"Skating Where the Puck Was"

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"Skating Where the Puck Was"

Postby Bill Bernstein » Mon Dec 10, 2012 11:46 am

Hi All:

More a warning than an announcement here: I've just come out with a new Kindle/Nook with the above title.

I actively discourage Bogleheads from buying this one; it's aimed primarily at institutional money managers, and its content and rationale will be familiar to all of you, which are a warning against the "alternatives"/Yale Model bandwagon, which I think has grossly overgrazed its commons. You'll be wasting your money since won't learn much from it that you already don't know.

The one concept which Bogleheads might find interesting is that as an asset class becomes easier to buy and thus more widely held by weak-handed investors, its correlation with other asset classes will rise preciptously, since it also becomes easier to sell during a general downturn. But, there, I've already told you, so you don't have to pay for it!

Best,

Bill
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Re: "Skating Where the Puck Was"

Postby Tigermoose » Mon Dec 10, 2012 11:54 am

The one concept which Bogleheads might find interesting is that as an asset class becomes easier to buy and thus more widely held by weak-handed investors, its correlation with other asset classes will rise preciptously, since it also becomes easier to sell during a general downturn.


Very interesting. Could this explain why, I think, that international equities, public REITS, and GOLD have become more correlated with equities? So the catch-22 for the small investor is that assets with low correlation aren't accessible, and those that are now accessible lose some of their diversification benefit as they become accessible. This also calls into question the practice of looking at historic correlation numbers for assets that previously were not as accessible to the general investing public.
Institutions matter
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Re: "Skating Where the Puck Was"

Postby Bill Bernstein » Mon Dec 10, 2012 12:07 pm

Exactly. The best you can do is wait for the asset class to fall out of favor. Here's a great example from the booklet: the correlation of precious metals stocks with the S&P over time:

Image

See, I told you that Bogleheads wouldn't need this one.

Bill
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Re: "Skating Where the Puck Was"

Postby richard » Mon Dec 10, 2012 12:39 pm

wbern wrote:The one concept which Bogleheads might find interesting is that as an asset class becomes easier to buy and thus more widely held by weak-handed investors, its correlation with other asset classes will rise preciptously, since it also becomes easier to sell during a general downturn. But, there, I've already told you, so you don't have to pay for it!

Do you think assets become easier to buy because they have become more popular? It doesn't make sense to create a liquid market in an unpopular asset class.

Yet another case of "everyone wants to be a contrarian" ruining some nice strategies.
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Re: "Skating Where the Puck Was"

Postby BlueEars » Mon Dec 10, 2012 12:57 pm

wbern wrote:Exactly. The best you can do is wait for the asset class to fall out of favor. Here's a great example from the booklet: the correlation of precious metals stocks with the S&P over time:
....(snip)...

Bill, I'm guessing that you would not use correlation as a way to determine this, or would you? Is it a good assumption that correlations are not a useful timing mechanism? In other words, low correlations may be a sign the asset class is out of favor but do we have any hope that it will, after not too many years, ride the momentum wave again?
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Re: "Skating Where the Puck Was"

Postby grok87 » Mon Dec 10, 2012 1:00 pm

wbern wrote:Hi All:

More a warning than an announcement here: I've just come out with a new Kindle/Nook with the above title.

I actively discourage Bogleheads from buying this one; it's aimed primarily at institutional money managers, and its content and rationale will be familiar to all of you, which are a warning against the "alternatives"/Yale Model bandwagon, which I think has grossly overgrazed its commons. You'll be wasting your money since won't learn much from it that you already don't know.

The one concept which Bogleheads might find interesting is that as an asset class becomes easier to buy and thus more widely held by weak-handed investors, its correlation with other asset classes will rise preciptously, since it also becomes easier to sell during a general downturn. But, there, I've already told you, so you don't have to pay for it!

Best,

Bill

Bill,
Many thanks for the heads up. Sorry but you're going to have work much harder than that to dissuade me from reading anything you've written!
:)
Look forward to reading it.
cheers,
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Re: "Skating Where the Puck Was"

Postby Bill Bernstein » Mon Dec 10, 2012 1:21 pm

Again, thanks for all the kind words.

Well, causation probably does run both ways between ease of purchase and popularity, hard to disentagle that, and both of those lead to increased correlation.

No, I sure don't look at correlation as a measure, though John Rekenthaler, jokingly I think, suggested that one could measure the "bozality" of an asset class (the extent to which it was owned by bozos), an otherwise fairly unobservable quantity, by following correlations and working backward.

My measures are more qualitative, but Rick Ferri, who I quote in the piece, noted a good one--the % of alternatives in large endowment portfolios. It's like pornography: hard to define, but you know it when you see it.

