Back from a 4:55 am wake up call to fight a little fire.Go figure, a guy dumps a bunch of coals down a steep embankment covered with pine needles and it started a fire. Huh, who'd a thunk?
Now back to our regular programming.
I sure heard a lot of foreboding music on the network yesterday along with graphics such as "Danger for the Dollar."
In the video from November 4 I noted that I felt the chance for something bad coming in the market had increased significantly. While I still feel that way it is too early for that to be right or wrong.
I disclosed slightly reducing emerging market exposure in the face of my increased expectation of a bear market as a means of reducing volatility and to lighten up in a segment that had grown faster than the rest of the portfolio since the summer.
When taking defensive action the focus needs to be the impact on the portfolio. Given that bear markets take several months to roll over and start a focus on this week makes no sense for investors (as opposed to traders) it does not matter.
The thing that should matter is being true to what you are comfortable with. Think ahead of time about defensive action and do not panic. The action last week for me with emerging market seemed fairly simplistic given my opinion. If you think the market is going to down a lot wouldn't it make sense to reduce volatility a little? Do you really need to be that savvy to figure that out? I'd say no. To clarify I sold 1/4 of one position, this was a tweak and not a big bet. A few tweaks can noticeably alter the volatility characteristics of a diversified portfolio.
At this point the market is still up YTD and so if you are reasonably close to the market you are at worst down a little and out-nimbling down a little is a tall order. I've detailed what I have done in past posts in the last few months to reduce exposure.
Anyone interested in reducing exposure into a bear market needs their own time table to do so. My approach will not be 100% correct but the goal is trying to reduce the impact of a big decline.
This is the time where emotions might start to run high. All I can say is that the market is down a little and there is nothing unprecedented about the current market action.
19 comments:
Maybe a bit OT, but relavent to recent posts--did you see that the S&P has a new index? It's the S&P 500 130/30 Strategy Index. There are no products yet, but the backtested returns are somewhat better than the S&P. A hedge fund-like approach to beating the S&P with less volatility seems to be what a lot of posters here are looking for, myself included. Would love to hear your thoughts, please.
Yeah 130/30 products are gaining popularity. My bet is that the future benefit will be less than what the back tested benefit suggests. Very simply, once a group of fund companies hops on a trend they tend to push it's utility value down not up.
Roger,
how is your individual portfolio doing ytd? Not your clients per se. Just wondering how much a real money manager account is performing vs. the S/P.
see my comment from this am on yesterday's post about talking about performance.
Roger.
What do you think of The Callan Periodic Table of Investment Returns? Have you ever used this in your research?
http://tinyurl.com/24wjw8
i have seen this sort of thing before by a different name (maybe Ibbotson has one of these floating around somewhere?).
some of the trends isolated are ones i have learned from, used and written about but certainly not relied upon heavily.
Having some sense of this sort of thing is useful.
Roger
Another question...I see that ishares has a new BRIC out, BKF.
Do you happen to know what their country allocation is by percentage? I was wondering how it compared to EEB as I was planing on buying back into EEB soon?
The new 8:
iShares FTSE Developed Small Cap ex-North America Index Fund (IFSM)
iShares FTSE EPRA/NAREIT Global Real Estate ex-U.S. Index Fund (IFGL)
iShares FTSE EPRA/NAREIT Asia Index Fund (IFAS)
iShares FTSE EPRA/NAREIT Europe Index Fund (IFEU)
iShares FTSE EPRA/NAREIT North America Index Fund (IFNA).
iShares S&P Asia 50 Index Fund (AIA)
iShares MSCI BRIC Index Fund (BKF)
iShares MSCI Chile Index Fund (ECH).
http://tinyurl.com/2dshbu
JackS
Here is an interesting article from Wharton School about the current economy:
http://tinyurl.com/38rxxv
Roger,
I am NOT a heckler. I am just curious are you up or down for the year. At this point most investors are down. I would think only a few clowns would say they are having a big year. Year to date you are?? What do you see the Dow & Nasdaq doing for December and how do you see the Dow and Nasdaq for 1st 1/2 of 2008?? Simple questions-Direct questions - not heckling and deserving real DIRECT, honest answers!
At this point most investors are down. I would think only a few clowns would say they are having a big year.
Maybe I'm a clown :) but I'm having a big up year so far (knock on wood) as I am up 15% YTD.
My 4 largest positions (since the beginning of the year) which constitute over 50% of account value are Berkshire Hathaway (Warren Buffett), PIMCO Commodity Real Return Fund, Fairholme Fund, and Chesapeake Energy. One could argue that I made some big bets, but I don't think any of them were imprudent or excessive, and I could make that case very persuasively IMO.
IMO, the bigger positions I took aren't the equivalent of making big bets on hot, momentum names with high valuations like FXI, AAPL, GOOG, RIMM, etc. that could get 50% haircuts in a heartbeat.
Again, I see risk more as permanent capital impairment rather then short-term volatility so taking a very large position in something like Berkshire Hathaway really isn't a big risk (up 25% YTD), and actually this year it has tended to do the opposite of the market so it REDUCES overall portfolio volatility. For the record, I just sold 1/2 of my Berkshire the other day and plowed that back into Fairholme (up 12% YTD) which is now at 20% of portfolio value. Philosophically, I have NO problem putting 20% into a single mutual fund if all the research and diligence suggests it is a top-tier fund run by excellent managers with substantial skill in stock-picking.
