A reader left the following comment;I am down on the year now, F this.\\John
I think F stands for flarg.
At a close of 1439 yesterday, the S&P 500 is up 1.5% YTD. If John is down 0-2% for the year he is pretty close to the market as is someone who is 0-2% ahead of the market.
While I understand if John doesn't want to hear this right now the reality is if you save properly and stay close to the market, either way, over long periods of time you're probably going to have enough money when you need it. There are no guarantees with anything of course so the context is about doing what you can to put the odds in your favor over time.
One thing that I think gets away from people is the extent to which "big" declines are very normal. Hussman said it over the weekend and I have said it very often on this site; 30% declines happen often enough to be considered normal (paraphrase of Hussman).
Despite my having said that and that people know it I don't think they really wrap their arms around it and think about what that will actually be like when it happens again (this not a prediction, I am stating something fairly obvious about normal market behavior).
When the market drops 5% the comments sometimes heat up with worry or nastiness. These are signs of emotion and I repeat, we see this reaction after a 5% drop.
I promise you that there will be "big" drops in the future but you will weather them better if you have some sort of game plan in mind ahead of time.
To that point, yesterday I shaved off a portion of my position in CVRD (RIO) which maybe half of our clients own. I sold most of it very early in the day so I got a lucky price relative to where it closed. The intention with the trade was to remove a little volatility in case emerging and/or materials becomes "the last leg to fall."
To be clear as I know at least one of my hecklers will get this wrong, I sold some only and still own the stock. For everyone else, nothing has changed as far as my belief in the company this is simply a tweak, along with one or two other things I might to that hopefully alters the portfolio's volatility.
37 comments:
Aha! So that's the guy that put my RIO spread into the toilet (for now) [grin]
A little shameless plug today, but I think relevant to your readers. We've talked about the "ultimate buy and hold" article at fundadvice.com. I just wanted to let folks know that I've set up a paper ultimate buy and hold fund at marketocracy.com. I blogged about it today and also put a link to the fund on marketocracy.com that folks can watch instead of watching paint dry.
What is one of your generic portfolios up or down for the year?
I have a lot more cash than roger, but I do not understand why those who have problems with the large swings did not lighten up a few weeks ago. I do remember roger making that comment a little while ago.
short term is so hard to predict, but there will be another rally. Will anybody sell off some on that rally or buy more?
I think roger gives excellent insight even if I criticize for not have sold more earlier this year.
I know you would like me to leave my name roger, but in 2006 when I advocated buying low last summer I got a nasty reply signed from "FU". Since then I have gone anonymous.
I did not know it was from Flarg. What is his last name?
I do not know why you choose to blog and receive these comments, but I would rather stay anonymous.
I think you mis read the post. I received a comment from a reader lamenting that he is in the red for the year as of the close yesterday.
flarg is a humor attempt, a substitute for a four letter expletive that starts with the letter F. the reader said "F this."
I am still up for the year.
anon, I was ready to shed some shares on IWM when it was at 84.00 just a couple of weeks ago. To me, it's easy to sell (I did shed some shares of other things), but the hard part is to know when to get back in. All too often when things look overbought or oversold, they continue along that trend for quite some time. Case in point, I was buying puts last October because I thought things were WAY overbought. Imagine if I would've sold, when would I have gotten back in? The seas are tough to navigate sometimes.
oops, when I say last Oct, I meant Oct 2006. Damn, can't believe 2007 is almost over.
"There is $45 trillion of debt in the US, more than 3x GDP, a 100-year high. In addition, there are $320 trillion of notional derivatives outstanding, up from $35 trillion ten
years ago"
Above quote from ftalphaville.ft.com and atributed to Draaisma and the Morgan Stanley team.
Now I am not talking about a worse case scenario, but with debt at 3x GDP couldn't we have one of those 10,000 year events the modeling guys never account for? If we do couldn't they also be wrong about the derivatives modeling?
What if instead of showing profits on all these derivatives all of a sudden the lost 2 to 5 % of the value of the derivatives. I know they are long one thing and short another and it couldn't happen in 10,000 years. But what if it did?
