Dual momentum investing boiled down to the simplest view involves only seeing if the S&P 500 outperformed USA t-bills for the last year. If so, invest in an low cost S&P 500 fund. If not, invest in a high quality short duration bond fund.
There are many different tweaks to this idea. Dual Momentum Investing by Gary Antonacci does a good job of exploring this idea and providing evidence on historical returns using this method. 3 big advantages of this strategy are
- Simplicity – easy to implement and it takes nearly no time each year
- Low cost – uses low cost index fund and has very limited transaction costs (direct or tax costs from sales) as it averages fewer than 1 trade a year)
- Good performance historically – the book details performance and the low risk nature of the strategy in backtesting.
There are ways to adjust the strategy that increase the complexity a bit for those looking to increase returns or reduce risks.
It is something worth reading in my opinion. The book isn’t the easiest to read but it is decent and worth reading.
Gary Antonacci also has a blog worth reading.
To be financially successful, you need to invest. The problem most people have is deciding where their investments should be made. For a long time, real estate was seen as the best and most profitable bet. Remember the house flipping trend in the early millennium, before the housing market crashed? A successful investing strategy for a short period is no guaranty of that strategy working for the long term. Diversification provides more long term stability.
There are two approaches to investing in a franchise. The one most people go for–especially those who are tired of being someone else’s employee–is to opt into an already existing franchise. Yes, the cost of these franchises can be pricey. For example, the average UPS franchise cost is anywhere from $100K-$440K, depending on where your franchise will be located, if you will need to build a new structure, etc. But there is financing available and if you work with an established brand (like UPS, food chains, mall shops). There are risks and you can read about problems franchisees face just by searching online, but it also has been very successful for many people.
Another approach, for people who already own their own successful businesses, is to think about turning those businesses into franchises. This way people will pay you to run your company at their locations. This is quite a huge leap in complexity but the profit potential is very large.
My favorite method for business, and one my brother used for his business, Hexawise (I continue to consult for Hexawise), is bootstrapping. With this method you grown the business from the funds the business is able to generate. You don’t have to worry about pleasing investors or large debt payments. It does limit the ability to spend cash before the business generates it but this is often a benefit, in my opinion, as it forces you to avoid spending you can’t afford. It is a drawback however if the business really needs to spend a large amount of cash before it generates large amounts of income.
If you don’t want to have the responsibility of running a company yourself but still want to profit off of business investments, your best chance to do that is to invest in a promising new business. There are some people who turn enough of a profit doing this that it becomes their entire vocation.
Investing in a business has many benefits, especially if that company does well. When you invest, you typically do so in one of three ways:
- Silent partnerships: You front the money and lend your reputation in exchange for a share of the company’s ownership so that the investment will be profitable. This is good for people who want to have more control over what the company does with your investment. It can also be one of the riskiest types of investments to make.
- Angel investments: This is where you invest a large sum in a promising company but remain entirely hands-off while that company gets up and running. Most angel investors ask only for their initial investments plus a small sum on top of that original amount (usually accrued via interest charges) so that the investment is profitable for everyone.
- Traditional investments: Buying stocks or bonds in public companies. This is by far the easiest and is a very sensible way to invest. Often this is done using index funds to invest in the performance of the broad stock market.
The Usual Suspects
If you want to make real money via investing, you will want to make sure your investment portfolio includes a good mixture of stocks, bonds, mutual funds etc.. In fact, while we’re listing them last, these are the investments you will usually want to make first, as you build enough wealth and capital to make larger investments like franchises and investing in promising startups.
For many people, the first investments are savings accounts, 401(k)s or retirement accounts. If this is where you are, your next step should be something with a guaranteed return like a treasury bond (government bond) or a money-market account with a good interest rate. Let these investments mature while you are learning about stocks, mutual funds, real estate, business investing, etc. Then use the profits from those initial investments to fund your larger and riskier future projects.
You should never invest more than you can afford to lose. Sure taking risks can pay off, but if you want to build a genuinely successful portfolio, play it safe, especially when you are just getting started.
The report, The Dwindling Taxable Share Of U.S. Corporate Stock, from the Brookings Institution Tax Policy Center includes some amazing data.
