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Re: A Backtest of the Dividend Growth Model, 1871-2010

TJSI,

Earnings can definitely be incorporated into the DDM.

ROE*(1-Payout Ratio) = Sustainable Growth Rate
EPS*Payout= Dividend per Share

Yes you are taking the PV of the dividend cash flows, but they are derived from earnings using the payout ratio and ROE.
by rmelvey
Wed Oct 29, 2014 9:39 pm
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 68
Views: 3685

Re: commodities and multi-asset class portfolios

When calculating the skewness of the portfolio are you doing it based off of the log returns? If not, a 5% loss is not equivalent to a 5% gain and so it makes sense that one would prefer positive skew because large negative returns kill the effect of compounding. However, if doing this based off of ...
by rmelvey
Wed May 21, 2014 8:48 pm
 
Forum: Investing - Theory, News & General
Topic: commodities and multi-asset class portfolios
Replies: 65
Views: 3738

Re: (In)efficient markets, utility curves, and investing ris

I think putting more can into equities for longer time horizons can be justified if you go outside of the EMH. You can break down equity returns into the investment return (dividend payments) and the speculative return (changes in the multiple paid for a dollar of dividends). The actual investment r...
by rmelvey
Wed Jan 01, 2014 11:46 am
 
Forum: Investing - Theory, News & General
Topic: (In)efficient markets, utility curves, and investing risk
Replies: 16
Views: 967

Re: Rebalancing the Permanent Portfolio

That article has its facts wrong. The PP was never down 15% in 2013. I wouldn't trust their opinion on the portfolio if they can't calculate its returns properly.
by rmelvey
Tue Dec 31, 2013 12:11 pm
 
Forum: Investing - Theory, News & General
Topic: Rebalancing the Permanent Portfolio
Replies: 28
Views: 1871

Re: Rebalancing the Permanent Portfolio

I am using the PP and have been for the last 3 years. Today I sold some stocks, bought gold, and bought LTT. It does feel contrarian, but I am okay with that. The portfolio didn't have a great year, but every strategy has some down years. If anyone out there is rebalancing into gold, take a look at ...
by rmelvey
Tue Dec 31, 2013 11:25 am
 
Forum: Investing - Theory, News & General
Topic: Rebalancing the Permanent Portfolio
Replies: 28
Views: 1871

Re: The Case for High Yield Bonds

I don't own them, but they are part of the market portfolio. Not owning them is somewhat of a tilt. I can see the benefits (mainly peace of mind that you are getting your fair share) from owning the market portfolio which would warrant a representative allocation to HY bonds.
by rmelvey
Sat Dec 28, 2013 6:21 pm
 
Forum: Investing - Help with Personal Investments
Topic: The Case for High Yield Bonds
Replies: 24
Views: 2016

CFA Results

Anyone else take the CFA? Results came out today. I passed level one :D
by rmelvey
Tue Jul 23, 2013 8:33 pm
 
Forum: Personal Finance (Not Investing)
Topic: CFA Results
Replies: 30
Views: 3395

Re: Suggestions for Switzerland trip

I am in Zurich right now. So far my favorite part of the city is the old industrial district that is becoming more of an artist spot. Lots of cool shops in the arches of the old viaduct.
by rmelvey
Fri Jul 12, 2013 12:46 pm
 
Forum: Personal Consumer Issues
Topic: Suggestions for Switzerland trip
Replies: 7
Views: 572

Re: A spectacular movie, and a terrible movie

I thought Crash was very terrible as well. The worst part is that I was telling my sociology professor how bad the acting and premise was.. turns out she loved it! :|
by rmelvey
Fri Jul 12, 2013 3:33 am
 
Forum: Personal Consumer Issues
Topic: [Can you recommend]A spectacular movie, and a terrible movie
Replies: 161
Views: 10856

Re: TIPS question

hudson, There might be a risk premium associated with taking the inflation risk. So if inflation comes in just as expected, the nominal bond would outperform. With that said, TIPS are fantastic for someone who is saving for retirement. They are the closest thing to a "risk free" asset so I...
by rmelvey
Sat Jul 06, 2013 6:24 am
 
Forum: Investing - Theory, News & General
Topic: TIPS question
Replies: 12
Views: 1323

Re: How do I TLH gold?

