Lessons Learned


As those who have been following this blog know, I have been 100% in cash since just before the Brexit vote and I was right…for two days.  That is just one of the risks of running a research project live and evidence against doing so.  So far it has cost me 1.3% in foregone profits.  I did make up for the loss I had last year by moving to 97% in equity between January 11th and January 21st but nowhere near the more than 40% profit Goldman Sachs reported yesterday.

I think it is fair to say this is not a marketable strategy to investors who would compare it to a buy-hold strategy in the S&P 500 nor to speculators who would compare it to a trading algorithm like Goldman’s. It is interesting to me as a research project to test the concept of portfolio navigation for an 8% DTR.   I have learned enough to make some dramatic changes when I start investing again.

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Remember when…

Remember when real estate was hot and people were making lots of money flipping homes until…2007.  VNQ is the Vanguard Real Estate ETF.


Well here is this report from Fortune magazine:


Remember when the S&P 500 was beating every other index and almost all managers…until Brexit.


JKK, JKJ and JKL are the three small cap sectors of the equity market first identified by Ron Surz.  The S&P is flat (blue fill).

The thing that caused the collapse in real estate and then the entire market is not what is happening now.  The villain in 2007 was Wall street firms like Goldman Sachs who created weapons of mass destruction  with names like credit default swaps, and pools of mortgages that were falsely identified as AAA.  The last thing anyone wanted to own then was cash.

If we have another collapse it will be caused by a Federal Reserve that has flooded the market with liquidity and manipulated the yield curve to cause long term interest in the U.S. to be zero, resulting in foreign countries issuing  negative interest rate bonds.

There was something wrong years before 2007 but most investors refused to recognize it and act on it.  There is something wrong now and it has been building for 8 years. Once again, the one thing no one wants to own is cash, but I am not sure that cash will be a safe haven this time.  The fact that Bitcoins exist is evidence that citizens are loosing trust.  In God we trust; in Governments…not so much.

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Who’s afraid of the big bad bear?

WSJ quotes Monday morning 9/19.  Markets are up in the U.S., Asia and Europe because:

  1. There were bombs and knife attacks in three American states…and the market is up 100 points? So, not to worry?
  2. The Boston Fed president is worried that low interest rates could be letting markets get out of hand? How about: ARE MAKING MARKETS OUT OF CONTROL. You’re still not afraid to invest?
  3. Libya is becoming more unstable and that is causing the price of oil to drop.  Still?
  4. Banks are too scared to take free money to execute currency hedges between the dollar and those countries offering negative interest rates. Still???
  5. Hillary and Trump are now tied, given the third party vote. I am beyond scared and I don’t care what little piggy’s think!  I like my brick house full of cash!
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A Star is Born?

For years Vanguard’s Technology ETF (VGT) underperformed the Spyder (SPY) and then until the 4th quarter of 2015 it merely tracked the S&P 500.  Now, since Brexit, VGT is 10% ahead of SPY.  Who could have guessed it?  Joshua Ramo, for one.  In “Seventh Sense” He claims the Big Data firms in VGT will not only lead the market but will transform the market due to a new era more dynamic than the industrial revolution.

Professor Yuval Harari ( http://www.ynharari.com ) has some very interesting videos on his website along with excerpts from his bestselling book, “Sapiens”.  I can hardly wait to get his new book, “Homo Deus”.  In one video he answers in two words the question, why would anyone exchange goods and services for the U.S. dollar?

On the other hand, Rana Foroohar in her new book, “Makers and Takers” says Apple hasn’t produced a real innovation since Steve Jobs died and the Silicon Valley giants have been taken over by finance wizards who transform lead into gold by shuffling paper around, becoming takers instead of makers.  I recommend all of the above to broaden your perspective on, where do we go from here?  To remind you of where we have been I offer the following:


I am still in cash.

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Paper due September 12th

An article on “Measuring Performance Toward Retirement” will be published on September 12th by The Journal of Performance Measurement.

