What About Foreign, Bob?

Robert Arnott has an article up at IndexUniverse that explores whether the equity risk premium still exists and if so what should investors expect from it. This is important in terms of understanding the dynamics of a stocks/bonds/cash allocation and how to structure one that is suitable for yourself or for your clients. Arnott brings out some stats that show for 10, 20 and 30 years US equities have annualized out at 1.41%, 9.14% and 10.71% respectively. Over those same time frames bonds annualized out at 6.44%, 8.44% and 10.18% respectively. If you could into the wayback machine 30 years and knew you would make no active decisions then owning bonds probably would have made more sense, the idea being that if you can get close to equity-like returns without taking equity market risk then you would avoid equities. In his conclusion Arnott says “we aren’t saying that we should expect bonds to beat stocks over the next 10 or 20 years. Rather, this brief history lesson illuminates that the much-vaunted 4–5% risk premium for stocks is unreliable and a dangerous assumption on which to make our future plans.” Maybe I missed this elsewhere in the post but the conclusion seems very incomplete. While we do not know the future we do know the past. In the last 30 years long term yields fell from 15% down to almost 2% and now are back over 3%. This is where that 10.18% comes from. This is not repeatable unless yields first go back up to 15%. Maybe that will happen, though I doubt it, but if it yields did go...

What About Foreign, Bob?

Robert Arnott has an article up at IndexUniverse that explores whether the equity risk premium still exists and if so what should investors expect from it. This is important in terms of understanding the dynamics of a stocks/bonds/cash allocation and how to structure one that is suitable for yourself or for your clients. Arnott brings out some stats that show for 10, 20 and 30 years US equities have annualized out at 1.41%, 9.14% and 10.71% respectively. Over those same time frames bonds annualized out at 6.44%, 8.44% and 10.18% respectively. If you could into the wayback machine 30 years and knew you would make no active decisions then owning bonds probably would have made more sense, the idea being that if you can get close to equity-like returns without taking equity market risk then you would avoid equities. In his conclusion Arnott says “we aren’t saying that we should expect bonds to beat stocks over the next 10 or 20 years. Rather, this brief history lesson illuminates that the much-vaunted 4–5% risk premium for stocks is unreliable and a dangerous assumption on which to make our future plans.” Maybe I missed this elsewhere in the post but the conclusion seems very incomplete. While we do not know the future we do know the past. In the last 30 years long term yields fell from 15% down to almost 2% and now are back over 3%. This is where that 10.18% comes from. This is not repeatable unless yields first go back up to 15%. Maybe that will happen, though I doubt it, but if it yields did go...

Confirmation Bias, Again

Jeff Saut quoted a couple of investment luminaries this week including one I know personally. From Ken Fisher in 1989 was; Here’s the paradox: the odds are overwhelming I will end up richer by aiming for a good return rather than a brilliant return – and sleep better en route. And from Benjamin Graham; The essence of investment management is the management of RISKS, not the management of RETURNS. Well-managed portfolios start with this precept. From John Serapere I would add; 75-50 I don’t remember hearing that when I worked at Fisher (for a few months in 2002) but long time readers will know that the above, even if worded differently, are cornerstones to my approach. The 75-50 refers to a portfolio strategy that targets 75% of the upside of the market and only 50% of the downside (do the math, it works). In terms of people who read my site or others like it, many of you are do-it-yourselfers but may not necessarily be expert stock pickers (and you don’t have to be). The idea of going along for the ride during the up phases of the cycle and then being devoted to learning and understanding what causes large declines and seeking to take defensive action fairly early in the decline to avoid the full brunt of down a lot as I call it is not only valid, but I would say easier and places even less emphasis on stock picking which seems to be something many prefer not to do. Another aspect to avoiding the full brunt of down a lot is it places less importance in...

Confirmation Bias, Again

Jeff Saut quoted a couple of investment luminaries this week including one I know personally. From Ken Fisher in 1989 was; Here’s the paradox: the odds are overwhelming I will end up richer by aiming for a good return rather than a brilliant return – and sleep better en route. And from Benjamin Graham; The essence of investment management is the management of RISKS, not the management of RETURNS. Well-managed portfolios start with this precept. From John Serapere I would add; 75-50 I don’t remember hearing that when I worked at Fisher (for a few months in 2002) but long time readers will know that the above, even if worded differently, are cornerstones to my approach. The 75-50 refers to a portfolio strategy that targets 75% of the upside of the market and only 50% of the downside (do the math, it works). In terms of people who read my site or others like it, many of you are do-it-yourselfers but may not necessarily be expert stock pickers (and you don’t have to be). The idea of going along for the ride during the up phases of the cycle and then being devoted to learning and understanding what causes large declines and seeking to take defensive action fairly early in the decline to avoid the full brunt of down a lot as I call it is not only valid, but I would say easier and places even less emphasis on stock picking which seems to be something many prefer not to do. Another aspect to avoiding the full brunt of down a lot is it places less importance in...

Monday Twofer

Yesterday I read an article at Seeking Alpha where the author revisited his analysis of a large cap industrial stock that he wrote about favorably last October. Since mid October the stock is up 31% versus about 9% for the S&P 500. The stock in question is one I own for clients (the name is not important for this post) and so obviously I am favorably disposed. The author reasonably notes his having been correct before and lays out why he believes the name still has bright prospects ahead. As noted above the market is up 9% in the last six months which should at the very least should make us wonder about the notion of confusing being smart with a bull market. The history of this stock has been to go up more than the market but also to go down more than the market. While this is at least a little counter factual my hunch is that having been involved with this name for seven or eight years that had the market been down 9% in the last six months that this stock would have been down more. This does not make the author wrong or make it a bad stock but from the top down, during a bull market (or if you prefer, during this ongoing sucker’s rally) most healthy companies go up and this company is healthy. There is plenty of need/demand for this company’s stuff and it is very profitable. Generically speaking this type of stock should go up in a rising market and that is generally what this one does. This is about...

Monday Twofer

Yesterday I read an article at Seeking Alpha where the author revisited his analysis of a large cap industrial stock that he wrote about favorably last October. Since mid October the stock is up 31% versus about 9% for the S&P 500. The stock in question is one I own for clients (the name is not important for this post) and so obviously I am favorably disposed. The author reasonably notes his having been correct before and lays out why he believes the name still has bright prospects ahead. As noted above the market is up 9% in the last six months which should at the very least should make us wonder about the notion of confusing being smart with a bull market. The history of this stock has been to go up more than the market but also to go down more than the market. While this is at least a little counter factual my hunch is that having been involved with this name for seven or eight years that had the market been down 9% in the last six months that this stock would have been down more. This does not make the author wrong or make it a bad stock but from the top down, during a bull market (or if you prefer, during this ongoing sucker’s rally) most healthy companies go up and this company is healthy. There is plenty of need/demand for this company’s stuff and it is very profitable. Generically speaking this type of stock should go up in a rising market and that is generally what this one does. This is about...