In 1965 foreign ownership of USA stocks totaled about 2%, in 1990 it had risen to 10% and by 2015 to 26%. That the foreign ownership is so high surprised me. Holdings in retirement accounts (defined benefit accounts, IRAs etc.) was under 10% in 1965, rose to over 30% in 1990 and to about 40% in 2015. The holdings in retirement accounts doesn’t really surprise me.
The combination of these factors (and a few others) has decreased the holding of USA stocks that are taxable in the USA from 84% in 1965 to 24% in 2015. From the report
As with much economic data it isn’t an easy matter to determine what values to use in order to get figures such as “foreign ownership.” Still this is very interesting data, and as the report suggests further research in this area would be useful.
Related: There is No Such Thing as “True Unemployment Rate” – The 20 Most Valuable Companies in the World – February 2016 (top 10 all based in the USA) – Why China’s Economic Data is Questionable – Data provides an imperfect proxy for reality (we often forget the proxy nature of data)
Alphabet (Google) writes how they purchased 3.2 million shares this quarter in their earnings release:
In Q1 2016, we repurchased 3.2 million shares of Alphabet Class C capital stock for an aggregate amount of $2.3 billion, of which $2.1 billion was paid during the quarter. The total remaining authorization for future repurchases is approximately $1.4 billion. The authorization has no expiration date.
And they tout non-GAAP earnings, while of course reporting the GAAP earnings as required. One of the things executives like about non-GAAP earnings is they pretend the stock they give away to themselves doesn’t have a cost to shareholders. When you call attention to spending over $2 billion in the quarter to buy back 3.2 million shares it seems silly to then claim that the stock you gave away shouldn’t be considered as an expense.
How can you pay over $2 billion just to get back the stock you gave away and also pretend that money is not really a cost? And on top of that you promote the buyback as evidence that the stock is really worth more than you paid (after all why would you pay more than it is worth). But when you give the stock away to yourself that shouldn’t be seen as a cost? It is amazing they can do this and think they are not doing anything wrong.
And where does Google stand compared to last year for outstanding shares? 689,498,000 last year compared to 699,311,000 now. So nearly 10,000,000 more shares outstanding, even after they bought back 3.2 million this quarter. In the previous quarter there where 697,025,000 shares outstanding. All these figures are weighted-average diluted share balances for the entire quarter.
Google CEO, Sundar Pichai, got a $100 million stock award in 2015 (before being promoted to CEO). After the promotion he will be taking an additional “$209 million in stock granted every other year (he has to stay at Google for four years after each grant to cash them out).” He was granted $335 million in stock in 2014 and $78 million in 2013. You can see how quickly the executives paying themselves this well (this is 1 executive, a highly ranked one but still just 1) can dilute stockholders positions even with multi billion dollar buybacks in a quarter.
You don’t hear companies promoting how much dilution they are imposing on shareholders in order to provide windfalls for executives. I wonder why? No I don’t. I do wonder why reporters promote the buybacks and ignore the fact that the dilution is so extreme that it even overwhelms billions of dollars in buybacks.
Alphabet reported $6.02 a share in earnings and $7.50 a share in non-GAAP “earnings” for the latest quarter.
As I have said before I believe Google’s ability to extract enormous profit from their search dominance (as well as YouTube and adwords) makes it a very compelling long term investment. It would be better if the executives were not allowed to take such huge slices from the cash flow Google generates. But it is able to sustain those raids on stockholder equity and still be a good investment and appears likely to be able to continue to do so. Though I think they would be better off reducing the amount executives take going forward.
This post continues our series on peer-to-peer lending (and LendingClub): Peer to Peer Portfolio Returns and The Decline in Returns as Loans Age, Investing in Peer to Peer Loans. LendingClub, and other peer-to-peer lenders let you use filters to find loans that meet your criteria. So if you chose to take more, or less, risk you can use filters to find loans fitting your preferences. Those filters can also be applied to automate your lending.
There are resources online to help you understand the past results of various investing strategies (returns based on various filters). Some filter are just a trade-off of risk for return. You can invest in grade A (a LendingClub defined category) loans that have the lowest risk, and the lowest interest rates and historical returns. Or you can increase your risk and get loans with higher interest rates and also higher historical returns (after factoring in defaults).
