opihiman2

I read from Norbert himself that not to use DLR anymore. The fund is too illiquid causing the bid / ask spreads to be wider than it should be. RBC supposedly has a much better spread. Although, I haven't checked it out lately. I suppose I should just get into IBKR. I mean, $10 a month is less than what I spend on Internet or cell phone service. But, it's probably infinitely better for my financial well being.

Any of you Canadian guys (or even U.S. guys with financial interests in Canada) ever used Norbert's Gambit to exchange currency near the spot rate? If so, what's the best fund to use to minimize bid ask spread? I read that RBC's stock listing on either side is the best, most liquid fund to use. But, I thought maybe you guys might know of a better one. Also, any advice on what broker I should use? Currently, I'm with TD Ameritrade. I was thinking of heading over to IBKR, which may just be better to use since I think they are also a forex broker. Anyways, any inputs would be appreciated.

Canadian dollar is now around 79 cents US. Yeah, I've been looking at USD to CAD for the past few months. I wonder how low it will go. It seems like a good idea to switch USD to CAD at some point. Any thoughts on this, guys? I have wondered the same. What I have been doing is selling some US common stock out of my RSPs,and TFSAs. AIG for the most part - Nothing against AIG - bought it substantially cheaper than today, when the currency was around par. I probably lose some upside but I can shift it into stocks that pay decent and rising dividends in Canada but not yet. I am not ready to pull the trigger on the currency in a big way yet. We reached 0.67 cents around 10'yrs ago. Yeah, I remember that. I was in Vancouver around 99-2000 and thought the exchange rate was great. I'm not sure where the CAD will end up, but if it goes to below .70, I think I'm going to start sending all my USD to CAD.

Canadian dollar is now around 79 cents US. Yeah, I've been looking at USD to CAD for the past few months. I wonder how low it will go. It seems like a good idea to switch USD to CAD at some point. Any thoughts on this, guys?

Holy shit. $44 a barrel. Ouch. Feel the pain O&G industry. FEEL IT.

Sorry, late to the discussion. I thought this was an excellent post. Really good points made by Cardboard, and reflects some of what I've also learned along the way. I used to think concentration was important. But, over the past several years, I've done enough modeling and simulations to show that diversification is actually better. I've also heard this from some of the most successful quant/hedge funds like Bridgewater and RenTech. They go for uncorrelated and diverse bets rather than the value investing way of getting deep and concentrated. I see and understand the rationale for the later, but I also know that no matter what, there is just no way for the average small potatoes investor like us to know everything about a company or predict with great accuracy about future events. Guys like Ackman, Buffett, and Einhorn can do away with these things since they have way more capital to force changes and make things happen in their favor. They have a competitive edge in that sense. But the rest of us smucks have to just make due with all of our mistakes in investing. Not to say those guys don't either, but they just have much more resources and tools to fix or alleviate their mistakes. So, nowadays, my portfolio consists of 20-30 positions. Although, I'm only ever 40-50% invested at any given moment. I can only tolerate that much risk, and I adjust my investments for that. I realize that had I taken a much larger swing, 100% in or even leveraged to the hilt, I would have returned 40% CAGR over the past 10 years or much more if using leverage. But, if I had some major blow ups along the way, that could have easily dwindled to 10%. I've seen one large asset management company in Canada go from 33% CAGR over 10 years to now just around 10% in the past 14-15 years including their blow ups during the financial crisis. I'm just targeting 15% CAGR, and anything over is icing on the cake. I'm not willing to blow my entire return on crazy huge bets like I've seen some people on this board make time and time again. I just don't have that kind of risk tolerance. Another thing that Cardboard said that I agree with is that people don't consider the overall risk/reward ratio when making investments and bets. BAC is a good example. I know people on here love BAC, but at these levels, I don't understand why. Does anyone here really see BAC going over $330 billion market cap in a reasonable time frame to return over 10-12% cagr? That would mean it would double from these levels. And, is it a worthwhile bet considering all of the risks out there for a major mean reversion event? I don't understand these kinds of investments. There are not that many companies worth $300 billion plus in market cap. The odds are WAY against you in making a bet on BAC to more than double within a reasonable time frame. But, people on here are doing this kind of non-sense all the time. They start plying into O&G when oil was priced at a higher level than it was back during the period of the oil shock. You see guys like Yadayada and all these other new comers talking about how oil will never fall again and that $100 / barrel is here to stay. What ever happened to the contrarian thinking on this board? It really seems that people have stopped thinking critically about these risk/reward profiles. I think that the next couple years will yield another big mean reversion event. It's about time. For everyone fully invested in the market, good luck. I don't see a favorable risk/reward setup in equities or anything else for that matter. It's because of this that I'm only 10-20% invested in the market and setting really tight stops (10% on the downside) to prevent large losses. Anyways, good post, Cardboard.

