World Beta Blog

I’m in Chicago for a speech this Thursday, Oct 1 – Monday Oct 5.  Drop me a line if you want to meetup!

Julian Robertson interview where he mentions liking V, MA, and AAPL (disclosure: we own all three).  If you have been following the Tiger Cubs AlphaClone model, you would be up 35% YTD. (And historically you would have beaten the market by 17% a year.)

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Great critique of VectorVest.  My favorite:

“VectorVest is the only service that…Uses a Market Timing System that has NEVER FAILED!”

30% annualized returns, why aren’t they mentioned in the same sentence as Jim Simons?

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Marc Faber is a little gloomy.

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A book I will not be reading. Here are the two I will be reading this wknd here and here.

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Top 200 songs of the decade.

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Daniel Kahneman interview below.  Some of his work is the foundation for why our timing model works:

A research paper about my paper.  Cool!  I haven’t had the chance to read it yet…

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Draw your own conclusions on endowment performance last year, fiscal year ending June 30th.  Below are facts.

Bonds +7%

60/40 -12.7%

Texas -13%

Penn -15.7%

Columbia -16.1%

MIT -17%

Williams -18%

Amherst -20%

Brown -23%

Yale -24.6%

Stanford -25.9%

US Stocks -25.95%

Cornell -26%

Harvard -27.3%

Foreign Stocks -31%

Buy and Hold -31.1%

Real Estate -41%

Commodities -61%

(Data sources: Global Financial Data, Harvard and Yale Annual Reports)

US Stocks – S&P 500

Foreign Stocks – MSCI EAFE

Bonds – 10 Year US Govt

Commodities – GSCI

REITs – NAREIT

Buy and Hold is an equally-weighted, monthly rebalanced allocation to the above 5 asset classes

Harvard and Yale are announced returns for 2009

60/40 is the traditional 60% stocks, 40% bonds allocation

A reader emailed in to tell me they noticed my 2007 paper is the most read paper on the SSRN in the past year out of over 200,000…cool!  Maybe I should be a professor, ha.

The good (great) news is that an investor following the system would be have a portfolio hitting all time highs right now.  Real time performance since publication  (through August) is outperformance of over 30% with massive reductions in volatility and drawdown.

Do you use the system?  Leave a comment with your approach, and how you’re doing!

(PS Added a new fan page for AlphaClone here on Facebook, check it out!)

I’m speaking tomorrow at the Berkeley AAII meeting, then Tuesday at TradeTech West in SF.  If you’re at either, come say hello!

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I enjoy getting constructive criticism, and hecklers don’t bother me, but at least have the dignity to read the book before you post a review!  Examples here (Louis and Rodi Williams reviews).

Although this is definitely my favorite 1 star review!

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Yes please.

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Seems like a trading strategy to me.

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Dow Award 2009

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Well, this is certainly a contrarian position:  We need more debt, not less.

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The 50 Best Things to Eat in the World.  I’ve had 0.  Although I’m still waiting for someone to take me up on Alinea on my upcoming Chicago trip…

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Letters of Note

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Hookworm as a cure for asthma?

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Gene Therapy Cures Color-Blind Monkeys.

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The equity premium(s)

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Some notes from Pabrai’s annual investor meeting.  Concentration works both ways!!

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POTENTIALLY interesting, let’s see what other funds they come out with.  130/30, meh.

Traveling to San Francisco for a week starting Friday, drop me a line if you’re around…

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A nice list of bubble books, and I can say I’m actually pretty excited about this one coming out soon.

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How to take a picture in space for $150.

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Some defenders of the endowment model.

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The perfect tortilla.

There has been a lot of coverage in the media on the Harvard and Yale endowment returns for 2009 (Bloomberg, WSJ, Barron’s, NYTimes, Dealbook, CNBC, etc)

In an earlier post I examined the performance of the endowments (estimated) versus some publicly traded asset classes, allocations, and tactical models.  Below I update the post with the final numbers, and then to expand a bit and see exactly what a difference this past year made.

Most commentators focus on the headline generating losses, but take note of the following observation – Harvard and Yale were in line with stocks for 2009 (-25.95%), and beat REITs (-40.62%), commodities (-59.68%), and foreign stocks (-30.96%).   The trailed US government bonds (7.10%).  Even after including 2009, Harvard and Yale have beaten stocks since 1985 by over 3% with less volatility.

Below are some returns from the endowments from 1985-2008, followed by 1985-2009 (and remember these are for fiscal year ending June 30th!!):

(Data sources: Global Financial Data, Harvard and Yale Annual Reports)

US Stocks – S&P 500

Foreign Stocks – MSCI EAFE

Bonds – 10 Year US Govt

Commodities – GSCI

REITs – NAREIT

Buy and Hold is an equally-weighted, monthly rebalanced allocation to the above 5 asset classes

Harvard and Yale are announced returns for 2009

60/40 is the traditional 60% stocks, 40% bonds allocation

Timing model is from my 2007 paper, Rotation is from my 2009 book.

Some observations, 1985-2008:

-Harvard and Yale’s returns are highly correlated at .91, suggesting they follow similar strategies and allocations.

-Harvard and Yale beat any one asset class by roughly 3-5%.

-Harvard and Yale beat most indexed allocation models by 4-5% with similar volatility.

-Harvard and Yale are highly correlated to equity markets, as well as a diversified buy and hold including real assets.