LendingClub lets you set filters to use to automatically invest in new loans as funds are available to invest (either you adding in new money or receiving payments on existing loans). This is a nice feature, there are items you can’t filter on however, such as job title. And also you can’t make trade-offs, say given x, y and z strong points and a nice interest rate in this loan I will accept a bit lower value on another factor.
So I find I have to be a bit less forgiving on the filter criteria and then manually make some judgements on other loans. For me I add a bit higher risk on my manual selections. I would imagine most people don’t bother with this, just using filters to do all the investing for them. And I think that is fine.
Practically what I do so that I can make some selections manually is to set the criteria to only be 98% invested. This will cause it to automatically invest any amount over 2% that is not invested. You can set this to whatever level you want and also is how you can make payments to yourself. I will say I think one of the lamest “features” of LendingClub is that is has no ability to send you regular monthly checks. So you have to manually deal with it.
It should be simple for them to let you set a value like send me $200 on the 15th of each month. And then it manages the re-investments knowing that and your outstanding loans. But they still don’t offer that feature.
As I said one of the factors in setting filters is managing risk v. reward but the other is really about weaknesses in the algorithm setting rates. You can just see it as risk-reward trade-off but I think it is more sensible to see 2 different things. The algorithm weaknesses are factors that will fluctuate over time as the algorithm and underwriting standards are improved. For example, loans in California had worse returns (according to every site I found accessing past results). There is no reason for this to be true. If a person with the exactly same profile is riskier in California that should be reflected in higher rates and thus bring the return into balance. My guess is this type of factor will be eliminated over time. But if not, or until it is, fixed filtering out loans to California makes sense.
Once you set your filter criteria then you select what balance you want between A, B, C, D, E and FG loans. I set mine to
I actually have a bit over 1% in FG (but I select those myself). In 2015 the makeup of the loans given by LendingClub was A 17%, B 26%, C 28%, D 15%, E 10%, F and G 4%.
Related: Where to Invest for Yield Today (2010) – Default Rates on Loans by Credit Score – Investing in Stocks That Have Raised Dividends Consistently – Investment Risk Matters Most as Part of a Portfolio, Rather than in Isolation
Sadly Lending Club uses fragile coding practices that result in sections of the site not working sometimes. Using existing filters often fails for me – the code just does nothing (it doesn’t even bother to provide feedback to the user on what it is failing to do). Using fragile coding practices sadly is common for web sites with large budgets. Instead of using reliable code they seems to get infatuated with cute design ideas and don’t bother much making the code reliable. You can code the cute design ideas reliably but often they obviously are not concerned with the robustness of the code.
|2||Alphabet (GOOGL)||USA||$496 billion|
|4||Exxon Mobil||USA||$341 billion|
|5||Berkshire Hathaway||USA||$329 billion|
|8||Johnson & Johnson||USA||$296 billion|
|10||Wells Fargo||USA||$245 billion|
Apple lost $131 billion in market cap since my October post. Alphabet (Google) lost just $1 billion in market cap, and for a short time moved past Apple into the top stop. Facebook achieved a rare increase during this period, gaining $16 billion and moving up 1 spot on the list. All the top 10 most valuable companies are based in the USA once again.
The next ten most valuable companies:
|13||China Mobile||China||$219 billion|
|15||JPMorgan Chase||USA||$214 billion|
|16||Procter & Gamble||USA||$211 billion|
|18||Industrial & Commercial Bank of China||China||$206 billion*|
|20||Petro China||China||$191 billion|
Market capitalization shown are of the close of business February 26th, as shown on Google Finance.
The 11th to 20th most valuable companies includes 4 USA companies, 3 Chinese companies and 3 Swiss companies. Toyota fell from 20th to 25th and was replaced in the top 20 by Verizon, which resulted in the USA gaining 1 company and costing Japan their only company in the top 20. Pfizer also dropped out and was replaced by Walmart.
The total value of the top 20 decreased by $189 billion since my October post: from $6.054 trillion to $5.865 trillion. Since my October 2014 post of the 20 most valuable companies in the world the total value of the top 20 companies has risen from $5.722 trillion to $5.865 trillion, an increase of $143 billion. The companies making up the top 20 has changed in each period.