Yeah, surprised to not hear about MPIC funds. How is Sanj's fund been doing lately? Last I checked over 4 years ago, I think he was doing a little under 16% CAGR net of fees. Anyone know what's it up (or down) to now?

+1 on Cardboard's and Kevin's post.

Holy crap, slide 4 on that presentation is really telling. Even adjusting for inflation, I've read that we're at higher oil prices now than during the late 70's oil crisis. But, still, not by terribly much. But look at how much well permits were issued then and now. Maybe it's because we have better technology for extraction nowadays with fracking, and there are much more areas that are feasible for extraction. However, it still seems like a huge bubble in extraction that is going to pop big time soon.

Yep, and that's the real paradox of these back tests, especially in small micro-caps. Actually utilizing the strategy may cause the strategy to perform differently. Anyways, by the way, Norm, it was your site that gave me the push and courage towards automated investing. I haven't touched a 10 q in ages. I'm much better off for it.

Hell yeah taxes matter. I don't think most people have a sizeable amount of their liquidity in a tax advantaged account like an IRA. Besides, I think it's very important to disclose these things in the methodology and conclusion, otherwise, it would be highly misleading. I mean, 17% CAGR sounds fantastic, and to the average Joe with no deeper understanding of these things, they may just plow right into it without knowing that the taxes will take a significant chunk of the performance. They will end up heavily disappointed. I'm just saying, if you're going to provide some deeper statistics like draw downs, you should be complete and more accurate by including the tax implications of the strategy. Churning the entire portfolio over every year IS a big disclosure one should make.

West, a good back test will take things like slippage, taxes, rebalancing, and transaction costs into account. One of the more important things is slippage. Not everyone will get a trigger in real time that says, "Stock X just met the screen, buy NOW at this price!" In reality, people will end up buying the equity at a different price, sometimes dramatically so, than what the screen in a back test would have bought it at. So, you really need to run a back test with pricing parameters that are intervals of 5-10% around the price. The overall CAGR will then also be a range of #'s. When I don't see all of these things in a simple back test, it really makes me question the overall methodology, and I pretty much just ignore the results. I'm confused, but I'd like to understand what you're trying to say. Why was my back test poorly constructed? If there's something wrong about it, I'd like understand why it's wrong so I can avoid making the same mistake in the future. On taxes, and all other talk about the "conclusions" from this "study" (in quotes because calling what I did a study is a bit of stretch): I am merely posting data here! I've said it before, but I'll say it again: Any conclusions from the data are left to the reader to make! :)

But you only get your tax advantaged index fund returns when you never sell and don`t get dividends. I am under the impression that these studies are made for people who want to sell index funds. From the back of my head compounding of tax advantages really kick in after 5 year holding periods or so, so any value investing that sells near fair value has these problems. Well, I think that's the point of indexing. Invest for the long term, cost average over that period, and take a one time long term capital gains tax. Whereas, an actively traded system has a compounded long term capital gains tax. So, for example, in NormR's Graham screener. At the end of 12 years, if someone followed the screen, someone would end up with 15% CAGR vs 20% CAGR as shown in the hypothetical tax free account. But, if one were trading in an IRA and took out total compounded return, one only takes the long term tax hit once. The tax costs are better. The CAGR following this strategy is a little over 17.5%. So, taxes do matter quite a lot. As for the dividends, that would happen even with the screener strategy, so that point is moot.

Also, Compustat and CRSP databases are the best equities database out there. They try their best to get rid of many known biases, for example, survivor-ship bias (which is a BIG but problem that most people don't realize when they run back tests on stupid finance sites, i.e. Yahoo, that allow you to export their data). Although, even with best efforts, there are still some errors and bias in those databases. Although, I think they are pretty negligible at this point. If someone said they ran a back test using those two databases, I would be pretty confident in at least the data portion. The actual test construction, well, sorry west, that was a poorly constructed back test. By the way, I've been following NormR's stock screening portfolio's over the years. He has two, I believe, that both follow a value investing strategy. Anyways, I've been looking at the tax implications of the strategy: hold for one year, sell at the end, run the screen again, invest again. CAGR performance of the Graham screener run in real time over the past 12 years was a little over 20.1%. It is pretty fantastic. However, when one takes taxes into consideration (I'm using 25% capital gains tax), the CAGR comes down to 15.3%. Much better than S&P, but still not as good as it seems. You gotta take those taxes into account.

