Even though I don't think it is the ideal strategy for the vast majority of investors I still find Nassim Taleb's idea of 90% t-bills and 10% going berserk (again that is my word not his) to be intriguing on what I guess is an academic level.
If you knew what this year's Dry Ships (DRYS), which went from $17 to $79 last year, and Suntech Power (STP), which went from $34 to $80 last year, were going to be and you put 5% into each and put the rest into some combo of t-bills and euros and could repeat you'd be in pretty good shape.
There are various new fixed income and more recently currency products listing that make the 90% part easier with regard to foreign diversification (the WisdomTree products that were filed a while would go a long way to filling some gaps if they actually list).
If we move away from the specific 90/10 and think more about getting alpha from a smaller portion of the portfolio while the rest is more conservatively allocated here is one thing that a few people have asked about that very likely will not work... putting 50% into a double long ETF and the rest into treasuries.
The idea is that the double long ETF would replicate the market plus the treasury interest so the two added together would beat the market. There are a couple of OEFs that do this with SPX futures and treasuries and I believe these funds don't succeed regularly but someone please correct me if I have that wrong.
The problem with the double long plus treasuries concept is that the double long fund attempts to capture twice the move of the S&P 500 on a daily basis (and even then it is not perfect) not over longer periods of time. Over the next three months (just a random time period, you could pick any other) the double long fund could lag twice the SPX, do better than twice the SPX or come in right on the nose, there is no way to predict because it depends on the sequence of daily moves in the SPX which can't be predicted.
Another issue is that it will never be 50/50 after the first day the idea would be implemented. From day to day it would vary slightly and depending on the market does it could vary a lot over time. To maintain something close to the intended 50/50 there would need to be a fair bit or rebalancing which would probably be expensive and maybe would wear out the calculator. Even then it seems like you'd always be a day or two behind.
I am curious enough about the concept to keep exploring but I would rule this specific idea out.
One key to a happy marriage (we're at 15 years and still happy) is choosing your battles. Just as my wife does not fight me on college basketball in March I do not fight her on the Academy Awards or the red carpet show right before. That being said, is it me or did John Travolta look like Eddie Munster?
18 comments:
Eddie Munster wearing a bad rug.
But then again, is there such a thing as a "good rug"?
R in NY
Roger, on the subject of exchange-traded currency products, what is your take on these new ETNs from Merrill Lynch?
http://seekingalpha.com/article/65784-elements-currency-etns-aim-to-outperform-comparable-etfs
they provide no new exposure versus Rydex ETFs so no big deal but now why would anyone use the iPath ETNs--the Elements will pay interest.
I would rather see new exposures come, which they will at some point.
Great post.
A famous hair transplant doctor has also noticed Travolta's fake hair and talks about him on his blog.
See
http://www.baldingblog.com/2006/03/17/john-travoltas-hair-piece/
Considering one of his best lines from Saturday Night Fever was
"Don't touch the hair!"
its sad and ironic how unattractive and repelling is hair actually is now....
Here's a thought Roger. With thousands of stocks and a few hundred ETFs, it would seem pretty difficult to predict which ones might go "berserk" to the upside over the next year or so. So I wonder if it might actually improve the odds of this strategy to use your 10% speculation capital to short some stocks that have already gone parabolic and show signs that they may be topping out. No guarantees here either of course but at least you've narrowed the field so to speak.
With thousands of stocks and a few hundred ETFs, it would seem pretty difficult to predict which ones might go "berserk" to the upside over the next year or so is exactly why I don't think this is an ideal strategy for most folks.
I am not sure shorting is easier. some people are good at this and so for some it would work but going this route adds the headwind of the market going up most of the time. This would require being a good stock picker (for stocks that will drop) and out navigating survivorship bias.
COIN could be the new DRYS.
one way to screen for the long-shot home runs is to screen for them in Feb. Look for the highest YTD returns, check out the chart and the company, look for a catalyst and huge spurts in upside volume.
I have no position yet in COIN, but i have an open limit order to buy on a pull back... small, speculative position, just like Taleb says.
Due to personal medical issues which have become so sensitive to stress, I farmed out half of a rather large port to a mgr that uses the same investment system that I am already comfortable with. In this managed half he captures some aggressive stock selection against lower beta etf's. He uses IBD lists of new generation stocks that have the potential to be the 10baggers. Personally, I asked him to hold back due to the toppiness of the mkt back in december. He did not and a few stocks that declined badly impacted the entire account; a drawdown of -13% while the s&p is down -10.7 in the same time period. Bottom line, aggressiveness requires patience, and a mind set that knows the old adage, "don't confuse brilliance with a bull mkt." In my own account that I manage and keep 80 percent invested I'm only down -3.8%. So much for my stress reduction strategy, as I am spinning wheels confronting the mgr with limited success. From his point of view he is not that far from the benchmark and is prepared to capture bigger gains in the future. All this is not exactly applicable to the 90/10 discussion but serves that neurotic need to vent.
venting may be good for you, but the way you have done it is very constructive for others.
may ask what the mix of potential 10 baggers to low beta ETFs is? the 13.8% seems like a lot, I am wondering is some of the low beta ETFs dropped more than expected.
Roger,
RE..."the mgr's half"
Aggressive stocks were 28%. His low beta etf choice was health care (close to IHF)...actually represented by a fido select for a long term hold...but he could not resist re-entering fxi after a 12 percent correction in december...so to be more accurate...the sector selection is not all low beta. Mgr did very well by buying on dips in the last four years and I think felt a little cocky by not being influenced by the doom and gloomers. He dutifully stuck to a discipline based on data but in December..I think..disregarded the TA signs of the text book like...as you have aptly described.. rollover in this bear mkt.
well i am sorry the ride has been bumpier than you are comfortable with but your details really are helpful for others.
thanks again for sharing this.
Where is Roger and what have you done with him?
Advocating going berserk? I thought you were the voice of reason. I have enough crazy ideas myself :)
I honestly think Roger may be able to pick stocks but I think most readers should stick to etf's or mutual funds.
Right now I just want to see this "rally" go for a little while.
BTW I thought Hussman was very good again today.
seg
hearty chuckle.
you are right about Hussman this week. lagging treasuries for a decade is a compelling argument.
here's the link for anyone who has not read the post.
Roger,
That 50%-double-long-ETF + 50%-T-bills idea won't work. There are various ways to create a double-long ETF, but they all boil down to basically the same thing: leveraging up the ETF by a factor of 2 using borrowed money. So the interest earned on the T-bills is cancelled out by the interest spent on the debt used for the 2x leverage. Note that this logic still holds even if the double-long-ETF uses futures, options, or any other derivative instrument in order to implement the 2x leverage; thee pricing of these derivative instruments all involve an "implied interest rate" that's at least equal to the T-bill rate.
The real question is whether you goose the portion of the portfolio that is exposed to broader markets by using the Ultra Proshares and then moderate that risk as the cycle gets older, much like Roger raising some cash or using the double short etf? Can you get additional alpha (some but not crazy) this way with reasonable risk that, over time, generating a bigger return? Perhaps another way of looking at this is what is the best way to incorporate the Proshares Ultras into a portfolio?
HSTRX
MarkM
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