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'Lazy' portfolio


Bart
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Hi all, the more I become aware of my own limitations, the more I become drawn towards the idea of a setting up a lazy portfolio: i.e. a portfolio that is almost guaranteed to beat the market with 1-3%, so generating long term (10+ years) returns of 8-12%, instead of trying to swing for the fences (15%+ returns) the whole time with only very mediocre results. 

 

The approach I was thinking of:

 

- 50% in index funds/ETF, to just track the market - e.g. Vanguard VTI. Does anyone know good low cost ETFs that capitalise dividends, and thus do not pay dividends, as dividend leakage is a significant cost for a European (Belgian) investor?

 

- 50% in good owner/operator companies: BRK, MKL, LMCA, FRMO, CKI, ... Any other names along these lines would be very welcome for further research.

 

Thanks,

 

Bart

 

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Hi all, the more I become aware of my own limitations, the more I become drawn towards the idea of a setting up a lazy portfolio: i.e. a portfolio that is almost guaranteed to beat the market with 1-3%, so generating long term (10+ years) returns of 8-12%, instead of trying to swing for the fences (15%+ returns) the whole time with only very mediocre results. 

 

The approach I was thinking of:

 

- 50% in index funds/ETF, to just track the market - e.g. Vanguard VTI. Does anyone know good low cost ETFs that capitalise dividends, and thus do not pay dividends, as dividend leakage is a significant cost for a European (Belgian) investor?

 

- 50% in good owner/operator companies: BRK, MKL, LMCA, FRMO, CKI, ... Any other names along these lines would be very welcome for further research.

 

Thanks,

 

Bart

 

So you expect to beat the market by 1-3% for a total of 8% - 12%.  Half of your portfolio will be in the market so the other half must generate excess returns of 2% - 6%. If you can generate those types of excess returns, that half my return low double digits. (e.g. 7% for the market + 6% excess returns = 13%).

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I would try to create your own equal weight index with ETFs. Read up on the pit falls of market cap weighted indexes by Stahl at Horizon Kinetics (available on FRMO's website).  You could build a more balanced portfolio with market cap weighted sector specific, small cap, midcap, international, and EM ETFs. Maybe put 20% in VTI and fill in the gaps with this approach. I've read enough of Horizon Kinetics papers that I'm on the look out for a day of reckoning as indexes become evermore popular.

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I would try to create your own equal weight index with ETFs. Read up on the pit falls of market cap weighted indexes by Stahl at Horizon Kinetics (available on FRMO's website).  You could build a more balanced portfolio with market cap weighted sector specific, small cap, midcap, international, and EM ETFs. Maybe put 20% in VTI and fill in the gaps with this approach. I've read enough of Horizon Kinetics papers that I'm on the look out for a day of reckoning as indexes become evermore popular.

 

Ross, thanks very much for this. I've indeed read quite a few of those papers. So what you're basically saying is that to reduce exposure to the importance of companies with high market cap on the total index returns, it might be a better approach to diversify away to small cap, EM, etc ETFs?

 

My current portfolio has a large overlap with the companies you hold, thinking of setting up 'rules' to buy more, eg. 13x earnings for bidvest, 1.2 book for MKL, 1.25 for BRK etc. I'd think that over the long term, it is difficult to go wrong with that kind of approach.

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If I wanted to find a lazy portfolio that will very likely beat the index by a good margin I'd consider Joel Greenblatt's new fund Gotham Enhanced Return (GENIX).*

 

*Minimum investment is 250K

 

Not too familiar with this one, but I see a fund that turns over its portfolio >3x a year and has pretty high expenses. Can you talk a little about this?

 

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I would try to create your own equal weight index with ETFs. Read up on the pit falls of market cap weighted indexes by Stahl at Horizon Kinetics (available on FRMO's website).  You could build a more balanced portfolio with market cap weighted sector specific, small cap, midcap, international, and EM ETFs. Maybe put 20% in VTI and fill in the gaps with this approach. I've read enough of Horizon Kinetics papers that I'm on the look out for a day of reckoning as indexes become evermore popular.

 

Ross, thanks very much for this. I've indeed read quite a few of those papers. So what you're basically saying is that to reduce exposure to the importance of companies with high market cap on the total index returns, it might be a better approach to diversify away to small cap, EM, etc ETFs?

 

My current portfolio has a large overlap with the companies you hold, thinking of setting up 'rules' to buy more, eg. 13x earnings for bidvest, 1.2 book for MKL, 1.25 for BRK etc. I'd think that over the long term, it is difficult to go wrong with that kind of approach.

 

Yeah, you are on the right path. The problem with VTI is its 72% large/giant cap. Also healthcare, financials, and tech make up the majority of the index. You could ballance VTI with a small and mid cap etf then add in sector etf's where you are lacking: consumer staples, maybe energy, communication, realestate, industrials, utilities....

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This has a lot of appeal to me, because if you can find some way that takes less work it frees up time for other things, and I am not one of those guys who is really thrilled by the game of investing.  If you can find something that beats the market by a couple points that will probably be enough.

 

Graham had a lot of lazy strategies that you could pick from.  Net nets, the defensive investor checklist, low pe low leverage formula, buying CEFs at discounts, and many more.

 

Charlie Munger had the best lazy strategy ever: go to a dinner party and meet the best investor of your generation before he gets big and give him your money.