Bill
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Re: "Skating Where the Puck Was"

Postby staythecourse » Mon Dec 10, 2012 1:22 pm

Love it. A boglehead style author, like Dr. Bernstein, coming on here to convince us not to waste our money on a book. :D

I would have to disagree there are some assets that will never high correlation. Gold (the hard stuff) and equities will NEVER have a high correlation. Cash is another. If equities are doing well no one will want to own gold or cash and their zero real return. If markets tank that is when folks take their money out and start bidding up the prices on assets considered "safe". If anything more liquid trading environments will only enhance that as it makes it easier for folks to do that. I wouldn't be surprised if the liquidity of markets is the reason volatilities seem higher now then in the past.

Good luck.
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Re: "Skating Where the Puck Was"

Postby Bill Bernstein » Mon Dec 10, 2012 1:29 pm

Stay the course:

Thanks for your comments. Then we both have testable hypotheses; I'm willing to bet that GLD, now that it has made gold an easily tradable commodity, will provide little shelter during the next downturn.

Needless to say, I was referring to risky assets, not riskless ones, whose correlation will go to -1.0 during a crisis.

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Re: "Skating Where the Puck Was"

Postby staythecourse » Mon Dec 10, 2012 1:49 pm

wbern wrote:Stay the course:

Thanks for your comments. Then we both have testable hypotheses; I'm willing to bet that GLD, now that it has made gold an easily tradable commodity, will provide little shelter during the next downturn.

Needless to say, I was referring to risky assets, not riskless ones, whose correlation will go to -1.0 during a crisis.

Bill


i love it a bet with Dr. Bernstein. :D

On a more serious note I 100% agree that riskly assets will go to 1.0 in times of crises. Now the question is if risky assets go to 1.0, i.e. tanking, where does all the money go?? My guess is cash, LTGB, gold or some combination.

Off the topic, but since I have your ear can you tell me why in times of crises money bids up the longest end of the yield curve, i.e. Long term treausuries?? I would think with how liquid treausury bonds are that folks would flock to shor term treasuries (just to eliminate default risk) until the stress subsides?? It isn't like most folks hold treasuries until maturities. Is this behavioral to go for the furthest out in times of market stress or is there another reason??

Thanks.
...we all think we're above average investors just like we all think we're above average dressers... -Jack Bogle
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Re: "Skating Where the Puck Was"

Postby Bill Bernstein » Mon Dec 10, 2012 2:03 pm

The money goes nowhere; for every dollar of an asset class that gets sold, someone else buys it from the seller.

Rather, the equilibrium price falls.

Think about the loss in home values the 4 years. Where did that money "go"? Money certainly didn't flow "out" of houses. Their value simply fell. End of story.

Yields fall across the board during a crisis, and since price change is approximated by [duration * yield change], you see more price change at the longer end.

Bill
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Re: "Skating Where the Puck Was"

Postby chaz » Mon Dec 10, 2012 2:30 pm

I will reread "The Four Pillars of Investing", a terrific book for non-institutional investors.
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Re: "Skating Where the Puck Was"

Postby btenny » Mon Dec 10, 2012 3:37 pm

Does anyone have correlation curve like above for Small Cap Value? Does the Small Value premium still exist or has it gone away for the same reason discussed above? Everyone is tilting and buying this class has never been easier. So is there any benefit any longer to tiltiing?

Bill (the btenny one)
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Re: "Skating Where the Puck Was"

Postby Bill Bernstein » Mon Dec 10, 2012 4:30 pm

Well, since the major driver of SV returns is simply the market return, the correlations with other asset classes are going to be pretty similar to TSM.

The larger question is whether the premium has gone away because it's gotten so much easier to buy.

I don't know the answer to that one, but I suspect the correct response is that "some of it has."

But not all of it; as I write in the piece, the unabated enthusiasm for IPOs suggests that the speculating public is still happy to overpay for growth, and thus underpay for value.

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Re: "Skating Where the Puck Was"

Postby wjo » Mon Dec 10, 2012 5:01 pm

Bill -

No worries. I enjoy your writing so much it will be an early Christmas present to myself - even if I already know most of it!

Two comments/observations/questions:

1. If asset correlations are rising for easily investable assets, perhaps the value of slicing and dicing is diminished? (Particularly for those who use a value tilt - value investing is something you continue to advocate for in your recent missive - if correlations are increased, perhaps the benefit of such an approach stems from a risk based story rather than behavioral where the benefit accrues to the patient holder?).

2. If the place to go to get better returns are those where weak handed investors aren't, I suppose for the small investor that argues looking for sidelines outside of the equity markets - side business, private real estate investing, etc. Diversifying income and assets. More risk but potentially more reward.

Anyway, that for the heads up and looking forward to the book.

-wjo
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Re: "Skating Where the Puck Was"

Postby Bill Bernstein » Mon Dec 10, 2012 5:11 pm

WJO:

Well, yet one more Boglehead has demonstrated they don't need the booklet, having reached the conclusion that I make, which is that the best opportunities:

1) Lie well outside the publicly traded markets, and
2) They involve real work, which is presumably what you're trying to avoid in retirement.
3) Carry with them a gargantuan amount of nonsystematic risk.

