World Beta Blog

We already have one blog reader that has won the NAAIM prize for best paper, let’s get another!  Deadline is March 2011 and the prize is $10k.

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I have long believed there is an opportunity for online education surrounding investing and personal finance.  A few different sites have investing/finance as a component of their offerings (like Sympoz and MIT Open Course) but I have yet to see the “Rosetta Stone” of investing education.

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I actually didn’t know FQ took over a mutual fund as sub until a reader left a comment on the blog.

Here is an older PDF “Balancing Betas“.

Managers FQ Global Essentials Fund (MMAVX)

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Great post on just how little people understand about investing.  Wow.  From the Dorsey Wright folks:

“If interest rates rise, what will typically happen to bond prices?

18% - They will rise
28% - They will fall
5%   -They will stay the same
10% - There is no relationship between bond prices and the interest rate
37% - Don’t know
2%  - Prefer not to say

The heinous data above comes from Finra’s newly released Financial Capability Survey: only 28% of the national sample of more than 28,000 adults had a clue that bond prices would fall if interest rates went up.  This strikes me as a pretty good argument to get a competent financial advisor.

In unrelated news, 67% of respondents rated their overall financial knowledge as “high,” and 75% endorsed the statement, “I am pretty good at math.”

The financial market is a really expensive place to get an education.”

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Diversification and Risk Management.

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Many investing blogs and websites exist for the purposes of investor education, and many are professionals that are supposed to have a fiduciary duty to their clients.  If you write an investment blog or run an investment website and also run Google Ads such as the below on your site I can’t take you seriously.  It’s embarrassing.

81% Profit in 1 Hour – Every Hour!

What are today’s top 3 hot stocks? Top 3 penny stocks gaining fast.

Up 1,381% since inception

I read everything from GMO so a bit surprised I didn’t see this:  Momentum – A Contrarian Case for Following the Herd

from South America.  If you are in Buenos Aires and want to meetup, drop me a line!

There are not any topics that incite more vitriol than the Federal Reserve and the U.S. Dollar.  The following post borrows heavily from The Chart of the Day 11/15 from Ned Davis Research.  (If you are not familiar NDR is consistently one of the best quant shops on the Street.)

One of the most famous charts in all of the investing literature is the one below that illustrates the U.S. Dollar’s purchasing power since the creation of the Federal Reserve in 1913.  The description usually goes along the lines of this ZeroHedge post:

“This is the chart they don’t want you to see: the purchasing power of the dollar over the past 76 years has declined by 94%. And based on current monetary and fiscal policy, we have at least another 94% to go. The only question is whether this will be achieved in 76 months this time.”

The above statement is factually true – $1.00 in 1913 is only worth about $0.03 in current dollars due to the effects of inflation (which have averaged about 3.3% a year).  But that is all the chart tells you – that the U.S. has had mild inflation this century (with fits of disinflation, deflation, and high inflation mixed in):

The chart is then used to justify any number of arguments, usually laden with exclamation points!! bold text and large fonts.   Cries to end the Fed, buy gold (or sell gold), sell stocks and build forts stocked with guns, food, and ammunition usually follow in a stream of rants and raves. These articles are written like this for a reason as it elicits an emotional response (who doesn’t hate their government?) and certainly makes for great headlines and copy.

The problem that almost everyone (and I mean everyone) misses is that you have to do something with those dollars.  An investor can chose to put them under their mattress, in which case your purchasing power would be just that of the above chart.  Or, one could invest in T-Bills, in which case the dollar was a perfectly fine store of value, and your $1 would be worth $1.41 today (for a real return of 0.35% per annum).

However, if an investor decided to take on a little more risk they could have invested in longer duration bonds, corportate bonds, foreign currencies, gold,  or even equities all of which would have been better stores of value than your mattress.  The below chart shows real returns of stocks and bonds.  While $1 would be worth only three cents had you put your hard earned cash under the mattress, it would be worth $1.41 had you invested in T-Bills, $5.05 in 10-Year Bonds, and a whopping $271 in US stocks:

For those looking for a beautiful coffee table book on this topic check out Triumph of the Optimists: 101 Years of Global Investment Returns.