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Another lazy way is invest via factors (namely, value and small size).  There are some Vanguard funds (small cap value for instance) that you can obtain for pretty cheap prices and some ETFs that focus on the SCV factor.  This will probably add a few percentage points of return.

 

Packer

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Another lazy way is invest via factors (namely, value and small size).  There are some Vanguard funds (small cap value for instance) that you can obtain for pretty cheap prices and some ETFs that focus on the SCV factor.  This will probably add a few percentage points of return.

 

Yes I think this is the way to go. Only problem is you will have long periods of under performance. But if you stick with small cap value you will beat the market assuming past history holds true. I would say one other thing you could do which is still probably pretty lazy but a little less lazy than to invest in small cap value is to have a cash/bond component whose proportion you vary based on how expensive overall markets are.

 

So when markets are terrible with pe ratios below 10 you should be fully invested in small cap value. When PE ratios are 16 like now maybe you are stay fully invested and when PE ratios go to like 25 and over you cash out. I don't have any idea of whether this would work but my guess is that it might beat a pure small cap value allocation.

 

Anyways I would probably invest in this:

https://www.google.ca/finance?q=MUTF%3AVISVX&ei=DP4tVMD_FIekqwHb-IH4Cw

 

Although you might want to check out the following before you do:

http://servowealth.com/resources/articles/vanguards-index-switch-they-still-dont-get-it

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Another lazy way is invest via factors (namely, value and small size).  There are some Vanguard funds (small cap value for instance) that you can obtain for pretty cheap prices and some ETFs that focus on the SCV factor.  This will probably add a few percentage points of return.

 

 

Although you might want to check out the following before you do:

http://servowealth.com/resources/articles/vanguards-index-switch-they-still-dont-get-it

 

The article and packers comment are right on point. MSCI or any other index provider cannot create indexes to appeal to the masses in the micro, small, and midcap spaces simply because the liquidity does not exist. Take Vanguard as an example. They have 2.86T in AUM, Vanguard cannot decide to equal weight their indexes or sectors because they are constrained by AUM. You should be able to out perform the broad market cap weighted indices by 1% a year by using a more balanced approach.

 

I've been confronted with the same issue lately. I have a few brokerage accounts that are constrained to etf's and mutual funds while my roths and cash accounts are uninhibited at IB. I have to rely on indexes for the compounding of nearly half of our funds. I do like a couple of mutual funds, OAKBX and YACKX, but outside of them indexing makes up the majority of these accounts. VTI and VTSAX made up the rest of the majority of the accounts, but Stahl has convinced me I can do better.

 

Some ETFs I'm considering:

 

QUAL

VLUE

MOAT

various Schwab/Vanguard Sector ETFs

various Schwab/Vanguard Mkt Cap ETFs

VIG

FNDA,X,B,F,C,E

 

Outside of ETFs/funds, I like investing in companies. I feel more confident in knowing what my 15 stock index is up to than I do about any ETF. Owner operators are a great place to start. What you want is essentially a buy and hold portfolio. There are a lot more companies outside of investor lead insurance companies out there that are owner operated or have superb management and a defensible moat.

 

 

 

 

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Tilt your index funds/ETFs.

 

Consider GLRE, TPRE, Y.

 

Thanks for the feedback.

 

James - what do you mean with 'Tilt your index funds/ETFs?'

 

What Packer16 said (plus momentum and quality, if can).

 

See: http://www.etf.com/sections/index-investor-corner/18883-swedroe-look-at-value-quality-a-momentum.html

 

Search http://www.bogleheads.org/forum/ for tilting, DFA, the Larry/Swedroe portfolio, etc..

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I'd say Berkshire. It's the greatest investor's lifetime collection of businesses.

 

Second I'd say the ISE Wealth index etf.

 

+1.

 

100% in BRK. Mother of all lazy portfolios.

 

Plus, you are joining their laziness club. 

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If I wanted to find a lazy portfolio that will very likely beat the index by a good margin I'd consider Joel Greenblatt's new fund Gotham Enhanced Return (GENIX).*

 

*Minimum investment is 250K

 

Not too familiar with this one, but I see a fund that turns over its portfolio >3x a year and has pretty high expenses. Can you talk a little about this?

 

The fund actively rebalances based on Joel Greenblatt's "Magic Formula".  See 'The Little Book that Beats the Market' for reference on how the strategy works.  Basically they are long low P/E high return on capital stocks, and short high P/E, low return on capital stocks.  The expense ratio is a bit high, but seems worth it given the fact an individual investor has almost no capacity to get the required diversification for this type of long/short strategy at a reasonable cost.  This is one of the few strategies that works well, despite the diversification.  (and again less diversified in this case could blow up easier due to the shorts).  The fund is 170% long and 70% short, equaling about 100% long on average.  The 70% short 70% long portion is added market neutral return, while there is the additional 100% long portion, so you can make money in two ways, also helping cover the higher expense ratio.

 

Intuitively the strategy is extraordinary in my opinion.  Would you rather own expensive stocks with poor returns on capital, or cheap stocks with high returns on capital?  If you are hands off, this strategy should work very well over time (and has already worked per the results). 

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Info here: http://wealth-index.com/

 

Just as a disclaimer I have only used it to source ideas for research.

 

Indeed a very interesting concept - however, as far as I know, there is no ETF available (yet), and the mutual fund by Virtus is only for US based investors.

 

Does anyone know a way to invest in the wealth index for European investors?

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