Monday, February 25, 2008
Even though I don't think it is the ideal strategy for the vast majority of investors I still find Nassim Taleb's idea of 90% t-bills and 10% going berserk (again that is my word not his) to be intriguing on what I guess is an academic level.
If you knew what this year's Dry Ships (DRYS), which went from $17 to $79 last year, and Suntech Power (STP), which went from $34 to $80 last year, were going to be and you put 5% into each and put the rest into some combo of t-bills and euros and could repeat you'd be in pretty good shape.
There are various new fixed income and more recently currency products listing that make the 90% part easier with regard to foreign diversification (the WisdomTree products that were filed a while would go a long way to filling some gaps if they actually list).
If we move away from the specific 90/10 and think more about getting alpha from a smaller portion of the portfolio while the rest is more conservatively allocated here is one thing that a few people have asked about that very likely will not work... putting 50% into a double long ETF and the rest into treasuries.
The idea is that the double long ETF would replicate the market plus the treasury interest so the two added together would beat the market. There are a couple of OEFs that do this with SPX futures and treasuries and I believe these funds don't succeed regularly but someone please correct me if I have that wrong.
The problem with the double long plus treasuries concept is that the double long fund attempts to capture twice the move of the S&P 500 on a daily basis (and even then it is not perfect) not over longer periods of time. Over the next three months (just a random time period, you could pick any other) the double long fund could lag twice the SPX, do better than twice the SPX or come in right on the nose, there is no way to predict because it depends on the sequence of daily moves in the SPX which can't be predicted.
Another issue is that it will never be 50/50 after the first day the idea would be implemented. From day to day it would vary slightly and depending on the market does it could vary a lot over time. To maintain something close to the intended 50/50 there would need to be a fair bit or rebalancing which would probably be expensive and maybe would wear out the calculator. Even then it seems like you'd always be a day or two behind.
I am curious enough about the concept to keep exploring but I would rule this specific idea out.
One key to a happy marriage (we're at 15 years and still happy) is choosing your battles. Just as my wife does not fight me on college basketball in March I do not fight her on the Academy Awards or the red carpet show right before. That being said, is it me or did John Travolta look like Eddie Munster?