The gold ETFs have a totally different legal structure from GTU. They are not very close to being identical at all. That would be a good pair to swap in and out of for TLH.
by rmelvey
Wed Jul 03, 2013 6:51 pm
 
Forum: Investing - Help with Personal Investments
Topic: How do I TLH gold?
Replies: 12
Views: 886

Re: Saving money for taxes - invest it?

You should invest it... but in T-Bills :wink:
by rmelvey
Fri Jun 21, 2013 1:39 am
 
Forum: Investing - Theory, News & General
Topic: Saving money for ~1 year - how to invest?
Replies: 31
Views: 2301

Re: The Perfect Storm for the Permanent Portfolio?

The thing is, in the short run tapering is no good for any asset except for cash. No major asset class is up today. The PP can not work magic. For someone that is in a PP, departing from a PP almost necessarily means moving to something less diversified which runs the risk of blowing up later.
by rmelvey
Thu Jun 20, 2013 10:18 am
 
Forum: Investing - Theory, News & General
Topic: The Perfect Storm for the Permanent Portfolio?
Replies: 5
Views: 794

Re: Does your bond fund own any stocks?

I think an even sneakier example of this is when bond funds own bonds that act like stocks because the credit quality is so low. Makes it really hard to understand your risk allocation.
by rmelvey
Tue Jun 18, 2013 2:27 pm
 
Forum: Investing - Theory, News & General
Topic: Does your bond fund own any stocks?
Replies: 6
Views: 603

Re: How Commodities Can Help a Portfolio

Another important thing to keep in mind is that gold and silver have been perfectly investable in since the early 1970s. I think squabbling over the commodity indices is missing the bigger picture. One can use gold and silver as a proxy for the commodity universe and understand the diversification s...
by rmelvey
Tue Jun 11, 2013 4:02 am
 
Forum: Investing - Theory, News & General
Topic: How Commodities Can Help a Portfolio
Replies: 129
Views: 8641

Re: How Commodities Can Help a Portfolio

rmelvey, Can you do this for commodities? And explain how, if one ignores ex-post returns, one can be sure the macro theory was correct, and applied correctly? use simple macro theory to understand the diversifying properties of certain investments, ignoring their ex-post correlation coefficients W...
by rmelvey
Fri Jun 07, 2013 3:10 pm
 
Forum: Investing - Theory, News & General
Topic: How Commodities Can Help a Portfolio
Replies: 129
Views: 8641

Re: Today's WSJ: Old School Stock Picker Struggles w Index C

Active management is what makes indexing work. Rick Ferri Hah, much more succinct than my post :) There are few arbitrage opportunities because people think that there are arbitrage opportunities. Contrarily, if everyone thought that there were no arbitrage opportunities, they would be plentiful. T...
by rmelvey
Fri Jun 07, 2013 2:48 pm
 
Forum: Investing - Theory, News & General
Topic: Today's WSJ: Old School Stock Picker Struggles w Index Craze
Replies: 17
Views: 2337

Re: How Commodities Can Help a Portfolio

I feel like most of the commodity detractors in this thread here haven't internalized the difference between a supply shock and a demand shock. Citing the 2008 crisis as a reason to not hold commodities is a prime exhibit of this. If you hold the stock market: -bonds offer a demand shock hedge -comm...
by rmelvey
Fri Jun 07, 2013 2:29 pm
 
Forum: Investing - Theory, News & General
Topic: How Commodities Can Help a Portfolio
Replies: 129
Views: 8641