Bill
Last edited by Bill Bernstein on Mon Dec 10, 2012 5:29 pm, edited 2 times in total.
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Re: "Skating Where the Puck Was"

Postby btenny » Mon Dec 10, 2012 5:24 pm

So both of you are saying that self managed cash flow positive rental real estate is very likely a good investment for the little guy but frought with risk. Many here have advocated this for a long time if the properties are bought at a competitive price and you keep your total investment money low in any single property. This is old news coming back to tell us there is no free lunch. Everyone has to work as my Dad used to say.

Bill
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Re: "Skating Where the Puck Was"

Postby Bill Bernstein » Mon Dec 10, 2012 5:31 pm

Bill:

Well, it depends on the local market; it probably works well in Orlando or Tuscon, but don't try it in Portland OR.

But you have made a very important point, which is that real estate is not investing, it's *work.*

Bill
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Re: "Skating Where the Puck Was"

Postby chaz » Mon Dec 10, 2012 5:35 pm

wbern wrote:Bill:

Well, it depends on the local market; it probably works well in Orlando or Tuscon, but don't try it in Portland OR.

But you have made a very important point, which is that real estate is not investing, it's *work.*

Bill

Investing in a REIT fund isn't *work.*
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Re: "Skating Where the Puck Was"

Postby Browser » Mon Dec 10, 2012 5:53 pm

Marvelous comments, Dr. B. Now you've gone and made two groups angry with you, I'm afraid: first the Permanent Porfolioers who are counting on gold to save the bacon if interest rates take off and drag down Treasurys and Stocks like the 1970s; and second, those "expert" commentators who are endlessly chiming about all the latent "money on the sidelines" just waiting to materialize into the markets somewhere. Thank You! Now, excuse me so I can log on to Amazon and download your new Kindle book.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: "Skating Where the Puck Was"

Postby btenny » Mon Dec 10, 2012 6:05 pm

A parallel point but still valid. If people work at Real Estate as hard as many on here work at investing then they would make money either way...

Bill
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Re: "Skating Where the Puck Was"

Postby MCSquared » Mon Dec 10, 2012 6:13 pm

Browser wrote:Marvelous comments, Dr. B. Now you've gone and made two groups angry with you, I'm afraid: first the Permanent Porfolioers who are counting on gold to save the bacon if interest rates take off and drag down Treasurys and Stocks like the 1970s; and second, those "expert" commentators who are endlessly chiming about all the latent "money on the sidelines" just waiting to materialize into the markets somewhere. Thank You! Now, excuse me so I can log on to Amazon and download your new Kindle book.



I utilize the PP for part of my investment portfolio and I am not angry with his comments at all. In fact, I suggest you read Dr. Bernstein's piece about the permanent portfolio from a few years ago. I believe he said it was a thing of beauty in many respects as it's correlation grid is one not seen very often in finance. I think his problem with it was the recent money flows into the investment strategy and whether investors could stay the course due to the tracking error vis-a-vis conventional portfolios.

What should be mentioned is staying the course seems to be a problem for most portfolios. In any event, unless I am mistaken, you have previously said that stocks, long treasuries, and gold are all going to fall in value. Can I assume that you are shorting each of these or do you have a different strategy?
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Re: "Skating Where the Puck Was"

Postby matjen » Mon Dec 10, 2012 6:25 pm

William Bernstein...marketing genius!

I just bought one copy as a gift and one for myself. No one, not even the author, tells me what I don't need! I'll show you! :D
A man is rich in proportion to the number of things he can afford to let alone.
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Re: "Skating Where the Puck Was"

Postby Browser » Mon Dec 10, 2012 6:55 pm

MCSquared wrote:
Browser wrote:Marvelous comments, Dr. B. Now you've gone and made two groups angry with you, I'm afraid: first the Permanent Porfolioers who are counting on gold to save the bacon if interest rates take off and drag down Treasurys and Stocks like the 1970s; and second, those "expert" commentators who are endlessly chiming about all the latent "money on the sidelines" just waiting to materialize into the markets somewhere. Thank You! Now, excuse me so I can log on to Amazon and download your new Kindle book.



I utilize the PP for part of my investment portfolio and I am not angry with his comments at all. In fact, I suggest you read Dr. Bernstein's piece about the permanent portfolio from a few years ago. I believe he said it was a thing of beauty in many respects as it's correlation grid is one not seen very often in finance. I think his problem with it was the recent money flows into the investment strategy and whether investors could stay the course due to the tracking error vis-a-vis conventional portfolios.

What should be mentioned is staying the course seems to be a problem for most portfolios. In any event, unless I am mistaken, you have previously said that stocks, long treasuries, and gold are all going to fall in value. Can I assume that you are shorting each of these or do you have a different strategy?

