“In exchange for €10 billion ($13 billion) in rescue money, creditors would impose a one-time tax of 6.75 percent on all bank deposits under €100,000 ($131,000) and 9.9 percent over that amount….Anastasiades said savers would be compensated with bank shares. Moreover, all those depositors who opt to keep their money in Cypriot banks for at least two years would receive government bonds with a value equal to their losses. The bonds will be backed up by future revenue generated from the country’s newfound offshore gas deposits.”
And while I think it is absolutely moronic, I also think it is worth putting in context. One thing that people miss is that there are a lot of threats to wealth. One is taxes, one is outright confiscation, and one is inflation. In the US we are in a scenario many refer to as “financial repression”. This scenario of low/zero interest rates and inflation (2-3%) is terrible for savers as their deposits slowly bleed and lose 2-3% a year to inflation.
So while everyone is gnashing their teeth and freaking out about Cyprus, realize that here in the US, even though your deposits are safe – nonetheless they are getting confiscated, just by a different means…
I like Jim Rogers but this quote has always made me chuckle. I could list dozens of rich technicians, but one of the best sadly recently passed, and I smiled when I saw this headline cross the wires today from Curbed:
I was going to do this post as an issue of The Idea Farm, but there is already a two week backlog of good pieces so I figured I’d just post it here. Passive and active are meaningless terms to me since I’m a quant and everything is active in my mind. You have rules for buying, selling, and rebalancing. It is always ironic to me that likely the largest and most famous index, the S&P 500, is really an active fund in drag. It has momentum rules (mkt cap weighted), fundamental rules (4Q of E, liquidity requirements), and a subjective overlay (committee input). Does that sound passive to you?!
However, most of the early indexes were built to be representative of the marketplace. So while indexing was revolutionary, it was not necessarily the best approach for managing money. Over the past 30 years we have seen an amazing amount of research that has shown simple ways to construct mechanical portfolios, ie indexes, that outperform these market cap indexes. Simple indexes that take into account value, momentum and trend, and carry have been applied within and across asset classes to form more robust portfolios. Second generation indexes have improved upon the first generation (commodities are a great example here). (For a recent piece of ours that details why market cap indexing is flawed, check out Global Value in the Journal of Indexing.)
Below are two charts that I find highly useful. The first looks at yields on various indexes (the red dot is where we are now and purple/green represent one standard deviation bands). This chart poses the problem many investors complain about daily – where to find yield? (Note: S&P500 is TTM PE yield.)
One would conclude, that with the exception of mortgage REITs and US stocks, everything else is highly unnattractive. Bonds and REITs seem to be at their worst yields EVER.
However, if one looks at yields after inflation, so called real yields, the picture changes. Most asset classes are in normal valuation ranges, and while bonds are still trading at low yields, stocks are even more attractive, and mortgage REITS too.
I know this is very basic but I have had a shocking amount of conversations lately with people (retail and pro) that seem to forget ETFs pay out income and dividends. This matters more and more the larger the yield, but below is one of the older dividend ETFs, and the difference in returns is 23% vs. 67%! While it may look like the price is flat for the blue line, you have to include the dividends!
REITs have been the best performing major asset class since the market bottom in 2009, up over 200%. What are the current drivers of REITs saying now across trend, yield curve, and valuation? I’ll write up a longer piece in the upcoming weeks on my thoughts but below is a very short clip from CNBC yesterday…
4. Investment research boutique focused on private crowdfunded companies on AngelList and The Funders Club. Most people have no idea what they are investing in, and probably spend more time on researching buying a TV or a car than they do chipping $10k into these companies (which is one reason Wirecutter is so successful). Start a website that reviews the news around all of these companies, etc, and make buy or pass recs on the ones that are available to invest in.
3. Tax Harvesting. Setup a simple site that pulls portfolio info from ByAllAccounts or similar and emails you when to rebalance the portfolio based on tax implications. The academic research shows that it can add about 1-2% per year post tax returns. My buddy Richard Smith runs a similar site called Trading Stops, and I know Welathfront has added this feature (but have not seen it). Shocked there isn’t anything here. Here is a paper on the subject and there are a ton of posts in the archives.
This post is 2/5 on ideas in fintech. We have had to build everything custom in house as most online/public software is too limited…
2. Website for backtesting and tracking quant models. There have been a few entrants here (Turnkey Analyst, Ned Davis, ETFReplay). We actually built one over two years ago at TacticalAssetAllocation.com to track and receive emails for our quant models, but I don’t want to have to maintain it. (Ignore all the Latin placeholders for the text, all the guts and software works behind the scenes). Let me know if you want to run with it!
Quantopian looks like another interesting entrant here, and they have an intro webinar coming up in a week to check it out…
Below is a chart from Quantopian that backtests and reports on one of our published models…