Re: Today's WSJ: Old School Stock Picker Struggles w Index C

Personally, I think that active managers play a crucial role in keeping the markets sane. I especially respect value investors, who IMO, help the markets function as they are supposed to. With that said, I index because it makes sense from a cost perspective. When you index, you basically have all o...
by rmelvey
Fri Jun 07, 2013 2:21 pm
 
Forum: Investing - Theory, News & General
Topic: Today's WSJ: Old School Stock Picker Struggles w Index Craze
Replies: 17
Views: 2337

Re: Heavy Reading

If you want to dive really deep into the non-normality of markets than I would check out Benoit Mandelbrot's book "The (mis)Behavior of markets." He proposes a way of describing the stock market using fractal mathematics. In one of the final models he proposed before he died, he suggested ...
by rmelvey
Wed Jun 05, 2013 8:51 pm
 
Forum: Investing - Theory, News & General
Topic: Heavy Reading
Replies: 12
Views: 1627

Re: How Commodities Can Help a Portfolio

Hi Larry, Since monetary policy has such a huge affect on the bond market (explicitly altering the short end of the curve, and implitly changing the long end because of pure expectations hypothesis), couldn't one make the argument that gold is the better inflation hedge in the context of a diversifi...
by rmelvey
Wed Jun 05, 2013 1:18 pm
 
Forum: Investing - Theory, News & General
Topic: How Commodities Can Help a Portfolio
Replies: 129
Views: 8641

Re: Holding all world currencies in a cap-weighted index fun

Well, I am not sure the OP is referring to holding money under the mattress. Probably at very least held in interest bearing cash equivalents. BWZ is the best proxy for an international ST debt portfolio, although you can't backtest it very far. Personally I wouldn't count on currency diversificatio...
by rmelvey
Tue Jun 04, 2013 3:00 pm
 
Forum: Investing - Theory, News & General
Topic: Holding all world currencies in a cap-weighted index fund
Replies: 3
Views: 309

Re: How Commodities Can Help a Portfolio

Hi Larry, I just did a little messing around in simba's spreadsheet and I would appreciate your thoughts... I looked at excess returns (above the T-Bill return) for stocks, commodities, gold, and inflation. With respect to inflation (in excess of the T-Bill rate) gold has a beta of 5.4, commodities ...
by rmelvey
Tue Jun 04, 2013 1:09 pm
 
Forum: Investing - Theory, News & General
Topic: How Commodities Can Help a Portfolio
Replies: 129
Views: 8641

Re: Argument for a 100% stock allocation for 20 yr horizon

Yes I think it varies depending upon the job/field. For most young people the present value of their human capital is the most valuable asset they own. I think it makes sense to get a rough grasp on the approximate equity beta of their human capital before deciding on a stock/bond mix. For example, ...
by rmelvey
Mon Jun 03, 2013 2:39 pm
 
Forum: Investing - Theory, News & General
Topic: Argument for a 100% stock allocation for 20 yr horizon
Replies: 112
Views: 8436

Re: Argument for a 100% stock allocation for 20 yr horizon

I think human capital has a risk/reward profile similar to a junk bond. The coupon payments give the appearance of stability, but in a nasty recession they dry up very quickly. For me, incorporating human capital into the mix prompts me to take less equity risk, not more.
by rmelvey
Mon Jun 03, 2013 1:52 pm
 
Forum: Investing - Theory, News & General
Topic: Argument for a 100% stock allocation for 20 yr horizon
Replies: 112
Views: 8436

Re: How Commodities Can Help a Portfolio

"Causation" would be great if you knew what caused what, but I'm not convinced you do. I don't "expect" much of assets, because my observation is that whenever I check out statements about how various investments "tend to" act--even statements with "causality"...
by rmelvey
Mon Jun 03, 2013 1:23 pm
 
Forum: Investing - Theory, News & General
Topic: How Commodities Can Help a Portfolio
Replies: 129
Views: 8641