I guess whether they all fall in value will depend in part on all the newly-hatched PP-ers "staying the course". As BB points out, it's a lot easier to sell gold now than it used to be, so if you had wanted out of the PP in previous times getting out of the gold was the tricky part. I guess we'll have to wait to see what happens. BTW, I'm not hoping for that outcome since I have some IAU as insurance and would like to collect in the event everything else goes into the handbasket.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: "Skating Where the Puck Was"

Postby grok87 » Mon Dec 10, 2012 7:30 pm

matjen wrote:William Bernstein...marketing genius!

I just bought one copy as a gift and one for myself. No one, not even the author, tells me what I don't need! I'll show you! :D

+1
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Re: "Skating Where the Puck Was"

Postby brick-house » Mon Dec 10, 2012 7:56 pm

browser wrote

Marvelous comments, Dr. B. Now you've gone and made two groups angry with you, I'm afraid: first the Permanent Porfolioers who are counting on gold to save the bacon if interest rates take off and drag down Treasurys and Stocks like the 1970s; and second, those "expert" commentators who are endlessly chiming about all the latent "money on the sidelines" just waiting to materialize into the markets somewhere. Thank You! Now, excuse me so I can log on to Amazon and download your new Kindle book.


What's going to save the bacon of a traditional stock/bond (60 Stock/40 bond) portfolio - if treasuries and stocks are dragged down?
You don't need no gypsy to tell you why- Greg Allman
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Re: "Skating Where the Puck Was"

Postby rnitz » Mon Dec 10, 2012 9:57 pm

Dear Bill,

If I understand your point correctly, Gretsky has started a hedge fund? No? Ok, I guess I'll stay the course and stick with low cost, diversified, index funds :D
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Re: "Skating Where the Puck Was"

Postby Bill Bernstein » Mon Dec 10, 2012 10:12 pm

Actually, that's not as much of a joke as you think; watch the credits of "Miracle," and you'll see that a significant number of the 1980 hockey gold medal winners went to work in retail finance.

Bill
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Re: "Skating Where the Puck Was"

Postby grok87 » Mon Dec 10, 2012 10:42 pm

wbern wrote:Actually, that's not as much of a joke as you think; watch the credits of "Miracle," and you'll see that a significant number of the 1980 hockey gold medal winners went to work in retail finance.

Bill

just watched it last night and noticed that as well...
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Re: "Skating Where the Puck Was"

Postby JSMill » Mon Dec 10, 2012 10:47 pm

Dr Bernstein, I'm a physician who's been in practice for a couple of years. I wanted to thank you for writing "The Four Pillars Of Investing." I only wish I had read it in residency. Maybe it will be part of required med school reading one day. Thank you!
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Re: "Skating Where the Puck Was"

Postby SpartanlyPanly » Tue Dec 11, 2012 9:55 am

wbern wrote:WJO:

Well, yet one more Boglehead has demonstrated they don't need the booklet, having reached the conclusion that I make, which is that the best opportunities:

1) Lie well outside the publicly traded markets, and
2) They involve real work, which is presumably what you're trying to avoid in retirement.
3) Carry with them a gargantuan amount of nonsystematic risk.

Bill


if true, then the worst opportunities :
1) are within the public traded markets/total markets
2) involve no work and no thinking, i.e. automatic indexing
3) carry with them a gargantuan amount of systemic risk (this is a redundant point because identical to 1) )


food for thought.
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Re: "Skating Where the Puck Was"

Postby SpartanlyPanly » Tue Dec 11, 2012 9:59 am

wbern wrote:Stay the course:

Thanks for your comments. Then we both have testable hypotheses; I'm willing to bet that GLD, now that it has made gold an easily tradable commodity, will provide little shelter during the next downturn.

Needless to say, I was referring to risky assets, not riskless ones, whose correlation will go to -1.0 during a crisis.

Bill


Could you please elaborate which assets are riskless, i.e. a guarantee for not losing any money.
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Re: "Skating Where the Puck Was"

Postby Browser » Tue Dec 11, 2012 12:16 pm

brick-house wrote:browser wrote

Marvelous comments, Dr. B. Now you've gone and made two groups angry with you, I'm afraid: first the Permanent Porfolioers who are counting on gold to save the bacon if interest rates take off and drag down Treasurys and Stocks like the 1970s; and second, those "expert" commentators who are endlessly chiming about all the latent "money on the sidelines" just waiting to materialize into the markets somewhere. Thank You! Now, excuse me so I can log on to Amazon and download your new Kindle book.


What's going to save the bacon of a traditional stock/bond (60 Stock/40 bond) portfolio - if treasuries and stocks are dragged down?