I am not talking about them being totally wrong just a few percent of the total all in a couple of weeks or months. some kind of liquidity or confidence issue.
9 trillion dollar loss is less than 3% of the derivatives total. I am not saying it would be the end of the world, but isn't there a lot of risk in the market?
Well at least it is not just me citing the $320 trillion of notional derivatives outstanding as an issue.
BTW, I got the humor attempt about Flarg, but I guess my humor attempt was not that good.
lol, my bad.
what you say could happen, yes.
FWIW, and it might be worth nothing, The SPX cutting in half at the start of the decade was a once in a generation trade, before that the 1970s, before that the 1930s, before that maybe 1907 (not positive on that last one).
IMO as a function of how markets work I don;t think you can get two once in a generation events in the same decade.
I think what is more likely is a normal stock market event, 25-30% down.
I have expected this for a while and have been wrong and I hope to continue to be wrong for a while to come. we'll see.
Not to jump on the doom and gloom wagon too much, but to clarify a point, just because something is a once in a lifetime event doesn't mean it happens only once in a lifetime.
Dilution or diversification?
TYD 1yr 3yr 5yr SD(1yr)
OAKBX 12.3 15.2 11.5 13.3 5.3
FGBLX 12.2 16 13.5 15.6 6
S&P 500 3 6 8.6 12.2 8.1
Those were TYD results of yesterday. My porfolio is about the same risk as OAKBX and FGBLX(both balanced funds) but my return YTD was quite a bit less than these humble balanced funds. I wonder should I just sell off everything and own one or both of the balanced funds? Granted, at times during the past my total returns exceeded these the funds a lot of times, but overall, I can not beat these humble funds consistently. I wonder what did I miss?
No matter how much I promise myself, or how little I have invested, I always panic and sell at the bottom of every correction. I just cannot enforce my buy and hold strategy. If I turned it over to a manager, he would have to disconnect his phone.
On the bright side, real estate has been very good to be. No one comes around offering me half the peak value. Rents have rarely declined. I read an old adage once, "the market will always move to separate the most money from the most people." Those of you who question direction may take solace in that its doing its best to take your money. charlie
“FWIW, and it might be worth nothing, The SPX cutting in half at the start of the decade was a once in a generation trade, before that the 1970s, before that the 1930s, before that maybe 1907 (not positive on that last one).”
I think you are very wrong about “…once in a generation…”
If you had said very rare I would agree with you. But hurricanes are rather rare in the middle of Florida also. There was not one here for several decades and a few years ago we got three hurricanes in one year.
Remember they also said that debt was 3x GDP the largest it has been in 100 years (I am quoting the Morgan Stanley team not a Bears-R-US.com website where there are plenty of doom and gloom prognostications). Highest debt in 100 years sounds “very rare” to me.
I will admit to a personal bias concerning Greenspan (or easy Al as I prefer it). I think there has been to much liquidity (borrowing) for a couple of decades now and when that debt unwinds there will be a lot of problems. My biggest problem is determining if the unwinding will be highly inflationary or deflationary. I am becoming convinced it will be highly inflationary and Jim Rogers is going to look like a genius no matter how many errors Mr. Rogers might state from time to time.
I have a lot of respect for you Roger. However, IMO you are not counting a rather bad but not sky is falling scenario unfolding. Look at the dollar – it does not seem “normal” to me. My best current guess is next year will be bad, but who knows. Since early July I just read a lot and carry a lot of cash.
Although I am beginning to believe we will get another year end rally. But I am far from certain about it – which leaves me with my cash for now I guess.
I really wish Hussman had an Asia fund, but it looks like I will have to manage this my self. I would much rather trust a Hussmann Asia fund to manage my money than me. Then I think I would be rather content buying and holding. Roger, you wouldn’t know someone Hussmann would listen to about this idea would you?
But fraud accounts for a sizable share of the bad bets on mortgages, according to many industry experts, and lenders may have been victimized as much as anyone else.
"The lenders are holding the bag now, that's what we're finding out," said Glenn Theobald, head of a mortgage fraud task force formed in south Florida's Miami-Dade County in September.