Re: Total International Bond Fund

I think they decided to go hedged because they didn't want their bond funds to become a proxy for speculative currency bets. Making it hedged makes it more boring, creating a sticker asset base. I am not sure how I feel about it. Part of me thinks that foreign currency exposure feels risker than it ...
by rmelvey
Sun Jun 02, 2013 3:30 pm
 
Forum: Investing - Theory, News & General
Topic: Total International Bond Fund
Replies: 4
Views: 798

Re: How Commodities Can Help a Portfolio

March, 2013, Consumer Reports Money Advisor : But the thing is: either you have to believe there are simple stay-the-course strategies that just work, or you believe that you need to be agile and understand the markets and do some kind of white-water slalom through them. Well, in the first place, I...
by rmelvey
Sun Jun 02, 2013 3:22 pm
 
Forum: Investing - Theory, News & General
Topic: How Commodities Can Help a Portfolio
Replies: 129
Views: 8641

Re: How Commodities Can Help a Portfolio

March, 2013, Consumer Reports Money Advisor : Worth the trouble? We created two hypothetical portfolios that were worth $100,000 at the beginning of 2008. We invested one in an traditional mix of 60 percent stocks and 40 percent bonds. The other contains 51 percent stocks, 34 percent bonds, and 15 ...
by rmelvey
Sun Jun 02, 2013 3:11 pm
 
Forum: Investing - Theory, News & General
Topic: How Commodities Can Help a Portfolio
Replies: 129
Views: 8641

Re: Argument for a 100% stock allocation for 20 yr horizon

The idea of time horizon having anything to do with risk tolerance is actually extremely controversial in the academic community. I think everyone should check out Zvi Bodie, and at least try to come up with a decent counter argument to his thoughts on the subject. Thus far, I haven't seen a decent ...
by rmelvey
Sun Jun 02, 2013 12:03 pm
 
Forum: Investing - Theory, News & General
Topic: Argument for a 100% stock allocation for 20 yr horizon
Replies: 112
Views: 8436

Re: DFA Growth funds?

I said it in the last thread on this, but I think it's worth reiterating. P/E = (P/B) / (ROE) You can see P/B as a proxy for what the academics call "value" and and ROE as a proxy for "quality." There is really nothing new with combining these two metrics. P/E is already a perfec...
by rmelvey
Thu May 30, 2013 6:42 pm
 
Forum: Investing - Theory, News & General
Topic: DFA Growth funds?
Replies: 47
Views: 5130

Re: Fed tigthening? What to do? How markets act

Hi Larry, Fed tightening brings up something I have meaning to ask you... :happy I was wondering if you could shed some more light on why you don't like the barbell strategy. Your other article on pure expectations theory makes me think you understand some of the subtle benefits of a barbell. I like...
by rmelvey
Thu May 30, 2013 12:39 pm
 
Forum: Investing - Theory, News & General
Topic: Fed tigthening? What to do? How markets act
Replies: 41
Views: 2979

Re: trading costs matter

I am a big believer in Mr. Bogle's "costs matter hypothesis." That is why I stick with total market indices :D

So, DFAs approach to getting market exposure makes sense to me because they are largely sticking with that hypothesis. I just find their ERs a wee bit high personally.
by rmelvey
Thu May 30, 2013 12:31 pm
 
Forum: Investing - Theory, News & General
Topic: trading costs matter
Replies: 13
Views: 1079

Re: Do Commodities Hedge Against Inflation?

I guess I lack the standard deviation-aversion gene or something, because I'd tend to accept a moderate overall short or medium term fluctuation risk in a long-term portfolio before I'd sleep well introducing CCFs (some sort of derivative based on commodity speculation, right?) to theoretically low...
by rmelvey
Wed May 29, 2013 12:19 pm
 
Forum: Investing - Theory, News & General
Topic: Do Commodities Hedge Against Inflation?
Replies: 63
Views: 3523

Re: Cash versus bonds-Why not?