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A Sobering Thought

What would you call someone who doesn’t care how big the budget deficit is or how negative the balance of payments is; doesn’t care about political instability in Turkey or the middle east; doesn’t care who becomes president of the United States and doesn’t care that the stock market is at an all time high while the economy is weak?  I call them:

  1. Central bankers who live in fear of another global recession.
  2. Investment bankers who think they have no downside risk.
  3. Real estate developers who build until the money runs out.
  4. CEO’s who buy back shares to increase the value of their stock options.
  5. Investors whose homes and stock portfolios are at peak values.

Are they all drunk with power?

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After reading Rana Foroohar’s  disturbing book, “Makers and Takers,” I decided to review my own investment policy decisions to see if I might be able to identify some guidelines that would be useful to investors.  Foroohar concludes that investors would be wise to not seek professional advice and instead, put all their money in an ETF like the Vanguard S&P 500 (VOO ticker symbol).

Let’s begin with a critique of the research project that began February 2, 2015. Graph #1 shows where the market was at that time relative to August 17th 2016.

                                                     Graph 1

Graph 1 

The market, as measured by the S&P 500, was at an all time high (#2 in Graph 1).  Ms Faroohar would have had me invest the entire $100,000 in VOO.  My stated investment objective was to earn 8% compounded over the next 5 years using Portfolio Navigation theory developed at PRI.  Instead, I initiated the program with the DTR 6% portfolio with 40% in various iShare ETFs and 60% in short term fixed ETFs with a duration of less than 2 years.  Why?  I personally could not stomach putting $100,000 of my money in the market when it was at an all time high; but would I if it weren’t my money? In 2007 (see #1 in Graph 1) I was managing other people’s money in five trusts for FISERV Inc. and moved all five accounts to a minimum of 50% cash.

Many financial advisors have told me they would not dare hold that much cash for two reasons:  1. fear of being sued if the market went up, as happened in a case reported in Pensions and Investments magazine, and 2. Clients do not want to pay fees on cash held in their account.  Hmmm, would it be ethical for me to do one thing with my money and another with client’s money, or not hold cash because I’m not getting a fee for decreasing downside risk? When I correctly forecast the Brexit move and went 100% in cash (see #4 in graph 1 above) would I again be risking a law suit because the market subsequently went up 3%?  I cannot ignore the Where and Why described in her book, i.e., where we are (the top of an 8 year bull market)  and why it happened (buy backs and monetary policy).

Let’s take a closer look at the period of time since I began the Portfolio Navigation project.  Graph 2 shows how volatile this period has been.

                                                       Graph 2

Graph 2

Having 100% of one’s money in cash the day before Brexit might be considered dumb, given 20/20 hindsight, but having 100% in equities now is even dumber in my opinion.  What you don’t see is all the trades that took place as I was trying to manage this volatile period based on my 60 some years of experience in the investment business and the results of our research at PRI.  Graph 3 shows three pictures of uncertainty generated by PRI software.

                                                        Graph 3

2015 Distributions

As we move from 40% in equity (on the left) to 80% (on the right) the potential to exceed the Desired Target Return (DTR) relative to the downside risk goes from minus 10% to minus 60%.  I should take 60% more downside risk than upside potential for basically the same expected return of 9% and only 3% more upside potential?  No thank you Ms Foroorhar, because: I agree with your analysis and the risk-return trade off shown in Graph 3.

What did I learn?

  1. I would have been better off if I had just put all my money in the S&P 500 and played golf.  After too many trades I have ended up with only $2 more than I started with. However, it ain’t over ‘till it’s over.  This old soldier isn’t charging through a mine field for a 3% gain while risking a 20% loss.
  2. Neither bull markets nor people live forever. Don’t take stupid chances with your money or your life.
  3. I believe that Foroohar was correct about the need to use a longer planning horizon than 3 months. For people investing for retirement the planning horizon should be the time left until retirement.
  4. Foroohar is right, it is a complex problem that took her 700+ pages to describe. I disagree with her simple solution: put all your money in the S&P 500 and pray that Hillary will solve the gigantic problem Ms Foroohar describes.

I will continue to search for a better strategy when I resume this research project.

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