Mortgage scams involve a cartel of inside players -- colluding property appraisers, real-estate brokers and accountants willing to draw up fake income statements and tax returns -- who recruit people with good credit histories to serve as a decoy or "straw buyer" in a real-estate deal.
The conspirators inflate the price of the property, to get the biggest loan possible, pay the sellers the original price and then pocket the excess loan money as "cash back" at the closing of the deal.
The decoy buyer is paid off -- often with just $5,000 -- and the property is quickly abandoned to foreclosure, said Theobald, a senior official with the Miami-Dade Police Department.
'EPIDEMIC'
"It's an epidemic," said Nancy Hogan, a veteran realtor and former head of the Florida Real Estate Commission.
"The cash back, the fraud for profit, is what has been so rampant," she said.
The Club at Brickell has the highest current number of foreclosure proceedings involving any single south Florida property.
There may be other properties in the United States that hold the distinction of being riddled with more cases of apparent mortgage fraud than the Club.
But Doug Dewitt, a real estate broker contracted to work with several lenders on the valuation and disposal of foreclosed properties, said nearly 70 percent of the sales or closings at the Club over the last 18 months were questionable.
That works out to more than 200 possibly shady deals in a single building, he said.
The dubious transactions all fit a pattern that Theobald said should trigger "bells and whistles" for law enforcement anywhere -- time and time again properties that failed to sell for months when listed at around $450,000 were pulled from the market and then suddenly sold for more than $800,000.
Florida leads the nation when it comes to mortgage fraud, according to the Virginia-based Mortgage Asset Research Institute, a group that works closely with the U.S. Mortgage Bankers Association.
Many apartments could wind up being sold at auctions like one held last month for bank-owned properties in Fort Lauderdale, further depressing prices in a market suffering its biggest condo glut in decades.
"You've seen some of it already. They are actually having auctions to try and sell units," said Theobald, when asked about discount sales involving recently foreclosed properties.
"I don't know where it's going to end up," Theobald said. "I don't know when the bottom is going to be."
Ken Thomas, a Miami-based banking expert and lecturer at the Wharton School at the University of Pennsylvania in Philadelphia, said there was little surprise Florida led the country in mortgage fraud.
It stems, at least in part, in the way lenders plowed "easy money" into the local condo market before Florida's recent housing boom turned to bust, Thomas told Reuters.
BUY! BUY! BUY!
Everything is just peachy!
I guess as long as we keep printing money the economy will chucg along.
What the heck is reality these days? It know longer exists.
I don't think anyone here is in indiscriminate buy mode here. May wanna check the yahoo groups for that sort of stuff :)
E*TRADE,anyone?
We all know what the 'F' means. But I was wondering what John means by "this"? Is it his investing in stocks, mutual funds, index funds, (securities)?
Or is "this" just his losses for this year?
And is this his first year or so in investing?
Anon 9:13.
I was wondering if you are a Jim Shepherd fan? He is an economist that has been predicting a "critical mass" sell-off scenario for about a year now. Here is a copy from his last news letter (with his compliments):
http://www.jasmts.com/files/newsletters/promo/jasmts2007Oct12.pdf
Today, I showed investors a 36 unit duplex community that was sold in foreclosure in June for $630,000. The price today? After cleaning out the drugs, deadbeats and using some paint and carpet with 100% Lease up, $1.25 million. Sold in fifteen minutes.
The interesting is, both sides of the deal won handsomely. The foreclosure bidder doubled his money in five months. The new owner is getting the property for a minimum of 23% return, before all the writeoffs and depreciations with little deferred maintenance.
South Florida/Atlantic side is one area where I have purchased real estate alone and with investor pools the past eight months. We are very happy, indeed with a great return and all the tax benefits. There are great deals everywhere from California to the rust belt (especially Ohio and Michigan) to the east coast (especially North Carolina and south). The rental pool is expanding exponentially as mortgages become harder to close (for good reasons).
Forget the ivory tower pinheads. Talk to the investors with boots on the ground. This is the best time to buy well-chosen and hard-bargained real estate in the past twenty-five years.
Hi Roger,
Do you or anyone else here know of a good ETF Newsletter? I'm looking for something that speculates on ETF trends as well as discusses new ETF issues.