If you have a 15 year time horizon, your risk free asset is a 15 year inflation protected security. With a shorter duration bond, you are actually exposing yourself to another kind of risk: reinvestment risk. Long bonds are not riskier than short bonds. Risk comes from not matching the duration of y...
by rmelvey
Tue May 28, 2013 10:39 pm
 
Forum: Investing - Help with Personal Investments
Topic: Cash versus bonds-Why not?
Replies: 54
Views: 5392

Re: "There is a rebalancing bonus ... false"

Here is a link to the spreadsheet:
https://docs.google.com/spreadsheet/ccc ... MbVE#gid=0

It's very clear to see that it is pure randomness.
by rmelvey
Tue May 28, 2013 4:28 pm
 
Forum: Investing - Theory, News & General
Topic: "There is a rebalancing bonus ... false"
Replies: 188
Views: 14008

Re: "There is a rebalancing bonus ... false"

rmelvey, I wish you would state clearly what it is that you think rebalancing accomplishes. Because this thread is about the reality of a rebalancing bonus or lack thereof. But on your web page you certainly seem to be implying that rebalancing does something or other to increase returns. nisi, You...
by rmelvey
Tue May 28, 2013 4:14 pm
 
Forum: Investing - Theory, News & General
Topic: "There is a rebalancing bonus ... false"
Replies: 188
Views: 14008

Re: Do Commodities Hedge Against Inflation?

Here is my take on gold/inflation: If you want something that tracks inflation then buy an I-bond. If you want something to round out a diversified portfolio of stocks, bonds, and bills, then consider adding gold. Looking at assets in isolation is always dumb. For something like gold it is even dumb...
by rmelvey
Tue May 28, 2013 3:16 pm
 
Forum: Investing - Theory, News & General
Topic: Do Commodities Hedge Against Inflation?
Replies: 63
Views: 3523

Re: "There is a rebalancing bonus ... false"

nisi, I think taking the game to it's next logical extreme will help you realize the importance of geometric means. Let's say the game was a 50/50 chance of losing 100% or gaining 1000%. If you knew that you were going to repeat this game forever, would you still bet all of your money? It's pretty c...
by rmelvey
Tue May 28, 2013 1:32 pm
 
Forum: Investing - Theory, News & General
Topic: "There is a rebalancing bonus ... false"
Replies: 188
Views: 14008

Re: The new profitability factor, US and int'l evidence

rmelvey Holding P/E constant, a lower P/B implies a lower ROE. Don't think this is true. Book value is historical long-term while p/e is current. It MIGHT be true over the long term but untrue today. Larry Hi Larry, I am talking about the algebra of the metrics when looking at a single firm. ROE = ...
by rmelvey
Sun May 26, 2013 3:40 pm
 
Forum: Investing - Theory, News & General
Topic: The new profitability factor, US and int'l evidence
Replies: 169
Views: 11654

Re: Do Commodities Hedge Against Inflation?

rmelvey, I'm just going to state what I believe but not try to defend it here. I do not believe a zero return asset can ever improve a portfolio by virtue of low correlation or zero correlation. The only way it can improve a portfolio is through negative correlation. Nisiprius - Just saw this comme...
by rmelvey
Sat May 25, 2013 2:17 pm
 
Forum: Investing - Theory, News & General
Topic: Do Commodities Hedge Against Inflation?
Replies: 63
Views: 3523

Re: Do Commodities Hedge Against Inflation?

Jumping off of Larry's point, the best regression I have personally been able to run for annual gold price changes is using annual changes in the spot price of oil... R^2 in the mid 30s. Those gold miners are not going to like higher energy prices. Rising cost of production is bad for the producers,...
by rmelvey
Sat May 25, 2013 1:32 pm
 
Forum: Investing - Theory, News & General
Topic: Do Commodities Hedge Against Inflation?
Replies: 63
Views: 3523

Re: Do Commodities Hedge Against Inflation?