I've also had 20% in the PIMCO Commodity Fund (which copies the DJ-AIG index) since the beginning of year (actually long before that and it has benefited for the last couple of years), and so far this year commodities are outperforming the S&P 500 by a wide margin. I'm a believer in Rogers' commodity supercycle thesis plus Ibbotson has completed an in-depth study which demonstrates a 15 to 20% allocation to commodities is an excellent portfolio diversifier to equities. On top of that, commodities make an excellent direct hedge against the dollar. I've argued for this 20% commodity allocation in past comments on this blog. Some day in the future I think this will become conventional wisdom that commodities deserve a much higher percentage allocation in a diversified portfolio.
Could bigger percentages bite me on the @$$ at some point? Sure, anything is possible, but if you are going to outperform the market you have to be different in some meaningful way IMO. I'll argue with anyone that putting 15% into Berkshire Hathaway isn't anywhere near the same as putting 15% into GOOG in terms of business risk and valuation risk so you can't look at a big percentage allocation without also estimating a worst-case downside scenario.
iShares has a pdf fact card w/the country weightings
china 36.43
brazil 27.54
russia 20.47
india 15.56
anon 11:47 i told you this becomes a compliance issue, i told you i gave an update at quarter end, I told you that if you read the posts since then you should be able to piece together roughly where i am. what about that don't you understand.
further I find your sense of entitlement puzzling. you deserve?
how could you know where most people are either way? that comment makes no sense.
if you really care, do the work with what I have given you, and wait until the year end video.
caring so much is entirely the wrong focus of of what this site is about.
you don't deserve anything here.
I'm guessing that Anon 11:47 is a Generation X'er raised on the self-esteem myth believing that he/she deserves everything.
lol, but who wouldn't love to be told they were an impatient 30 year old?
MikeC.
I see that FAIRX is doing well, but PCRDX looks like a it gets MM fund returns with yield only after expenses the last 2 years.
I was wondering if your Berkshire Hathaway holding is BRKB, or do you hold the ridiculously expensive (now at 6 figures) BRKA?
http://tinyurl.com/2lch4d
I love BRKB and would like to buy in after the smoke clears in the economy, but I am worried that Warren Buffet has one foot in the grave and another on a banana peel. What do you think would happen to the fund if he were to die say next year? I that he has others to take control of the fund, but the shock wave could hurt the fund anyway.
JackS
MikeC.
I see that FAIRX is doing well, but PCRDX looks like a it gets MM fund returns with yield only after expenses the last 2 years.
JackS,
PCRDX is up about 21% YTD and we were talking about YTD performance. It was down 3.5% in 2006 so it was a drag on performance last year, but in 2006 I had a substantial allocation to REITs that carried 2006 (I sold almost my entire REIT position in May 2007).
PCRDX returned 29% in 2003, 16% in 2004, and 20% in 2005 so basically a broad commodity index fund has outperformed the S&P 500 4 out of the past 5 years. It's well beyond the scope of this reply, but I think there is a high probability that commodities as an asset class will outperform the S&P 500 over the next 5-10 years so having some commodity exposure makes sense. I don't want to sound outlandish, but you won't find me shocked 10 years from now if oil is $200, gold is $2,000, and corn, wheat, sugar, etc are all double and triple their current prices. Read Jim Roger's book, Hot Commodities.
I own BRKB which BTW is a stock not a fund. I'm not too concerned with Buffett's passing as I think he has made ample preparations and until the last 1-2 months the stock really wasn't trading with any sort of Buffett premium. When he dies, maybe it drops that day, maybe it doesn't, but his death won't permanently destroy value of the company, and he may live another 10 years and double or triple Berkshire's price in that time frame. Like I said though, I sold 1/2 the other day as the stock is up big in just the past few months and I believed I identified a better buy in something else I already owned
Thanks Mike, and you could be right about commodities. I may have to buy that book. What's the difference between PCRDX and PCRIX?
I was wondering about how BRKB and how it could be classified as a stock. Don't they just buy into stock positions of other companies? I mean, how do they calculate their bottom line as it relates to earnings as a single stock that owns other stocks? Is it like an ETF that's a fund that trades like a stock?
MikeC.
Did you ever read this old article from Jim Rogers that he wrote in 2?03 called "The Downward Spiral" about the dollar and the euro?
http://tinyurl.com/6o36
JackS
1. PCRDX and PCRIX are the exact same fund, just different share classes. PCRIX is the institutional class I shares which are not available to individuals or smaller investment advisors. Only big institutions can buy PCRIX. The difference is a smaller expense ratio. Avoid the class A shares which have a load (PCRAX).
2. I don't understand the question/comment on Berkshire. IT IS a publicly traded stock. Buffet does all sorts of things under the Berkshire umbrella. He buys individual stocks, he buys companies in their entirety (GEICO, Dairy Queen, and literally a hundred different companies), writes reinsurance, makes foreign currency and derivative bets, etc. In my view, with Berkshire, you arguably have the greatest investor of all time basically working for you for free (his salary as CEO is negligible) and the vast majority of his wealth is tied up in Berkshire so his incentive is to make it grow.
3. Never read that article. Thanks for providing it. Looks like he nailed it huh? I think Jim Rogers is one of the smartest guys in the financial markets. A key part of my investment approach and philosophy is to PAY CLOSE ATTENTION to what people with demonstrated track records of success say and do. Jim Rogers falls into that category. There are hundreds of people on the Internet and CNBC who couldn't find their you know whats. Most opinions/advice should be disregarded as useless. I pay attention to what the Buffetts, Rogers, Russells of the world say.
Again, his book is a must read.
Thanks for the advise Mike.
I was wondering if you ever heard of PIMCO's commodity fund CCF?
http://tinyurl.com/2mrt6f
http://tinyurl.com/3xuwaq
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