Thanks
roger,
I use our domestic market as "the mkt" for my benchmark...but I'm really cherry picking and making my port look better than it is. To be intellectually honest one needs to use a world mkt view. Personally, would be easier if there was a world index that has decades of history. What would it take for you to change and leave the s&p behind? If you were to create such an index what would be the allocation weighting using etfs? Me: russell 3000/50%; efa/20;epp/15%;ewj/5%;eem/10%.Does anyone know of a ready made completely calculated world index? The Russell Global Index exist but I can not find a chart.
The best reminder for myself about "normal" stock mkt behaivor is the saying, " Sausage tastes good and if you like it don't look too closely how it's made." If one wants good performance, there's no free lunch. Without incredible trading skills there are going to be 12Percent drawdowns.
When the going gets crazy, the crazy buy tranquilizers. The investors buy drug stocks.
I am having a good year. I think I have my diversification and allocations right, on balance.
Have you noticed (do you remember!) how beginning drivers focus on the potholes right in front of the car? As they get more confidence they look farther ahead.
Fred
Following Anon 3:47, the world is different today and in significant ways that mean we cannot look for a reliable precedent by considering merely the historical performance of US indices.
I know there is human/trader tendency at calamitous moments to find "new paradigms" that may help justify the novel reasoning/dangerous trading (investor?) behaviour (consider the "bricks and mortar stores are dead" argument used in the tech run-up to Nasdaq 5000)... BUT... I'd be interested to hear other opinions as to whether or not we actually are entering a "new paradigm" that may fundamentally alter the reliability of inductive reasoning viz. markets.
Consider: China (new driver of consumer demand and a price maker), energy (approaching terminal horizons for extractable oil, mixed with hyperdemand from new China (and new India, and maybe new Europe), Euro (as the world's reserve currency), Islamofascism (to the extent it is more than fearmongering), US shift from manufacturing to services.
[I would go on to mention the more temporary (cyclical) shift in US culture (shifting under the current administration towards the individual-centric pole (where agency theory concentrates power with those who have access) and somewhat away from the community-centric pole - cf. privatization of social security, resistance to universal health care, celebration of "market discipline" and the hypercriticism leveled at "regulation" - but this last point may have plenty of reference periods in US market history.]
The basic question: are we deluding ourselves to think this is simply a temporary down vector in a cycle, when in fact we're now in somebody else's game?
Rick
I was out for several hours and been busy for a while and I see we have an onslaught of comments to catch up on.
Anon 913am (and if some of the subsequent posts are yours or even if not), this boils down to philosophy on a couple of points and maybe we have had this discussion before but some folks might be new.
Every negative thing you mention could happen (we choke on our debt, dollar decline is disorderly, rates skyrocket and any other point you have raised).
A fast crash will snap back and a slow rollover decline will take much longer to come back regardless of the cause of either.
As a matter of philosophy (so here are readers can figure out what fits for them) I feel no need to outguess a slow decline because they happen so rarely and when they do they give plenty of time to get out. I have no fear of a 10% drop in the portfolio when the market drops 50% ( this is an example only not a prediction of what result i might get), literally no fear.
A fast decline is borne out of emotion and they snap back on emotion. Of course after the snap back it could rollover slowly at that point.
billb, a once in a lifetime event happen twice? never! (imagine the voice of Skeletor saying that and it's funny).
Point conceded but for me it is about realistic possibilities. Or more correctly my perception of realistic. Nassim Taleb notwithstanding a bet on that which has never happened would be a tough one for me to make.
Anon 10:42, you're trailing a couple of balanced funds? This is exactly the type of market when a fund that reduces beta is going to shine. Those funds will look lousy (which is of course the wrong way to look at it!) the next time the market is up 30%.
I have no influence with Hussman (or anyone really).
I think the problem with mortgages is much more about how pools of capital that invest in mortgages are levered up, I don't think an uptick to less than 2% default rate is the real problem.
Every thing is just peachy, lol. At 10:15 am we got the green light, wahhoo!! This is a sarcastic comment.
A good ETF newsletter to speculate with? I could say something sarcastic but instead I'll just say that is 180 degrees from what this site is trying to do.