A few other companies of interest (based on their market capitalization):
Since April of 2005, the portfolio Marketocracy calculated annualized rate or return is 7.1% (the S&P 500 annualized return for the period is 6.9%). Marketocracy subtracts the equivalent of 2% of assets annually to simulate management fees – as though the portfolio were a mutual fund. Without that fee, the return beats the S&P 500 annual return by about 220 basis points annually (9.1% to 6.9%).
Since the last update, I have added Gilead to the portfolio. I also dropped PetroChina and Templeton Dragon fund (as I had mentioned I would do).
The current stocks, in order of return:
|Stock||Current Return||% of sleep well portfolio now||% of the portfolio if I were buying today|
|Amazon – AMZN||736%||12%||9%|
|Google – GOOG||400%*||21%||15%|
|Danaher – DHR||129%||8%||8%|
|Apple – AAPL||85%||17%||17%|
|Toyota – TM||50%||8%||10%|
|Intel – INTC||46%||7%||8%|
|Pfizer – PFE||21%||6%||6%|
|Cisco – CSCO||14%||3%||3%|
|Abbvie – ABBV||1%||6%||8%|
|Gilead – GILD||-6%||6%||8%|
The current marketocracy results can be seen on the Sleep Well marketocracy portfolio page.
I make some adjustments to the stock holdings over time (selling of buying a bit of the stocks depending on large price movements – this rebalances and also lets me sell a bit if I think things are getting highly priced. So I have sold some Amazon and Google as they have increased greatly (and I have added to ABBV and GILD at nice prices). These purchases and sales are fairly small (resulting in an annual turnover rate under 2%).
I would consider selling Cicso. I also would like to find a good natural resource stock or two if I can find good stocks. I do feel the portfolio is too concentrated in technology and medical stocks so I am would choose a stock with a different focus if it were close to as good as an alternative focused on technology or health care, but I will also buy great companies at good prices even if that results in a less diverse portfolio.
I don’t try and sell significant portions of the portfolio and have a large cash balance to time the market. I will, however, sell some of the individual positions if I think the price is very high (or to rebalance the portfolio a bit).
The market has gone down a fair amount recently and may go down more. It may be in that downdraft I will find a nice candidate to add at an attractive price.
If you wonder why the Apple return isn’t higher, I debated adding it at the outset but decided against it. So I only started adding Apple in 2010 and added to that position over the next several years.
* Marketocracy seems to have messed up the returns for Google (probably due to the split); this is sad as their purpose for me is to calculate returns, but my guess is between 350-450%
Today there are more ways to invest your money than ever before. Alternative investments can help provide counterweights to more common investments.
Historical documents are important pieces of cultural memorabilia that are sought after by personal collectors, museums and universities. Given the prestige of the collectors, historical documents can go for top dollar. In one recent example, Bill Gates purchased the Codex Leicester for over $30 million.
Historical documents can be a great addition to any portfolio, but one word of caution: authenticity is critical. Far too many investors have been bamboozled by counterfeit documents. Raab Collection, an internationally recognized proprietor of historical documents, stresses the importance of due diligence. When they help clients such as the Library of Congress build their collections, every step possible is taken to authenticate a document before striking a deal.
Here are four other factors that should be considered before making your first historical document investment:
Plan for Preservation
The older historical documents get the more valuable they become – as long as they are properly preserved. The condition of the document is second only to authenticity when it comes to value.
Before you take ownership of a historical document, it’s a good idea to have a plan in place for how the document will be stored. Documents should be kept in waterproof, airtight containers that protect the fibers from the elements. UV radiation can also degrade paper overtime, which is why storing historic documents out of direct sunlight is always advised.
Protecting Your Investment
Unlike stocks and mutual funds, physical assets can be destroyed or stolen. Historical documents have to be treated like fine art. They should be insured and some form of theft protection should be put in place. Documents can be stored in a fireproof lockbox and/or stored in a bank safe under lock and key.
Get Documents Appraised
Professional appraisals are important for historical collectables. An appraisal will give you an official estimate of the value, which can be used for securing insurance. Appraisals also give you a better idea of an acceptable price when it comes time to sell off your investment.
Keep Track of the Market and Trends
You won’t be checking stats daily like the stock market, but keeping up with historical document sales is needed to ensure you make the best decisions for your investment. After all, making money on investments hinges on knowing when to buy and when to sell. Knowing what’s happening in the market will help you determine when the time is ripe to sell or whether you should hold onto your asset a little longer. Demand for historical documents tends to be higher than supply, but catching things right when interest is trending upward can help you make the most profit possible.