Unfortunately, it may not be possible to save the bacon if stocks and treasurys head down together. During the last quarter of 2008, the correlation of the monthly returns of Gold and TSM spiked up to 0.8 as they both went down together. As we know, it was the "flight to safety" returns from Treasurys that saved the bacon then. As Dr. B points out in his great new e-book (which I have avidly consumed) the trend of the correlation between commodities and equities has moved from negative to positive. The same thing appears to be going on with gold as well. There is still a low positive to low negative correlation between bonds and commodities and between bonds and gold. So, if stocks head down along with Treasurys, will Gold be there to "save the bacon" as in the 1970s? Maybe not. Gold was massively undervalued then, it wasn't even an investible asset except to the few, enjoyed a huge non-liquidity premium, and no-one had even heard of the Permanent Portfolio. None of those factors are at play today. When the bacon hits the fan, I don't think the PP will "crash" compared to more conventional portfolios - I think it will probably perform about the same as many similarly conservative portfolio allocations. It won't offer the same level of downside protection as it did in the 1970s, and it won't perform as well as conventional portfolios otherwise. As Dr. B points out, that's what happens to portfolio strategies once they've become bozo-ized.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: "Skating Where the Puck Was"

Postby brick-house » Tue Dec 11, 2012 1:33 pm

Browser wrote:

Unfortunately, it may not be possible to save the bacon if stocks and treasurys head down together. During the last quarter of 2008, the correlation of the monthly returns of Gold and TSM spiked up to 0.8 as they both went down together. As we know, it was the "flight to safety" returns from Treasurys that saved the bacon then. As Dr. B points out in his great new e-book (which I have avidly consumed) the trend of the correlation between commodities and equities has moved from negative to positive. The same thing appears to be going on with gold as well. There is still a low positive to low negative correlation between bonds and commodities and between bonds and gold. So, if stocks head down along with Treasurys, will Gold be there to "save the bacon" as in the 1970s? Maybe not. Gold was massively undervalued then, it wasn't even an investible asset except to the few, enjoyed a huge non-liquidity premium, and no-one had even heard of the Permanent Portfolio. None of those factors are at play today. When the bacon hits the fan, I don't think the PP will "crash" compared to more conventional portfolios - I think it will probably perform about the same as many similarly conservative portfolio allocations. It won't offer the same level of downside protection as it did in the 1970s, and it won't perform as well as conventional portfolios otherwise. As Dr. B points out, that's what happens to portfolio strategies once they've become bozo-ized.


I do appreciate your PP tutorial, predictions on future PP returns, and the bozo reference. Seems to me stocks were bozo-ised in the late 1990s, but I guess there is no reason to re-hash the 2000-2012 secular bear circus. It is better to look forward...

My question was directed at a 60% Stock - 40% Bond portfolio or even a 25% Stock - 75% Bond Portfolio. What saves "the bacon" of stock/bond portolios in a scenario where stocks and treasuries go down together? Is it stay the course and wait for the expected return to show up? Is it International stocks and bonds?
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Re: "Skating Where the Puck Was"

Postby Browser » Tue Dec 11, 2012 1:53 pm

My question was directed at a 60% Stock - 40% Bond portfolio or even a 25% Stock - 75% Bond Portfolio. What saves "the bacon" of stock/bond portolios in a scenario where stocks and treasuries go down together?

Gee, I thought I answered that. One of us needs to re-read the previous posts. I'm out of bacon-savers.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: "Skating Where the Puck Was"

Postby brick-house » Tue Dec 11, 2012 2:09 pm

Browser wrote:

Gee, I thought I answered that. One of us needs to re-read the previous posts. I'm out of bacon-savers.


My bad. I did not catch the bacon amongst the bull... :beer
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Re: "Skating Where the Puck Was"

Postby fanmail » Tue Dec 11, 2012 2:17 pm

chaz wrote:
wbern wrote:Bill:

Well, it depends on the local market; it probably works well in Orlando or Tuscon, but don't try it in Portland OR.

But you have made a very important point, which is that real estate is not investing, it's *work.*

Bill

Investing in a REIT fund isn't *work.*


No, it isn't work, which is why it falls under the easy to invest category and thus the rising correlation of assets.
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Re: "Skating Where the Puck Was"

Postby fanmail » Tue Dec 11, 2012 2:17 pm

matjen wrote:William Bernstein...marketing genius!

I just bought one copy as a gift and one for myself. No one, not even the author, tells me what I don't need! I'll show you! :D


I laughed
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Re: "Skating Where the Puck Was"

Postby Browser » Tue Dec 11, 2012 3:25 pm

brick-house wrote:Browser wrote:

Gee, I thought I answered that. One of us needs to re-read the previous posts. I'm out of bacon-savers.


