May 30, 2010

It appears as though things are getting a little dicier in the market. Emotion is clearly elevated as indicated by the now, but probably only temporary, ability of the market to have huge swings in a given day or big moves in one just one direction for a day. My thought along these lines has been that these exaggerated moves are signs of a fragile market. Fragile does not have to mean that it will implode or even go down in a meaningful way from here, maybe a run down to the low we’ve hit twice recently will do it but of course we don’t know at this point. For now the 200 DMA still looks important. The huge, I tweeted it was a panic, rally on Thursday stopped about a point under the 200 DMA, one point. Friday was obviously a down day and the S&P 500 is currently about 15 or 16 points below the indicator. From having one eye on CNBC it seems like most of the TV guests view this as a correction in a bull market while more people in print view the rally from a year ago March as a bear market rally or what I like to call a feel good rally. Throughout I have been saying that the worst financial crisis in 80 years won’t wrap up in 18 months and that at some point there would be a another decline that would scare the hell out of people. Whether the low for the current move is in or not, an emotion fueled, fast run back to 1200 will not be...