Transaction costs were not considered. Luckily, at least with IB and non-penny stock stocks, this is close to being true for me :) I didn't consider taxes as well. However, I did the study over one year periods exactly so that in theory people could take the Greenblatt approach to taxes, i.e., sell the losers one day before one year to get short-term capital losses on them, and sell the winners one day after one year to get long-term capital gains on them. On rebalancing: I just assume that at the end of each year the positions were all liquidated to cash and put into whatever the top picks were at the current time. That is not good. The rebalancing means there is a huge turn over ratio. Based on how this back test was constructed, the actual performance of all of those stock screening strategies is probably about 0.75 actual returns--I'm going off a some simple math, but I just found a research article that also said taxes in an active mutual fund will take off as much as 25% off CAGR. But, you're right. Using IBKR, transaction costs are negligible. So, the best CAGR is now down to 12.75% CAGR. Better than indexing, but not by much. It makes one wonder if it's worth the effort.

By the way, when you did your back tests, how did you handle the sell and buy transactions? Did you take transaction costs into account? What about short term/long term taxes? And, finally, did you rebalance the portfolio? I think those are all important to consider when doing back testing vs indexing benchmarks.

Wow, I just got this email from AAII: A member recently asked me if a screening strategy with fewer criteria performs better than one with many criteria. As irony would have it, a few days later after I was asked this question, Wesley Gray and his colleagues at Alpha Architect published a paper on SSRN comparing several of the value-oriented AAII Stock Screens to a simple valuation model. The study’s results are not an apples-to-apples comparison to the way we track the performance of the screens (I’ll discuss the differences momentarily), but it did find that only our Piotroski High-F Score screen fared as well as a screen that simply seeks non-financial stocks with low ratios of EBITDA (earnings before interest, taxes, depreciation and amortization) to TEV (total enterprise value). Valuation is among the biggest drivers of stock returns. A strategy solely focused on low valuations will have good returns if it identifies enough stocks. The challenge with any strategy is making it investable. It is quite common for an analysis of indicators to divide the results into deciles, or 10 evenly split groups ranked from lowest to highest. Even if the universe of stocks studied for the analysis is narrowed in some fashion, each decile may still contain far more stocks than the average individual investor is willing to hold or can cost-effectively hold. (In Gray’s study, the EBITDA/TEV screen identified an average of 96 stocks.) There is also a behavioral aspect to consider: How willing are you to hold stocks that are otherwise unattractive? Very coincidental and relevant to this post. The link to the whole article is here: http://www.aaii.com/investor-update?a=update11614 Super interesting. So, the study used the CRSP and CompuStat database. They also footnoted this: "Because our results are focused on a different universe of securities, the evidence we present can sometimes differ drastically from the results presented on the AAII website." Which I somewhat concluded as well given the security exchanges they were looking at for equities. Anyways, their EBITDA/(T)EV screen came up with 90+ equities on average, and its performance from 1963 till 2013 is around 16.52% CAGR. The only screen that outperformed it was the Pitroski F Score with slightly better percentages. From 1997 to 2013, a really good period to look at since, as we know, those were some challenging times with two major booms and two major busts, the CAGR of EBITDA/EV was around 15.4%. It's not quite fair to compare to the S&P, since both screens, I believe, exclude certain sectors such as the financials. So, maybe financials just suck and if you exclude it from the S&P, it would drastically outperform. Without a back test, we won't know. For Magic Formula, they claim that it actually underperformed the S&P500 over the really long period. I don't know. I've seen SO much different benchmark #'s for the MF. But, consistently, I read that people are benchmarking this that with a lot of leverage. Like, 175% long, 80% short. That's insane. I read another article that showed in a certain time period, MF barely outperformed S&P, maybe by 2%, with huge leverage. I think 130% long, 80% short. That's retarded. Anyways, enough rambling. Hope that was informative.

That's cool. I would rather see CAGR #'s instead. It looks like the better larger cap strategies had a CAGR of around 17%. That's not bad. But, I've seen better screens from AAII.

This thread: I'm sure you guys have all read similar comments before about Sears. There are a few gems in there, though. Q: "How the hell has Sears held out this long? What do they offer that even compares to their competitors??" A: "A familiar environment for old people." "People who want to step into a 1970s timewarp maybe?" Q: "My kids : 'Whats a Sears?'" A: "Its like Blockbuster." "Sears is what would happen if the DMV tried to open a retail store - this comes as a surprise to no one." retort: "It's more like what would happen if Ayn Rand took over a 120-year-old retail chain and tried to make it more "rational" and "efficient"." I know there are some Ayn Rand fans on here. But, I found this John Rogers quote on that thread hilarious: "There are two novels that can change a bookish fourteen-year old's life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs."

I view inflation as being strictly a monetary phenomenon rather than a supply problem. Therein lies our differences in view. Anyways, we'll see. I'm betting on higher than normal inflation going forward. My thesis is that this will pressure Feds to raise interest rates even more, thereby compressing profit margins. Rising prices will also stem consumer demand creating catch-22 situations for corporations, which will then balance out whatever pricing power they had with these increased prices. In sum, earning multiples will contract and cause PE multiples in the market to rise, making an overvalued market even more overvalued. Again, we'll see.