Switch benchmarks? WWSS? That stands for what would Skeletor say, lol. Never! Seriously I have no argument with your point. I do not have strong feelings nor am I sure if it is actually my call at the firm (and really I do not care) but the logic behind SPX is that in a lot of ways, although imperfectly, the S&P 500 index is the US market. What steps are we taking to add value for the client versus "the market" and is the risk taken and the result achieved worth the fee.
Rick I believe there is an episode from the second season of Kung Fu that answered all of your questions.
Seriously I think you are describing an evolutionary process. Some things will happen (or have already) faster than other things.
Along the lines of what you say I have been writing from the start that US investors will not be able to get their average 10% from US only. They will need to go elsewhere. I have thought this for three years. So far the real impact has been better returns from abroad but the US has been just fine.
Anon 3:45--
Not a newsletter, but a couple of sites that might help you out until you can find one.
ETFtrends chronicles all the developments in the ETF world with 5-6 posts everyday. It's a little superficial but will keep you up to date on the industry. ETFXRAY is similar but with fewer, more detailed posts.
A Dash of Insight has, among other things, a sector-based ETF portfolio with trades posted weekly.
I believe each of these sites offers portfolio management services for a fee, which might take the place of a newsletter for you.
roger, a little follow up on my rant for a global benchmark....and we posters shure do get a ready and reliable response from our host....anyway...I feel compelled to say that the firm is treating a client as almost stupid if value added is only based on our domestic market...but for the purposes of selling the product, so be it. There is a Russell Global Index and it can be found at Russell's website, just no ticker and chart.
can you get sector make up? cap size? yield? style tilt? country weights? volatility stats?
Drum roll...to answer my issue.
Vanguard has a fund of index funds:Vanguard Total Intl Stock Index VGTSX that covers them all but is ex=us. YTD: 18.22...Add that to SPY: ytd: 5.93 and divide by two.
THE best benchmark is 12.075. (Darn is morningstar a slow site)
Russell Global Index
Fact Sheet—Monthly Data Through September 30, 2007
Measures the performance of the global equity market based on all investable equity securities. The index includes approximately 10,000 securities in 63 countries and covers 98% of the investable global market. All securities in the Russell Global Index are classified according to size, region, country, and sector, as a result the Index can be segmented into more than 300 distinct benchmarks.
STATISTICS
Capitalization (in billions)
Average Market Cap ($-WTD) 68.22
Median Market Cap 1.08
Largest Company by Market Cap 521.42
Smallest Company by Market Cap 0.01
Fundamental Characteristics
Price/Book 2.58
Dividend Yield 2.3
P/E Ex-Neg Earnings 15.9
Lt Growth Forecast-IBES 11.64%
EPS Growth 5 years 22.8
TOTAL RETURNS in Percentages
September YTD 1 yr 3 yr 5 yr
Russell Global 5.21 14.08 24.85 20.57 21.76
For daily total return details for all Russell indexes, view this page.
MEMBERSHIP DATA
Top 10 Holdings
Exxon Mobil Corp.
General Electric Co.
AT&T, Inc.
Microsoft Corp.
Citigroup, Inc.
Bank of America Corp.
BP PLC
Procter & Gamble Co.
HSBC Holdings PLC
Chevron Corp.
Alphabetical membership list in pdf format.
COUNTRY DATA
Top 5 Countries
United States
United Kingdom
Japan
France
Canada
SECTORS — Largest Five by Weight
Russell Method
Financial Services
Consumer Discretionary
Materials and Processing
Energy
Technology
GICS Method
Financials
Industrials
Information Technology
Consumer Discretionary
Energy
what are the weights?
can you leave a link?
http://tinyurl.com/ytgfsx
for the russell global index....may have to call to get all the stats...I do salute you if willing to make this much tougher comparison. I, personally, feel not so hot, since my port is underperforming at around 12% to date. My only moral comfort is that 25% is kept in cash by my wife.
i am willing to learn about anything but switching to a benchmark that clients can't easily follow it very unlikely
looked at the site.
in order to actually benchmark you need to be able to analyze the constituency. Knowing the top five countries, for example, doesn't cut it.
