A reader left a question about how NARFX (the fund I just wrote about) and PVFIX (some fund the reader knows but that I have not studied) manage to achieve their low octane result (assuming the reader has it right about PVFIX).He wonders if the result comes more from the shorts than the long positions.
Obviously I don't know about these funds but the way I tend to view things I would say the answer is neither the longs nor the shorts; the result comes from how it all blends together.
I have touched on this before and while the idea of the blend achieving a desired result is something I am very comfortable implementing it is difficult to articulate. If you only use broad-based products I don't know how to makes this relevant for you. The concept of precisely managing things like volatility, yield and various market exposures comes from blending narrow products together; things like individual stocks, sector funds and/or sub-sector funds.
As things come and go from your portfolio, regardless of the frequency, you probably have a rough idea the extent that you make a portfolio more or less volatile. If you add 2.5% each to Research in Motion (RIMM) and Intuitive Surgical (ISRG) you probably know you are making your portfolio more volatile even if you cannot quantify it.
Adding stocks like these (to be clear I don't own either one) at that type of weighting is not unreasonable but it does change the make up of the portfolio and so by extension changes the behavior of the portfolio. If a portfolio has half the volatility of the S&P 500 and those two stocks are added it will cause the volatility to go up a lot, I think it would still be less than the market however.
The way I view things I am concerned with the impact on the entire portfolio. No one buys a stock they think will tank but when the market endures a decline (fast or slow) the more names like ISRG and RIMM in a portfolio the tougher time it will have weathering the decline. Whatever the fundamentals behind these two stocks are they did not change in the middle of August yet both stocks dropped twice as much as the market.
If owning the two names I am using as my example (or any other names) is a real big priority but too much portfolio volatility is tough to handle then the two hot potatoes have to be offset one way or another to bring the overall volatility down to a level that is comfortable.
This blending is the whole point. I think software or some sort of website service is needed for anyone looking to quantify. I prefer to quantify this to better understand the impact that any little tweak or big change will have.
Its starting to get cold here. The picture (a kind of where's Waldo) is from a few winters ago after what is for us a big storm.
12 comments:
Roger,
Very good reasoning on volatility management! Do you have a taget for your portfolio volatility? My retirement account is about 60% as volatile as the S&P 500.
"A target" implies that this is static but I don't view that way. Early cycle it probably makes sense to have a little more vol relative to what can be tolerated and late cycle, where I think we are now, to have less.
I try to live by my "sleep Factor". If I am worried about my portfolio (or trades) and it keeps me up at night I cut the risk down right away.....It seems to work for me.
Roger what happened to your udate of your old all etf portfilio. thanks
i made a reference to this in the comments, turns out our compliance guy thinks it would be an issue. The concern being that someone implements it on their own, something goes wrong and they come after us.
My saying I don't do this for anyone would not be enough of a disclaimer, so goes the thinking.
while I think it is an incorrect interpretation, this is how it has to be.
"Early cycle it probably makes sense to have a little more vol relative to what can be tolerated and late cycle, where I think we are now, to have less."
Roger, there is such great wisdom in that one sentence.
lmao, then i must have read it somewhere else
Pinnacle Value (PVFIX) is one amazingly odd little open ended mutual fund. The man who runs this thing gets no pay… none! John E. Deysher is his own largest shareholder. He receives no salary, bonus or deferred compensation. All of his income comes from the fund’s advisor profits, which I assume he owns outright. And he has committed to investing all of those profits into shares of the fund.
Pinnacle Value is such a bizarre mutual fund, well… you’ve got to read about it from David Snowball himself, to believe it.
Here’s the link:
http://tinyurl.com/39gstk
And here’s a link to a chart, comparing Pinnacle (PVFIX) to Nakoma (NARFX) and SPY. You’ll need Java to see this chart:
http://tinyurl.com/3bd3hq
Careful, Pinnacle charges a 1% redemption fee for shares held less than a year.
Pinnacle Value truly is flaky. This guy buys micro-caps with a value style. He beats the stuffing out of small cap value when small cap value goes down, as it has, year-to date. iShares Morningstar Small Value Index (JKL) has gone down 7.6% this year, Pinnacle has gone up 16%.
He buys convertibles (which are small/medium caps), he shorts, buys (little company) preferred stocks, spin-offs, reorganizations, broken IPO’s, rights and warrants. His portfolio is micro-cap but the fund, in total, has half the volatility of the S&P 500.
This is financial cooking, really. Start with some high volatility; beef, onions, carrots, celery, herbs and some stock. Toss in a pot… and out comes lower volitility; Boeuf à la mode.
This doesn't relate to anything else, but today (Monday 11/5) I am really embarrassed for Maria Bartiromo just looking at her. Lip injections should be done subtly. Today she looks like her mouth just got clocked by Mike Tyson.
10:24 ano. A joke like that has no value unless you can name specific examples..
Many funds have go anywhere styles and achieve low volatility/high return and they are billion dollar funds. Mutual discovery(MDISX) and Wintergree(WGRNX), just to name a few. Yes,there is at least one high volatility high return fund that comes to my mind which is CGM Focus(CGMFX). Different fund managers to different investors. Garlic, onion, blue cheese and baking soda. Each may be pungent and unpleasant to some people, when used properly, the resulting dish may be quite satisfying.
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