Here is some "voodoo" for the commodity haters 8-) 100% Stocks CAGR: 9.68% 100% Gold CAGR: 8.9% 50% Gold / 50% Stocks CAGR: 10.74% Diving in a little bit further, that combined portfolio CAGR is 1.44% higher than the weighted average of the components CAGRs. Whenever people try to trash g...
by rmelvey
Fri May 24, 2013 7:17 pm
 
Forum: Investing - Theory, News & General
Topic: Do Commodities Hedge Against Inflation?
Replies: 63
Views: 3523

Re: Do Commodities Hedge Against Inflation?

Here is some "voodoo" for the commodity haters 8-) 100% Stocks CAGR: 9.68% 100% Gold CAGR: 8.9% 50% Gold / 50% Stocks CAGR: 10.74% Diving in a little bit further, that combined portfolio CAGR is 1.44% higher than the weighted average of the components CAGRs. Whenever people try to trash go...
by rmelvey
Fri May 24, 2013 6:44 pm
 
Forum: Investing - Theory, News & General
Topic: Do Commodities Hedge Against Inflation?
Replies: 63
Views: 3523

Re: "There is a rebalancing bonus ... false"

The coin flip game has an average arithmetic return of 25% Let me repeat myself. What are you averaging? And I will probably add why should I care about that particular statistic? The final distribution always has zero expected return, your just rearranging the tails. Hey ED hopefully this post wil...
by rmelvey
Fri May 24, 2013 6:17 pm
 
Forum: Investing - Theory, News & General
Topic: "There is a rebalancing bonus ... false"
Replies: 188
Views: 14008

Re: "There is a rebalancing bonus ... false"

The coin flip game has an average arithmetic return of 25%
by rmelvey
Fri May 24, 2013 5:05 pm
 
Forum: Investing - Theory, News & General
Topic: "There is a rebalancing bonus ... false"
Replies: 188
Views: 14008

Re: Do Commodities Hedge Against Inflation?

Respectfully: this retiree has not, does not, and will not go through the following thought process to keep my retirement income flowing--e.g., "You are forgetting that commodities combination of high volatility and low correlation boosts the geometric average return of the portfolio. Even if ...
by rmelvey
Fri May 24, 2013 4:32 pm
 
Forum: Investing - Theory, News & General
Topic: Do Commodities Hedge Against Inflation?
Replies: 63
Views: 3523

Re: "There is a rebalancing bonus ... false"

This is the best analysis I've seen of the rebalancing bonus. http://www.iinews.com/site/pdfs/JWM_Fall_2012_Parametric.pdf Overall, diversifying and rebalancing is a valu- able discipline and can be used to exploit volatility. Theoretically, rebalancing reduces concentration risk, downside risk, an...
by rmelvey
Fri May 24, 2013 4:24 pm
 
Forum: Investing - Theory, News & General
Topic: "There is a rebalancing bonus ... false"
Replies: 188
Views: 14008

Re: Do Commodities Hedge Against Inflation?

The authors conclude that commodities provide diversification from stocks, but so does burying money in glass jars [my input]. They also conclude that you needed to be a good market timer to make a real return on commodities and that not all commodities have provided the same return. So, to win the...
by rmelvey
Fri May 24, 2013 4:13 pm
 
Forum: Investing - Theory, News & General
Topic: Do Commodities Hedge Against Inflation?
Replies: 63
Views: 3523

Re: "There is a rebalancing bonus ... FALSE"

nisi, Look at the link that I posted earlier. There is no mean reversion in that example but there is a positive effect associated with rebalancing. It's an issue of arithmetic versus geometric returns. Mean reversion can certainly help, but it is not a necessary condition for rebalancing to boost r...
by rmelvey
Fri May 24, 2013 3:37 pm
 
Forum: Investing - Theory, News & General
Topic: "There is a rebalancing bonus ... false"
Replies: 188
Views: 14008
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