Not Safe Havens

Nicole Elliott from Mizuho made an interesting comment on CNBC Europe yesterday: Anything that can go down 10% in one week cannot be considered a safe haven…of course I am talking about the Swiss franc and gold. Both the franc and gold each had big drops (at different times) in August. Not putting too much in these things has been a major point here over the years and these week-long dips serve as microcosms for what can happen. Gold might be working its way back up to $1900, it certainly has bounced and for now the franc is still headed lower but at a flatter trajectory. The problem with gold in this context is that it is very volatile. Some advise putting 20% in gold which I have never understood because of the potential volatility. I think gold works because it usually has a low correlation to equities. From 1980 to about 2001 it mostly went down as equities went up (low correlation) and since 2001 it has gone up a lot as equities have drifted lower (again low correlation). Two big issues with the Swiss franc is that it is a very small currency and the run up from early this summer was evident of a buying panic. The currency is small enough that the SNB has tried several times to intervene in the currency market. It did not succeed but it obviously thought it could. Another issue, more of threat that might be on the back burner for now is that the banks are much bigger than the country in a similar vein as Iceland. A recurring...

Not Safe Havens

Nicole Elliott from Mizuho made an interesting comment on CNBC Europe yesterday: Anything that can go down 10% in one week cannot be considered a safe haven…of course I am talking about the Swiss franc and gold. Both the franc and gold each had big drops (at different times) in August. Not putting too much in these things has been a major point here over the years and these week-long dips serve as microcosms for what can happen. Gold might be working its way back up to $1900, it certainly has bounced and for now the franc is still headed lower but at a flatter trajectory. The problem with gold in this context is that it is very volatile. Some advise putting 20% in gold which I have never understood because of the potential volatility. I think gold works because it usually has a low correlation to equities. From 1980 to about 2001 it mostly went down as equities went up (low correlation) and since 2001 it has gone up a lot as equities have drifted lower (again low correlation). Two big issues with the Swiss franc is that it is a very small currency and the run up from early this summer was evident of a buying panic. The currency is small enough that the SNB has tried several times to intervene in the currency market. It did not succeed but it obviously thought it could. Another issue, more of threat that might be on the back burner for now is that the banks are much bigger than the country in a similar vein as Iceland. A recurring...

The WSJ Asks If Stockpicking Is Dead

The Heard on the Street column asked if stock picking is dead noting the proliferation of ETFs among other things which have served to cause higher correlations. Obviously the higher the correlation the harder it is to add value from stock picking. A little more specifically, I would tie in the notion of selecting sectors, themes and countries. Eddy Elfenbein posted a table of sector returns which underscores the point of avoidance that I have been making for a long time. I forget who said this but there is a nugget about major league baseball that might relate here that goes something like in a 162 game season there are 60 games that a team is going to win no matter what, there are also 60 games that a team will lose no matter what, so what matters is the remaining 42 games, that is what makes or breaks a team’s season. The way I apply this to investing would be to realize that in a reasonably diversified portfolio that goes narrower than SPY/EFA/IWM is that some large portion of the portfolio will do well relative to your benchmark, some portion will do poorly but what will be most important is just handful of decisions that have a disproportionately large impact on the outcome of the portfolio. Look at the funds run by Bill Miller and Bruce Berkowitz. At some point they each made a big decision to go heavy in financials and the outcome on the funds has been disproportionately large in a bad way on their respective results. As a matter of opinion the results we have...

The WSJ Asks If Stockpicking Is Dead

The Heard on the Street column asked if stock picking is dead noting the proliferation of ETFs among other things which have served to cause higher correlations. Obviously the higher the correlation the harder it is to add value from stock picking. A little more specifically, I would tie in the notion of selecting sectors, themes and countries. Eddy Elfenbein posted a table of sector returns which underscores the point of avoidance that I have been making for a long time. I forget who said this but there is a nugget about major league baseball that might relate here that goes something like in a 162 game season there are 60 games that a team is going to win no matter what, there are also 60 games that a team will lose no matter what, so what matters is the remaining 42 games, that is what makes or breaks a team’s season. The way I apply this to investing would be to realize that in a reasonably diversified portfolio that goes narrower than SPY/EFA/IWM is that some large portion of the portfolio will do well relative to your benchmark, some portion will do poorly but what will be most important is just handful of decisions that have a disproportionately large impact on the outcome of the portfolio. Look at the funds run by Bill Miller and Bruce Berkowitz. At some point they each made a big decision to go heavy in financials and the outcome on the funds has been disproportionately large in a bad way on their respective results. As a matter of opinion the results we have...

Big Ideas

My post from the other day about prospects for US stock being grim drew a lot of comments on the Seeking Alpha version of the post. I answered several questions including a couple from David Jackson. I thought I’d post the content here, I think the format will make sense; RN: First as far as the portfolio, when i first started writing in 2004 I was very public about have clients about 30% in foreign with the expectation that it would increase slowly to at least 50% by the start of the new (now this) decade and that is where we are. I expect to further increase the allocation to foreign as we move forward. To the person who says you can’t hide in foreign while the US is going down that is half right. During panics and otherwise fast declines yes foreign markets should be expected to go down too. However over a longer period of time, not true. In the last decade the SPX went down 24% on a price basis there were countless foreign markets that had normal returns for the decade or better than normal as the US dropped–they carried on without us. If your time horizon is a year then you probably should not own stocks but over a long period this has worked and I believe will continue to do so. Go to Bespoke’s website for numbers on how foreign markets did in the last decade. DJ: Which foreign markets are you allocating assets to? Are you looking at demographic factors in foreign markets as well? RN: David, our list of countries we...