World Beta Blog

A few years ago when we were publishing our first book Wiley sent us a few covers, and I hated all of them.  I proceeded to hold a design contest on 99Designs, and then sent Wiley a few of the entrants that I thought were much better.  Wiley disagreed, so I threw a tantrum and then said “let’s let the people decide” and had a vote on the blog.  The result?  My cover got 5% of the vote and Wiley’s won and became the current cover (which I now like).   I don’t pretend to have any design ability (or style according to my girlfriend).

I recently asked readers of The Idea Farm how they wanted to receive the info, by email or on a blog.  A whopping 92% said email (which is stunning to me).  

• We are taking down all social media for The Idea Farm, including Twitter, Facebook, and the blog.  Again, many of the publications we send out are very exclusive with their content and they don’t want it out on the web for everyone to read.  

• The list is moving to subscription-only for $195 per year.  I will still curate the research, but I want to be able to hire an analyst to help out with sourcing ideas as well as running the operations of the site.  I also don’t want to take affiliate revenue or clutter up the site with advertising to ensure all of the emails are unbiased and conflict-free.  

• Some may think $195 is expensive, but realize you are getting access to over $50,000 in research (if not $100k, I’ll tally up the total cost at end of year 1).  That is a 99.9% discount.

I’m doing a white paper/blog posts (or book depending) on some of the most popular asset allocation strategies.  Below are a few we are going to write about….any good ones I’m missing?

Strategic 

60/40

Equal Weight

Coffee Can

Tobias

Bernstein

Endowment

Norway

Minimum Variance

Permanent

Risk Parity (All-Weather)

5.  Investment newsletter focused on Best Ideas.  Each month interview a hedge fund or other manager and outline their 1-3 best ideas.  Manual of Ideas does this a bit with their online conferences, and I know periodically Barron’s does their roundtable, Private Investment Brief is a spinout of Santangel’s, and SumZero or VIC have private networks where people volunteer their ideas. But I haven’t seen much here on an ongoing basis. (There are also our list of “ideas” conferences.)    

We are going to do it as an extension of Hedge Fund Letters.  Let me know if you’re interested!

(Update:  I penned most of these articles awhile ago, but in the meantime it looks like Mauldin has launched something similar called Just One Trade - although it is going for a whopping $2,500.)

I used to use Portfolio123 years ago but stopped since they didn’t include dividends.  And not including dividends is like having a car with no engine.  I was pleasantly surprised to see they have now integrated S&P Compustat (which along with FactSet are the two best institutional quality backtesters but both cost well over $50k per year).  

Worth checking it out.

I received a lot of emails from readers on the shift to a premium offering, so I thought I would summarize the why and the what.

The What

1.  If you subscribe to MFR or Idea Farm you will get first look at our publications, including the recently completed QTAA paper 2012 update.

2.  You get a free copy of all upcoming books – including Shareholder Yield out in a few weeks.

3.  Updates to data series readers want – ie quarterly CAPE updates.

4.  Mailbag questions from readers.

5.  Most interesting I think, quant research systems and ideas not available to the general public.

The Why

1.  The reality is that it is expensive to run a research shop.  I wish I had a team of analysts that worked for free, but we paid ~$250-300k in data and research costs in 2012, on top of another $200k in lawyer fees (in addition to rent, salaries, etc).  Once the money management biz gets to scale I’d love to have all of the research published for free again.  

2. I am hoping it forces me to write more.  A lot more.  

3.  We are taking The Idea Farm private next week and charging a small fee.  Preferably, if we convert enough readers I’ll return MFR to totally free and refund the charges (so make sure to signup!).  

Again, this is a new experiment for me so we’ll see how it goes!  Any feedback is certainly helpful…

I’m pretty bullish on stocks right now.  Global valuations are cheap, although the US is one of the top 4 most expensive markets on a 10 year CAPE basis.  But right now, the US is allowed to be expensive.

Below are the two biggest threats to the equity markets.  Let me explain:

Keep Reading…

People often ask me why we use 10 year inflation adjusted PE ratios rather than simple trailing 12 months.  