You would need the weights of every country to then decide what to overweigt or underweight. Further there might be a few countries that cannot be accessed at all.
Roger, once again your timing is horrible...
RIO up nearly 8% today.
Every time I hear you talk about a plan, it boils down to selling after the market has already tumbled.
The idea is to sell at the high Rog baby.....not after 5 days of unmitigated pain.
Roger ,
you make excellent points as usual ( which I really need - you always need to consider the alternative)
But, yes I am rather concerned about all of easy Al's debt creation. Remeber the Fed does not create money (well very few Federal reserve notes). Their main influence is increasing the money supply by increasing debt. If the debt bubble ever reverses you get the nasdaq bubble all over again.
This time the debt bubble went into housing not stocks. I will not be comfortable until I see this debt bubble unwind (they are only fun during the expansion phase and i think that is over).
Of course I could be wrong, but I am seeing more and more evidence that I am correct. We will see.
reasonable "why's" but nothing that tells me the effect won't look the same as past ugliness--ie slow rollover with time to get out?
am I missing something? Is there a reason why the market would behave differently assuming things play out exactly as you are worried they might?
While a dissertation committee would show concern for the technicals that you mention, would clients really care? I would think that they would only want to know that an asset mgr can beat the simplicity of single global index that is easily duplicated by a few buy-hold index funds that have the credibility of a vanguard institution(veu/etf for their international index ex us; and vti/etf for domestic total mkt). In all deference, perhaps I am not fully appreciating how a portfolio is constructed. Ultimately "tradition" will trump, and I expect that the domestic large cap growth sector will one day come back as asset class leader making it a harder benchmark to beat. Meanwhile, it's a global benchmark by which I will measure my own account. Roger, if I can persuade you to guestimate what percentage would you suggest for an international weighting (assuming that Vanguard has already done a pretty job of weighting all the pieces within the international asset class)? Half? Thanks for the discussion.
Some thoughts on benchmarking and the potential for another 50%ish type drop so soon after the last one (2000-2002)
Benchmarking - I think the S&P 500 is a perfectly acceptable benchmark for professionals. I don't think it is necessary to get ultra-complicated here and look for some Global Index which may not even be an investable option in terms of a mutual fund or ETF. I'll note that I may be biased because I manage money professionally.
In my view, the critical question, is what would the investor do as an alternative if they didn't hire the pro, and wanted to spend ZERO time and effort researching and managing a portfolio. The answer that the Bogles of the world give is to dollar cost average into an S&P 500 index fund.
Once you introduce other asset classes like international developed, emerging, real Estate, small-cap, you've introduced an entire new level of complexity to the equation, and now our know-nothing investor has to decide on percentage allocations to each asset class and when to rebalance, etc. The average Joe-Sixpack isn't going to have the time, knowledge, or experience to do this, but he can just dollar cost average into the S&P 500 over time. For that reason, it makes sense to benchmark the professional to what is the most likely and simplest alternative for a complete novice to implement.
Could down 50%ish happen again so soon after just happening from 00-02? In my view, it is critical to understand that down 50%+ (1929-1932, 1973-74, 2000-2002) doesn't happen for just some arbitrary reason out of nowhere. Down alot occurs when stock valuation levels are extremely high relative to historical norms.
The problem/difficulty right now is the market (S&P 500) looks reasonably valued according to some metrics like forward earnings compared to bond yields, but looks just as overvalued as the 1929 and 1972 peaks if you look at metrics like Hussman's Price to Peak earnings ratio or Price to Revenue multiples. Who knows what will happen, but I think one should be prepared for the possibility of another 50% decline in the S&P 500.
Jasper, I am sorry if I have this wrong but I think you are missing a big part of what benchmarking is all about.
In order to benchmark against an index you need to know every aspect of that index so that you can then make decisions as to how you think you should position against that benchmark.
If Telecom is 4% of this Russell index you may want 3% or 5% based on your outlook. If Finland is 3% you may want 6% because of their economic outlook and you may decide to take that 3% at the expense of Switzerland. The index may tilt to value but later in the cycle you may want to favor growth.
This type of decision needs to be made with every aspect of the index. THerefore you need access to all the info on a perpetual basis.
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