My bad. I did not catch the bacon amongst the bull... :beer

May the Good Lord and other posters please forgive me for hijacking this thread into yet another Permanent Portfolio debate. But I feel obligated to try to defend myself by calling in the Big Gun himself. From the Kindle book where he discusses the PP. I recommend highly that you go ahead and spring for the three bucks to read all he has to say about it:
... you get an expected return [from the PP] of . . . 4.5%/ 0.5% nominal/ real. You’ll gain some return from rebalancing, but lose most of that to investment expenses. There will be tears.

So while I’ll admit that the Harry Browne portfolio still has a lot to recommend it, I’m not sanguine about its current popularity, which rests on the salutary recent performance of its two most unorthodox risky components, gold and long bonds. Both investment history and human psychology suggest that when these two asset classes turn sour, as they will one day, Harry Browne adherents will abandon the approach in droves...
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: "Skating Where the Puck Was"

Postby BBL » Tue Dec 11, 2012 3:29 pm

May the Good Lord and other posters please forgive me for hijacking this thread into yet another Permanent Portfolio debate.


The PP? Nah - I was hoping for some more Bozo references and Bacon-savers. If you don't have any more of those handy then I guess my time in this thread is complete. :|
To win without risk is to triumph without glory. Pierre Corneille
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Re: "Skating Where the Puck Was"

Postby Browser » Tue Dec 11, 2012 5:58 pm

I wonder what Dr. Bernstein would say about this asset?
For many investors, an ideal asset class would combine superior long-term absolute and risk-adjusted returns with a hedge against inflation and stock market volatility. There’s a way to get all of that, in an asset class you might never have thought of until now: fine wine. Investment-grade wine deserves careful consideration, particularly now that – unlike other collectibles, such as art and rare books – it can be traded on a regulated exchange.

People have been purchasing fine wine for investment for more than 150 years. The practice originated with the British, Dutch and the French. Only recently, however, has it become possible to do an in-depth comparative analysis of the investment-grade wine market versus other asset classes – sufficient market information only became available after the creation of the London International Vintner’s Exchange (“Livex”) in 1999 and the subsequent publication of the Liv-ex Fine Wine Investables and Liv-ex 100 indices in 2001.
.
Not for everybody, but on the basis of annualized returns, volatility, and risk-adjusted returns, for the last 20 years fine wine has beaten the pants off the S&P 500. EAFE, Emerging Markets, Commodities, and Gold. And maybe the puck isn't there yet.

http://advisorperspectives.com/newsletters12/Fine_Wine-Why_its_for_More_than_Just_Drinking.php
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Drinking the Profits

Postby Bill Bernstein » Tue Dec 11, 2012 6:55 pm

I don't know about fine wine, but I know that paintings have been looked at by Bill Baumol in the AER Review papers in 1986.

He noted that standard economic theory suggested that if an item has consumption value, that should detract from investment value.

Which is exactly what he found with paintings over the past 300 years.

Since the pleasure of fine wine, to say nothing of its perishability, is arguably greater than paintings, then that should detract from its investment return to an even greater extent, the data you quote not withstanding.

Or, to quote George Raft, "Part of the $10 million I spent on gambling, part on booze, and part on women.
The rest I spent foolishly."

Bill
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Re: "Skating Where the Puck Was"

Postby maddyken » Tue Dec 11, 2012 7:51 pm

While I appreciate the idea of investors getting to the party too late I disagree with much of what's been posted so far.

I haven't conducted comprehensive research but from what I have seen some institutions have done well using actively managed portfolios which contain alternatives. I realize average investors don't have access to some of the classes used by institutions.

Eliminating alternatives from consideration, especially now, really cuts into one's diversification. By eliminating alternatives one falls back on essentially capital assets, throwing out classes based on supply-and-demand and psychology...these last 2 categories being where a number of inflation fighters live, along with low correlators.

It's easy for me to post the above because I delegate almost everything to my fund managers, but everyone can do that. I think going forward with just stocks and bonds could be risky, given growth and rate prospects. Throw high inflation into the mix and things could get tough for capital assets.

Hope for the best but expect the worst, be prepared. Instead of skating to where the puck was or where you think it might go be an adept skater and use several sticks.
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Re: Drinking the Profits

Postby grok87 » Tue Dec 11, 2012 7:53 pm

wbern wrote:I don't know about fine wine, but I know that paintings have been looked at by Bill Baumol in the AER Review papers in 1986.

He noted that standard economic theory suggested that if an item has consumption value, that should detract from investment value.

Which is exactly what he found with paintings over the past 300 years.

Since the pleasure of fine wine, to say nothing of its perishability, is arguably greater than paintings, then that should detract from its investment return to an even greater extent, the data you quote not withstanding.

Or, to quote George Raft, "Part of the $10 million I spent on gambling, part on booze, and part on women.
The rest I spent foolishly."