Some observations, 1985-2009:

-Harvard and Yale’s returns are even more highly correlated at .95, suggesting they follow similar strategies and allocations.

-The bear markets of 2008/2009 knocked a full 2% off the compounded returns of the endowments.

-Harvard and Yale still beat any one asset class by roughly 3-5%.

-Harvard and Yale still beat most indexed allocation models by 3-4% with similar volatility.

- The endowments’ Sharpe Ratio took a heavy beating, knocking it down to the .6-.7 range from over 1.0.  (A nice rule of thumb is that most asset classes have Sharpe Ratios of around .2, a diversified allocation is around .4, and momentum style models can get you up to .7 and .8.)

- The timing model now has a higher Sharpe Ratio than the endowments, largely due to avoiding the bear markets of 2008 and 2009.  The leveraged timing model (at 2X at broker call rate) would have outperformed the endowments on an absolute and risk adjusted basis.

-The Buy and Hold allocation now has a whopping .9 correlation to the Harvard and Yale endowments.

Some comments:

What is some of the advice you give individual investors?

1.  Diversify across equities, bonds, and real assets.  More bonds the less risk you want.

2.  Avoid taxes.

3.  Avoid fees.

4.  Index.

A simple portfolio we advised in the book was:

US Stocks:  VTI, SPY

Foreign Stocks: VEU, EFA

Bonds: BND, AGG

Real Estate:  VNQ, IYR

Commodities: GSG, DBC, LSC

We further split these allocations into 10 and 20 asset classes in the book.  Next,

5.  Use risk management (ie the timing model).

6.  Seek alpha (via hedge-like mutual funds, AlphaClone, etc.)

Is the endowment model broken?

Just looking at the data, the endowment model has outperformed anything over the time period studied.  The biggest criticism for the endowments is that they did not manage their risk, liquidity, and “tail-risk” enough. I think that is a fair criticism.  But, in general, diversification works (most of the time).

There is a great paper coming out of a wealth management shop here in LA that deconstructs the Yale returns even further (ie adding value and small cap tilts, a little leverage, etc).  They find that most of the outperformance is due to, surprise, the private equity allocation.  As we mentioned in the book, is the PE game over now that there is so much competition?  TBD.

Is buy and hold dead?

Anyone that makes this statement usually does not have a healthy respect for history if last year changed their opinion of buy and hold.  EVERY asset class is great sometimes, and horrendous other times (gold, bonds, S&P 500, foreign currencies, and Argentinean stocks included).  Buy and hold has never worked in periods of serious market stress.  Just ask those Tulip/South Seas buy and holders.

With a diversified portfolio of world asset classes (or a 60/40 portfolio) I think you need to be able to accept a 50%+ drawdown.  With a single asset class or security you need to be able to accept an 80-100% drawdown or total loss of capital.  I think using risk management via a trendfollowing method fits me personally.

How is the model allocated now?

You can follow timing updates here.

Lots of these are non-investment related…and it took a little longer to post than normal.  The good news is the cast comes off soon and I can get back to writing some of those white papers.

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Traveling to Dallas next week, drop me a line if you’re around.

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I really miss going to the drive-in – used to do it all the time growing up in Colorado.  Now, the drive-in comes to you…

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TiVo’d – Ken Burns’s new National Parks documentary series on PBS.

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Gonna teach all of my nephews how to dominate the paper plane folding world.

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Gold trading at $999 on 9/9/09.  Coincidence?

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Pre-ordered Bernstein’s new book on how to avoid the market collapse after the fact. (That is a little harsh, as he usually writes good books but focuses mostly on strategic buy and hold asset allocation. That, and he poached some research without giving it credit/citing the original source last year.) Regardless, I’m looking forward to what he has to say.

The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between.

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I was planning my first ever ski trip to Europe next year (tenatively St. Anton), but with the US $ puking as much as it is Mammoth is looking a lot more attractive.

From FutureSource:

Dallas September 13th – 16th

Drop me a line if you are in Dallas and want to get together.

There is a ton of good information in this quarterly report (link to PDF here, or in full at the bottom of this post).  Goldman looks at 687 funds with $500 billion in long stock positions.  Similar to a lot of what we do on AlphaClone.

They examine a few strategies that historically outperform the S&P500.  The first is a strategy of buying the 20 most concentrated stocks (defined as hedge funds owning X% of the company).  This has beaten the market by 14% a year since 2001.  The 20 current stocks are:

SHLD

AN

AZO

CF

CBG

JAVA

NYT

AKS

MA

ETFC

CTL

SLM

AYE

GT

HAR

LIFE

WYE

ANF

MBI

CIEN

The highest concentration of stocks <$1billion market cap is:

FDML

LORL

ARII

RDEA

VIRL

AMV

AMAG

TSTR

CHRD

SUAI

Another strategy is the VIP list.  This looks at the 50 stocks that most frequently appear among the largest 10 holdings of hedge funds with 10-200 holdings.  This strategy has historically beaten the market by 2.8% a year since 2001.  The top 10 are:

BAC

MSFT

AAPL

GOOG

JPM

PFE

QCOM

RIG

You can play around with these and many most similar strategies over on AlphaClone.

And probably my favorite graphic, here is the portfolio density of hedge funds vs. mutual funds.  If you recall from the academic literature, you want the concentrated funds and not index huggers.

The 100 largest hedge funds by equity assets:

Goldman Sachs Hedge Fund Monitor