Mirror Mirror on the Wall

Who is the fairest of them all?

Mkt vs China 9-28-15

  1. China did not suffer in the financial crisis Wall Street created.  The U.S. and Europe are still trying to dig them selves out of the wreckage.
  2. The U.S. owes $Trillian’s while China has $3Trillian of foreign currency.
  3. The U.S. can’t invest in the stock market but China can and has invested $Billions.
  4. Everyone believes China will become the greatest economic power in the world by 2020.
  5. The U.S. spends billions on wars while China spends nothing.
  6. China’s leaders were trained as engineers and scientists so they don’t know how to govern and are corrupt while ours were trained as lawyers and…
  7. China’s leaders put their country above political gain.  U.S. politicians put our country _____.
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Cyber wars and Algorithms that trade $billions based on how atoms collide with one another in metals conjures up the scary world portrayed in Aldous Huxley’s “Brave New World.” Some claim that the solution is to hire your own brainless robot to pick winners from their inventory of ETFs.

This current research project is searching for a better solution. One problem with my current approach is the exclusive use of ETFs. I have known for some time that ETFs are the favorite playground of this new breed of traders with the result that the volatility is 2 or 3 times as much as the S&P 500. I have lost a few battles during the past seven months of this research project resulting in a slightly less than 5% loss in the account since February. The 9% holding in SE Asia minus Japan and the 7% in Oil are worth questioning. The 71% in short term fixed income and cash speak for themselves. The approximately 18% loss in Asia compared to the 45% decline from the peak in the Chinese market is due to the fact that it was purchased before the big run up. Do I wish I had an algorithm that would have gotten me out at the top. NO! This is a five year investment strategy, not a 20 millisecond trading scheme.

Holdings 9-23-15

I believe China is doing a better job of managing their economy than market gurus give them credit for.  If I didn’t already own SE Asia I would be a buyer.  Oil is another story.  I am watching it closely.  Eventually I will be moving toward the 70/30 asset allocation that an 8% DTR calls for.


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The Facts about Who Developed PMPT & The Sortino Ratio

PRI-Rom Contract

The term, “Post-modern portfolio theory (PMPT)” was first used by Brian Rom to describe the underlying theory of an asset allocation model developed by The Pension Research Institute (PRI) called Primix. Mr. Rom wrote a very favorable article about Primix in Pensions and Investments magazine, May 2, 1988, page 34. The article noted that Premix “exactly calculates the risk of falling below the target return “ and later states: “users should request a white paper titled Risk and Relevance by the Institutes Director, Frank Sortino.” A few weeks later Mr. Rom signed an agreement with PRI to market PRI’s software. The agreement required Rom’s firm “include the following words on the opening screen: “This product is an extension of a model developed by the Pension Research Institute;” furthermore, the agreement limited Mr. Rom to “designing all Non-Technical Features” , such as the user interface.[i] PRI was responsible for all technical features.[ii] Therefore, all of the body of knowledge constituting PMPT (including all equations) prior to 1995, when Rom terminated the agreement, were developed by PRI. The source code for all Technical Features in the software including the Sortino ratio was written by Dr. Hal Forsey, professor of mathematics at S.F.S. U. A copy of the PRI Agreement was hand delivered to the San Francisco office of Wikipedia 9/8/2015.

The supportino evidence can be viewed by clicking on the PRI-Rom.pdf  contract at the top.

[i] Defined in the PRI agreement with Brian Rom as:”All those attributes of the Products that relate to on-screen menus and user interaction.”

[ii] Defined in the PRI Agreement as: “The algorithms, mathematical and statistical operations and other functions required to compute the results.”

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It Ain’t Over ’till it’s Over!

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Sortino Index told ya so May 15th!


What happened to the PRI Portfolio?

PRI Portfolio Monday 8-24-15.B

It was down 1.94% while the Dow was off 3.57% and the S&P was off 3.94%.  WHY is it down from the initial $100, 000 investment?  Partly because of the position we have in Asia X Japan and partly because of the costs of buying and selling all the ETFs we reported below.

                                             Table 1

  1. 4/1/15 sold ACWX and invested proceeds in AAXJ.
  2. 4/10/15 sold approximately half of JKH & JKG.
  3. 4/24/15 sold half of VWO.
  4. 5/15/15 sold remainder of VWO,JKD,JKE,JKG,JKH,JKI,JKJ,JKL

Unlike Jeb Bush, I will admit I would not have bought AAXJ in February if I knew what China was going to do last week and how the world markets were going to react.  PMPT can not predict these things.

For the previous posting cited in heading for the Sortino Index, click on the May 15th posting under the Video on the far right hand side of the screen titled: Alert.  It is the 5th recent posting under the videos.




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PRI 6 Months Performance

After 6 months the PRI portfolio should have been up 3.9%. Instead it is down 1.23%. That means for every $100,000 invested you would be down $1,233. Rebalancing would call for a return to the original portfolio designed to return 8% for the year. Portfolio navigation started out with a portfolio designed to return 6% and steadily increased the fixed income component to 77% as of today.  Given the big picture below, what should the navigator do?

Navigation 5 yr performance

If the planning horizon was 1 year he would increase equity to try to earn 9.3% in the next 6 months. But the planning horizon is 5 years, not one year. Therefore, there is no need to panic. We did reduce the large cash holdings from the sale of equities in April and May (see below) and took a 5% position in a high yielding REIT on July 31st. The color coding for the Sortino Index is still black. Time will tell if Portfolio Navigation is superior to rebalancing (see second video at the far right of the screen) and if reducing equity for the reasons explained below makes sense.

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Portfolio Changes up to 6/1/2015

Below are the initial holdings in the PRI account for the current research project to test the efficacy of using PMPT to manage a single portfolio.  The investment objective is to maximize the potential to exceed an 8% DTR relative to the risk of falling below 8%:

Initial Positions

As market conditions deteriorated and the proprietary PRI statistics caused the Sortino Index to turn black on our May 15th posting we became increasingly defensive by reducing equity exposure:

                                                         Table 1

  1. 4/1/15 sold ACWX and invested proceeds in AAXJ.
  2. 4/10/15 sold approximately half of JKH & JKG.
  3. 4/24/15 sold half of VWO.
  4. 5/15/15 sold remainder of VWO,JKD,JKE,JKG,JKH,JKI,JKJ,JKL

The result was to move from approximately 45% in fixed income (CSJ,GSY and FLOT) and 6.7% cash to an additional 15% in cash by June 1st.

Blog posting 7-8-15

What was happening during this period to U.S. Equities ?

(See Table 1 above for corresponding numbers on Graph)

PRI US Equity

What was happening to Foreign Investments

PRI Foreign & Fixed

Note:  While we purposefully avoided holdings in EPP and ACWX we did invest in AAXJ and added to it at #1.  We did sell all of VWO near the highs for this period.  I have tried to document the reason for these changes in previous postings.  The best holding during this period was the fixed income positions constituting 45% of holdings.

It is worth noting that ADRA has far outperformed Asian stocks and FGFLX has far outperformed European stocks but I have chosen not to invest in mutual funds that I recommended elsewhere because I do not want to introduce the active manager abilities of PMPT into this research project.

I believe these actions have been the antithesis of a Robot or a buy and hold strategy.  However, performance should not be measured relative to either of these strategies.  Performance should be measured relative to the DTR of 8% and we are currently slightly below that line .








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