Historical and autographed documents have always been popular collectibles, but now more people are beginning to realize their investment potential. Every year countless documents are sold privately and at auction for thousands and even millions of dollars. Investors that seek professional guidance before buying and take care to preserve their asset will be able to grow their portfolio or retirement nest egg by simply holding on to a piece of history.
In general alternative investments (historical documents, art, coins, collectibles etc.) should make up a small portion, under 5%, of an investment portfolio. Another investment that isn’t quite normal, but isn’t really considered a normal investment either is peer to peer loans. We have written about peer to peer loans several times on this blog recently, I would consider under 5% for peer to peer loans acceptable but would consider that part of the bond portion of a portfolio.
This is a continuation of my previous post: Investing in Peer to Peer Loans
LendingClub suggest a minimum of 100 loans (of equal size) to escape the risk of your luck with individual loans causing very bad results. Based on this diversity the odds of avoiding a loss have been very good (though that obviously isn’t a guarantee of future performance), quote from their website (Nov 2015):
This chart, from LendingClub, shows a theoretical (not based on past performance) result. The basic idea is that as the portfolio ages, more loans will default and thus the portfolio return will decline. This contrasts with other investments (such as stocks) that will show fluctuating returns going up and down (over somewhat dramatically) over time.
For portfolios of personal loans diversity is very important to avoid the risk of getting a few loans that default destroying your portfolio return. For portfolios with fewer than 100 notes the negative returns are expected in 12.8% of the cases (obviously this is a factor of the total loans – with 99 loans it would be much less likely to be negative, with 5 it would be much more likely). I would say targeting at least 250 loans with none over .5% would be better than aiming at just 100 loans with none over 1% of portfolio.
There are several very useful sites that examine the past results of Lending Club loans and provide some suggestions for good filters to use in selecting loans. Good filters really amount to finding cases where Lending Club doesn’t do the greatest job of underwriting. So for example many say exclude loans from California to increase your portfolio return. While this may well be due to California loans being riskier really underwriting should take care of that by balancing out the risk v. return (so charging higher rates and/or being more stringent about taking such loans.
So I would expect Lending Club to adjust underwriting to take these results into account and thus make the filters go out of date. Of course this over simplifies things quite a bit. But the basic idea is that much of the value of filters is to take advantage of underwriting weaknesses.
This chart (for 36 month loans) is an extremely important one for investors in peer to peer loans. It shows the returns over the life of portfolios as the portfolio ages. And this chart (for LendingClub) shows the results for portfolios of loans issued each year. This is a critical tool to help keep track to see if underwriting quality is slipping.
Peer to peer lending has grown dramatically the last few years in the USA. The largest platforms are Lending Club (you get a $25 bonus if you sign up with this link – I don’t think I get anything?) and Prosper. I finally tried out Lending Club starting about 6 months ago. The idea is very simple, you buy fractional portions of personal loans. The loans are largely to consolidate debts and also for things such as a home improvement, major purchase, health care, etc.).
With each loan you may lend as little as $25. Lending Club (and Prosper) deal with all the underwriting, collecting payments etc.. Lending Club takes 1% of payments as a fee charged to the lenders (they also take fees from the borrowers).
Borrowers can make prepayments without penalty. Lending Club waives the 1% fee on prepayments made in the first year. This may seem a minor point, and it is really, but a bit less minor than I would have guessed. I have had 2% of loans prepaid with only an average of 3 months holding time so far – much higher than I would have guessed.
On each loan you receive the payments (less a 1% fee to Lending Club) as they are made each month. Those payments include principle and interest.
Lending Club provides you a calculated interest rate based on your actual portfolio. This is nice but it is a bit overstated in that they calculate the rate based only on invested funds. So funds that are not allocated to a loan (while they earn no interest) are not factored in to your return (though they actually reduce your return). And even once funds are allocated the actual loan can take quite some time to be issued. Some are issued within a day but also I have had many take weeks to issue (and some will fail to issue after weeks of sitting idle). I wouldn’t be surprised if Lending Club doesn’t start considering funds invested until the loan is issued (which again would inflate your reported return compared to a real return), but I am not sure how Lending Club factors it in.