Bill

Here are some wine figures
http://www.wineinvestmentfund.com/lates ... index.aspx
Tranche Term Net Asset Value Total Return Annualised Return
2007 Apr 2007 to Jun 2013 +2.8% +0.49%
2008(1) Aug 2008 to Aug 2013 +3.3% +0.76%
2008(2) Aug 2008 to Aug 2013 +16.1% +3.51%
2008(4) Dec 2008 to Dec 2013 +23.9% +5.51%
2009(2) May 2009 to May 2014 +6.7% +1.84%
2009(1) Dec 2009 to Dec 2014 -5.4% -1.74%
2009(4) Dec 2009 to Dec 2014 -2.2% -0.73%
2010(1) Apr 2010 to Apr 2015 -16.7% -5.64%
2010(2) Apr 2010 to Apr 2015 -17.4% -5.86%
2010(3) Sep 2010 to Sep 2015 -21.1% -8.23%
2010(4) Aug 2010 to Aug 2015 -22.8% -8.49%
2010(5) Dec 2010 to Dec 2015 -25.6% -10.87%
2010(6) Dec 2010 to Dec 2015 -29.5% -12.26%
2011(1) May 2011 to May 2016 -22.2% -12.01%
2011(2) May 2011 to May 2016 -20.4% -11.16%
2011(3) Nov 2011 to Nov 2016 -3.7% -3.27%
2011(4) Nov 2011 to Nov 2016 -6.4% -5.56%
2012(2) May 2012 to May 2017 -1.2% -2.05%

looks like its had a bit of a selloff lately.
cheers,
grok, CFA | Danon delenda est
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Re: "Skating Where the Puck Was"

Postby azanon » Tue Dec 11, 2012 8:58 pm

maddyken wrote:While I appreciate the idea of investors getting to the party too late I disagree with much of what's been posted so far.


I just purchased and quickly read Bill's book, and actually find myself agreeing more with you than Bill.

My feelings are, mostly from both personal experience as well as articles like this one (Investors still rushing out of stocks into bonds: http://buzz.money.cnn.com/2012/11/15/st ... und-flows/ )* leads me to believe that Bill is maybe given the average investor with a healthy 401(k) a little too much credit for being more sophisticated than they really are. I work directly with 25 or so college educated people, not in the investment sector, and I bet not one of them could tell you what REIT even stands for, and probably none of them own Gold bullion, or a commodities fund. However, I know a bunch of them that have a crap-load of bonds and, if not bonds, mostly US Stocks. In short, the average Joe most certainly does not own the Yale Model. If the strong hand is a balanced fund, then my whole office except me, the dope, has the strong hand. And all of them owe me an explanation why I've beat the S&P 500 10 straight years (on pace for 11, so far), and probably with lower volatility (though I have no way of measuring that).

If the book's point is mostly just to let us know to not expect outstanding returns for the long term, then that's fine. But for my (passive), long-term investment portfolio, I don't see how I can do much better. I already have a job, and not much free time. I'm not open to using what little time I have left to go into the real estate business on the side, using the money I have tied up in retirement account and paying huge penalties for breaking IRAs.

Bill, I love you man, but you might have had good advice in your initial post.

* If links like that aren't allowed, just let me know and I won't do it again.
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Re: "Skating Where the Puck Was"

Postby Rick Ferri » Tue Dec 11, 2012 11:43 pm

Bill Bernstein wrote:since the major driver of SV returns is simply the market return, the correlations with other asset classes are going to be pretty similar to TSM. The larger question is whether the premium has gone away because it's gotten so much easier to buy. I don't know the answer to that one, but I suspect the correct response is that "some of it has."


If this is true (and I don't know) the question becomes, how much do you pay per unit of SV risk? The logical answer is “not as much as before.”

Rick Ferri
Mutual fund investing is simple. There is risk, there is return, and there are costs. All else is marketing.
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Re: "Skating Where the Puck Was"

Postby Bill Bernstein » Wed Dec 12, 2012 2:17 am

Azanon's comments are well taken; that's what I said in my original post: my major target is institutional managers, not small investors, most of who have never been near private equity or a hedge fund. (On the other hand, if you take a seven-figure portfolio to a wirehouse "wealth manager" you will very likely wind up owning one or more alternative asset classes.)

And those of you who ignored my advice and bought my booklet will recognize that I offer little advice to Bogleheads beyond "stay away from alternatives," which you already knew.

And I'm certainly not suggesting that anyone go out and buy Tuscon rental properties. The whole purpose of saving and investing is so you can *quit* work. I merely used that as an example to show that real alternatives, in their early, high return/low correlation initial phase are always real work. (Which was the purpose of the John Templeton and David Swensen stories.)

Rick's question is a good one. Is is worth, say, 40 extra bp to get heavy factor exposure? For now, I think that the answer is still yes.

Bill
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Re: "Skating Where the Puck Was"

Postby mlewis » Wed Dec 12, 2012 3:32 am

wbern wrote:
Is is worth, say, 40 extra bp to get heavy factor exposure? For now, I think that the answer is still yes.