Below are two charts that I think are at the crux of the arguement, and basically visually demonstrate why CAPE works.  

0.75 correlation for CAPE, and only 0.24 correlation for TTM PE.

Keep Reading…

I don’t pretend to consume information the same way my readers do (I still don’t have a Kindle or iPad, though probably should).  I was chatting with a reader over breakfast and this question came up, so I thought I would ask you directly how you would prefer to receive The Idea Farm content…

You probably think you are good at picking stocks (and investing in general).  I hate to be the bearer of bad news, but you are not.  In fact, you are terrible at investing.  Now, there may be a few of you that outperform, and part of that is due to luck, but I am speaking to the collective “you”.

The statistics back up his assentation.  DALBAR releases a yearly study called The Quantitative Analysis of Investor Behavior (QAIB) that compiles flow data of dollars into mutual funds.  They have found that the average investor underperforms the market by a mile – 4.32% per year in stocks and 5.56% per year in bonds! 

So why do most people think they are great investors?  Likely the same reason most people think they are better drivers than average, and are certainly better looking than average.  It is a built in behavioral bias floating around in our genetics passed down from our ancestors many years ago.

Don’t be too downtrodden; stock picking is hard, really, really, hard.  The basic odds are stacked against you.  My friends at Longboard Asset Management completed a study called The Capitalism Distribution that examined stock returns from the top 3000 stocks from 1983-2007.  They found that:

-39% of stocks were unprofitable investments.

-19% of stocks lost at least 75% of their value.

-64% of stocks underperformed the index.

-25% of stocks were responsible for all the market’s gains.

Simply picking a stock out of a hat means you have a 64% chance of underperforming a basic  index fund, and roughly a 40% chance of losing money! 

Not only is it hard to pick stocks, you are also up against the most talented investors in the world.

There is a famous saying in poker, “If you sit down at the table and don’t know who the fish is – you’re the fish.”  Most people who sit down at a poker table with a professional player will quickly lost all of their money.  While luck can have an influence in the short term, eventually the outcome is near certain.  Most individual investors do not know that they are the fish in the game known as Wall Street…

(Will update this post with a few more stats this weekend…)

Click to enlarge graph (Blackrock, via InvestaBullish)

Every day I receive a slew of emails asking about historical data.  While I use Global Financial Data ($), below are some resources for free and paid historical data.  If you are close to a B-School you can probably access a lot of the paid for free as well.  Some readers also suggested public libraries that give you access to ValueLine, Morningstar, etc.

Please leave a comment if you know of any other good websites I am missing.  

Quandl is also another one that readers have emailed in (HT: LW).

Free Multi-Index Data

The book is about $160, although you can probably get one used for less.  Not sure how much the data sub is on Morningstar.    Stocks, Bonds, Bills, and Inflation – Ibbotson (now part of Morningstar).  Includes monthly data for US Stocks Large (1926), US Stocks Small (1926), Long Term Corporate Bonds (1926), Long Term Government Bonds (1926), High Yield Corporate Bonds (1926), Intermediate Term Government Bonds (1926), Inflation (1926), T-Bills (1926).  Since 1969 adds Gold and Value/Growth classifications. 

Surprised no one has turned this into an Excel sheet.

Shiller has US Stocks, Dividends, Earnings, Inflation (CPI), and long term interest rates back to the 1870′s on his website.

Ralph Vince’s Barron’s Download

WREN

Free US Stock Index Data

Fama-French (Monthly 1926, Daily 1963)

Free Foreign Stock Index Data

MSCI Barra

Free Interest Rate Data

St Louis FRED CPI, Interest Rates, Trade Data

Free Real Estate Data

REIT data (1972)

Housing Shiller (1890)

Commodity Data

Morningstar, IASG, Barclay’s

Paid ($$) Data Sources

Morningstar Encorr ($10,000)

Morningstar Dimson, Marsh, Staunton Module ($3,000)

Pinnacle

CSI

CRSP ($25,000)

OlsenData

QuotesPlus

Norgate