Hey opihiman. On the CFA stuff, I don't remember. I didn't have a job for (most of) the time I was doing Level II and Level III, so I think it was about eight to ten weeks? However, I'm a little "special" in the fact that I work practically all the time. When I did those eight to ten weeks, most days I was doing more than ten hours of study a day, and I know I clocked in at least one fourteen hour day once a week. Sooo... Assuming eleven hours a day on average, seven days a week... Maybe 600 to 800 hours? Sorry if this isn't a great answer... On why I'm switching out of software, I like learning the 10% that matters 90% of the time in all subject areas. You name it. Computers... Bikes... How specific industries like, why not?, the fertilizer industry works. When you're doing investment research, you're doing nothing but learning about new stuff. All the time! I like that. In software I felt like I learned everything there was to know in my area (minus the extreme nuances) and that I was just repeating the same stuff over and over. It became very boring. Plus, I was subject to a lot of forces outside of my control, which I didn't really care for. (I still like software. A lot. I just don't want to do systems coding 40+ hours a week any more.) Just curious, but is that a similar reason as to why you switched? Hey West, Ah, very cool. That's awesome, man. My new boss was telling me things like, "The CFA is no joke, and it's almost equivalent to doing a masters degree." I don't know about that. I've heard varying mix things about the difficulty of the CFA. But, it sounds like it was a walk in the park for you. That's cool. No. To be frank, I got burnt out on IT. I've done it for about 15 years now. And, quite differently to you, I just got tired of learning new technologies all the time. Technologies that were changing or going nowhere. Case in point, about 7 years ago, J2EE and SOA webservices was being heavily pushed by players like IBM, Sun, Oracle, BEA. I worked in that for a long time, but I always felt that it was way too cludgey, cumbersome, and over-engineered. I felt that eventually, more simplified frameworks and languages would overtake J2EE. It turns out I was right! Haha. I spent all this time and energy learning something that just went into the dirt--well, mostly. Anyways, it sounds like you just got bored of it and wanted something new. I'm sure you will find something. I'll ask my boss if he needs another analyst. You have a great background. And, you're way ahead of the other analysts here. One last thing, since you have a software engineering background and are interested in the quant approach, have you ever tried creating automated trading/investing systems? I am trying to get ahold of a good, raw database like CompuStat and test my own strategies on it. I had one idea several years ago that I finally got to try out. Someone on here, I forgot who, sent me the data I needed by exporting it out of CompuStat. It was pretty simple. I just needed end of day price data of every stock that traded on the S&P in the CompuStat history. I imported the data into a JVM's 2 GB heap space. Then I ran my my backtest and walk forward tests via Java classes. It spits out basic statistics like draw downs, stocks that passed the filter, etc... Anyways, so far, that one idea is seriously outperforming. Like, I'm talking 40%+ CAGR. The only problem though with my strategy is the lack of oppty's. You pretty much have to put a 100% of your portfolio in one idea. Sometimes, there are several stocks that pass the filter. There would be more, but I narrow down the range to over a certain market cap and just the S&P. The tracking portfolio I set up for testing this idea out in a real world walk forward test is up over four times since 2010. I put 10% of my portfolio in that tracking portfolio, and now I'm thinking about increasing the overall percentage. I have other ideas I want to test out. But, it's not possible without other stock metrics. Anyways, if you're ever interested in doing some quant strategies, let me know. I thought my current firm would have access to a raw database like CompuStat. Apparently, they use online databases, and that's not really going to work for me.

I think the consensus is going to be wrong. YOY thin air credit expansion (as measured by adj. loans, leases, securities, and cash assests) have consistently been up a full 110 basis points over the long run median average since 2013. That, along with a host of other reasonings I'm just not willing to write down at the moment, will lead to higher inflation. Although, I agree with Milton Friedman's view that this higher inflation is laggy and quite variable. But, I think in 2016, we will start seeing much higher inflation. I'm talking about 5-6% YOY inflation. This will be enough to get the Fed's ass in gear and start driving higher interest rates.

Hey man, sounds like we come from similar backgrounds. I was a systems/software engineer for a long time in SV. I'm now working as a financial analyst at a small investment firm. Just started this week. Congrats on passing the CFA's all on the first go. Just curious, how long did it take you to finish that? Also, why the jump from software?

"On his blog Millennial Invest Patrick O’Shaughnessy examined the performance of stocks ranked on net buyback yield over the period from January 1987 through to July 2014. O’Shaughnessy found that the decile of stocks that repurchase the most shares in a year outperformed the market by 3.87 percent in the following year" That was interesting. I haven't read the Dividend Yield approach by Faber, but I wonder what the difference in performance is. Also, 1 year out performance could be a fluke. I wonder what the longer term performance is like.