Bill


And as you pointed out in your last kindle book, SV provides a likely premium for the saver even if the actual premium itself disappears, due to the higher volatility and ability to buy at depressed prices.

In 1999 you seemed worried that the Value premium might start to disappear due to the fact that it was catching on, and seemed to reward nonsystemic risk. I was curious of your thoughts looking back at that article from EF.
http://www.efficientfrontier.com/ef/999/risk.htm

I tend to believe that the value premium will never disappear since I see it as a behavioral issue (and admittedly challenge to the EMH).

I was recently reading some of Swenson's "Pioneering Portfolio Mgmt"
I was thinking that Swenson was ahead of his time, but that the markets may be catching up to him and his best days are probably in the past.
the Big 3 didn't do so well this year:
http://www.nytimes.com/2012/10/13/busin ... d=all&_r=0
I think Harvard, Yale, and Princeton all got beat by the S+P, and harvard was in the red even.

(haven't read the kindle book yet) but I wonder if anybody ever looked at how those endowments were performing once you consider their "fees"- paying all the staff and everything else it took to manage it. (with endowments in the billions maybe not too high?)

malcolm
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Re: "Skating Where the Puck Was"

Postby mlewis » Wed Dec 12, 2012 3:42 am

SpartanlyPanly wrote:
Could you please elaborate which assets are riskless, i.e. a guarantee for not losing any money.


Cash (unless you consider inflation risk!)
Cash Equivalents:
CD's and other FDIC insured deposits- bank accounts (once again, inflation risk)

Money Markets accounts are often included, though some would dispute this as riskless for sure.

Short Term treasury bills (how are Obama and Beohner doing in there?)

Treasury inflation protected securities at various maturities if held to maturity (not so riskless if you are not guaranteed access to them at full value whenever you want them)

In short, nothing is guaranteed. Take your risk where you like it.

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Re: Drinking the Profits

Postby umfundi » Wed Dec 12, 2012 4:16 am

grok87 wrote:
wbern wrote:I don't know about fine wine, but I know that paintings have been looked at by Bill Baumol in the AER Review papers in 1986.

He noted that standard economic theory suggested that if an item has consumption value, that should detract from investment value.

Which is exactly what he found with paintings over the past 300 years.

Since the pleasure of fine wine, to say nothing of its perishability, is arguably greater than paintings, then that should detract from its investment return to an even greater extent, the data you quote not withstanding.

Or, to quote George Raft, "Part of the $10 million I spent on gambling, part on booze, and part on women.
The rest I spent foolishly."

Bill

Here are some wine figures
http://www.wineinvestmentfund.com/lates ... index.aspx
Tranche Term Net Asset Value Total Return Annualised Return
2007 Apr 2007 to Jun 2013 +2.8% +0.49%
2008(1) Aug 2008 to Aug 2013 +3.3% +0.76%
2008(2) Aug 2008 to Aug 2013 +16.1% +3.51%
2008(4) Dec 2008 to Dec 2013 +23.9% +5.51%
2009(2) May 2009 to May 2014 +6.7% +1.84%
2009(1) Dec 2009 to Dec 2014 -5.4% -1.74%
2009(4) Dec 2009 to Dec 2014 -2.2% -0.73%
2010(1) Apr 2010 to Apr 2015 -16.7% -5.64%
2010(2) Apr 2010 to Apr 2015 -17.4% -5.86%
2010(3) Sep 2010 to Sep 2015 -21.1% -8.23%
2010(4) Aug 2010 to Aug 2015 -22.8% -8.49%
2010(5) Dec 2010 to Dec 2015 -25.6% -10.87%
2010(6) Dec 2010 to Dec 2015 -29.5% -12.26%
2011(1) May 2011 to May 2016 -22.2% -12.01%
2011(2) May 2011 to May 2016 -20.4% -11.16%
2011(3) Nov 2011 to Nov 2016 -3.7% -3.27%
2011(4) Nov 2011 to Nov 2016 -6.4% -5.56%
2012(2) May 2012 to May 2017 -1.2% -2.05%

looks like its had a bit of a selloff lately.
cheers,


The problem with wine as an investment, is it is illiquid. (I had to say that.) It's not easy to sell, and you have to prove the provenance, that it was stored correctly.

And, if you are a serious wine collector for your own account, you will end up sharing the pearls mostly with people who do not really appreciate it.

The overall quality of wine has improved remarkably over the past few decades. Also, any bottle (including whites) will usually improve a lot by laying for six months undisturbed. What matters is not temperature so much (within reason) but temperature fluctuations.

Buy a few bottles each of a few decent wines, lay them on a concrete floor and cover them with leftover pink insulation. Replenish (by the bottle or two) as needed. Prosecco (Aldi's is good), Sauvignon Blanc (unoaked), a lighter Pinot Noir, Cabernet. Done.

Keith
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