Data Source: Global Financial Data, Shiller

I’m in Seattle the next few days – drop me a line if you’re around.

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Time’s 50 Best Inventions ( The iSi Soda Siphon looks like a must order).

Lots of Top 10 Lists on the site including the very entertaining Top 10 Weird Insect Mating Rituals.

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Kahneman on experience vs. memory.  If you don’t have time then skip to the Q and A.

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I was reading an article on Peter Thiel today that reminded me a lot of Ned Davis’s fantastic book “Being Right or Making Money” (that is currently selling for a Klarman-esque $300 on Amazon).  For those not familiar, Thiel is one of the best entrepreneurs in the U.S. (PayPal co-founder, early Facebook investor).  However, after starting with some strong returns, his hedge fund Clarium Capital is looking at its third losing year in a row.  (If you want more info on Thiel (Wiki here) or on Clarium check out MarketFolly’s page.  Jay is a must read especially this week as all of the funds are filing 13Fs.)

I read all of his research I can get my hands on but it goes to show how difficult our business is, but also how difficult it is to translate economic theory, public policy, and personal views into actionable and more importantly, profitable investment ideas.

Books on the way for the holiday season – anything good I need to take a look at:

The Evolution of Technical Analysis: Financial Prediction from Babylonian Tablets to Bloomberg Terminals – Andrew Lo

The Quant Investor’s Almanac 2011: A Roadmap to Investing – Aldridge

The Warren Buffetts Next Door: The World’s Greatest Investors You’ve Never Heard Of and What You Can Learn From Them – Schifrin

The Power of Passive Investing: More Wealth with Less Work – Ferri

Frozen Desire: Meaning of Money – Buchan

Collected Works of Jules Verne

One of the biggest casualties of the 2008/9 bear markets was investors who had portfolios that were not aligned with their timeframe.  Many retirees went into the bear markets with portfolios with 50-100% in equity like assets when they had no reason to have any exposure to risk at all.  At the same time many institutions ran into trouble because their long timeframes clashed with their short term liquidity needs.

Anyways, one of the biggest disservices at investor can do to their portfolio is to act on a timeframe that is not consistent with their objectives.  People often ask me how they should allocate their assets to a new system or portfolio.  I say it is totally and 100% situation specific, not only from a CAGR maximization standpoint but also from a psychological well being frame of mind.  Simply avoiding the “I should haves”  or “I’m brilliants” is important.  While I always invest my assets immediately I think scaling into portfolios or allocations is completely reasonable.  Pick your timeframe – scale in over X-months, quarters, years, whatever.

Anyways, below is the same market on four different timeframes.  Notice how different the equity curves look as you move out (5 min, hourly, daily, weekly, and monthly bars).

Most of what we do operates at the timeframe of the last two charts.

(Also of interest may be these posts on long term equity valuations, pension funds and mismatched expectations, and poor timing.)

I’m doing an hour long live chat with Charles Kirk today.  It is text based (I type slow) so we have a full hour including questions.

Sign up here.

(This link will work for the archived version as well.)

Two great reads from GMO (Back to Basics: Six Questions to Consider Before Investing) and Hussman (Bubble, Crash, Bubble, Crash)

For all those people that missed the Webcast I’ll post a link here once compliance is done with it.

I will be in Seattle for a few days next week, drop me a line if you want to meetup!

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I’ve always had a sweet spot for the Market Wizard style books and here is a new one from Forbes’s Matt Shifrin: The Warren Buffetts Next Door: The World’s Greatest Investors You’ve Never Heard Of and What You Can Learn From Them. (And his website here.)

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Here is a link to a sleepy and somewhat dissheveled interview:

Quant ETF Aims for Ivy Endowment Returns, Thomson Reuters: REUTERS INSIDER

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Lots of free data sources here

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Esquire Commission to Balance the Budget