Tag Archives: harry-long

Ideas For An Ultra-Low Volatility Index Part VII

Here are the Ultra-Low Volatility Index strategy’s rules. Buy the PowerShares S&P 500 Low Volatility Portfolio ETF (NYSEARCA: SPLV ) with 80% of the dollar value of the portfolio. Buy the Direxion Daily 30-Year Treasury Bull 3x Shares ETF (NYSEARCA: TMF ) with 20% of the dollar value of the portfolio. Rebalance annually to maintain the 80%/20% dollar value split between the positions. The index is very Zen in its elegance. We are combining the S&P 500 Low Volatility ETF with a 3x leveraged exposure to long duration government bonds, which acts as an imperfect hedge. Because of the leverage inherent in TMF, we can allocate more capital to SPLV. In addition, it is not necessary to have margin exposure. Personally, I think most investors want a portfolio that will tread water, hold its own, and only drop slightly when markets are going crazy. Low drawdowns and ultra-low volatility enable an investor to hang on and to actually enjoy the possibilities of the long term. For too long, people have had the pain theory of investing pounded into their head . Or as I like to call, it “The Bill Ackman School For Kids Who Can’t Read Financial Statements Good And Wanna Learn To Do Other Stuff Good Too.” Many of these “special people” (and let me be clear, by “special” I mean reckless and dumb) believe that in order to enjoy a decent return, that they first must endure the pain of having positions move against them, in order to eventually triumph in a grand quest for the truth of their own genius, against all odds. The pain theory of investing sounds very heroic and glamorous, but in reality, a smooth ride allows investors to hold on to their positions in order to enjoy the benefits of the long term. Why get shaken out, when you can have a smoother ride? And the smoother ride, in this case, has a higher return across a full bull/bear market cycle. Here are the index’s results: (click to enlarge) Click to enlarge (click to enlarge) Click to enlarge I will be the first to admit that this strategy is not brilliant or original. It’s just solid blocking and tackling. The current trend towards complexity in the investment world is not just disturbing – it’s also not profitable. Recent blowups like Pershing Square ( OTCPK:PSHZF ) highlight the importance of protecting investor capital. Unfortunately, many managers have the misguided urge to prove their genius, rather than to make money and to protect investor capital. Remember, it’s not about pretending that you’re always right. It’s about making money. A good investor resists the urge to make it all about his own ego. He makes it about safeguarding investor capital. Like a good doctor, the first directive must be to “first, do no harm.” In future posts, we will examine ways to apply conservative risk control to portfolios in order to hedge or to move to cash during a simultaneous collapse in stocks and bonds. Thanks for reading. We feature even more impressive strategy indices in our subscription service. If this post was useful to you, consider giving it a try. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points, which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program, which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

3 Lies About The Stock Market

We’ve all been told outright lies about the stock market that do not square with the evidence. Today, we’re going to debunk some insidious lies. Lie #1: “Superior returns come from stock picking.” This lie is especially dangerous because it is partially true. High returns can come from stock picking. But higher returns most often come from not picking stocks. For example, if you had been smart enough to predict that Apple (NASDAQ: AAPL ) would trounce most of the S&P 500 after the unpleasantness of the financial crisis, you would be a great stock picker – you just wouldn’t be very bright at generating extremely high returns with a solid MAR ratio (CAGR/Maximum Drawdown). A 50/50 portfolio of leveraged S&P 500 and leveraged long duration government bond exposure would have trounced Apple. Take a look at 50% ProShares UltraPro S&P 500 ETF (NYSEARCA: UPRO )/50% Direxion Daily 30-Year Treasury Bull 3x Shares (NYSEARCA: TMF ), rebalanced weekly, vs. the performance of Apple. It’s not even close. And that’s holding stocks and bonds! The dramatic diversification not only provides Apple-trouncing performance but also does so with much higher Sharpe and MAR ratios. (click to enlarge) Click to enlarge Which leads us to: Lie #2: “Focus investing leads to the highest returns.” Absolutely not. As we have seen above, holding two major asset classes is the opposite of Phil Fisher style focus investing. If holding Apple (the greatest growth company of all time) since the summer of 2009 is not as good as holding two leveraged ETPs which give exposure to stocks and bonds, focus investing is not optimal. Focus investing may be better than holding the entire S&P 500, but it is not as good as holding the entire S&P 500 and long duration government bonds – i.e., dramatic diversification boosts returns more than focus. Remember, correlations between asset classes are, as a rule, more persistent than company earnings growth. Lie #3: “If you’re going to pick stocks, you need to predict earnings.” This lie is especially dangerous. Guessing quarterly earnings is a loser’s game. Here’s what’s better – measure the number of competitors in an industry. Long’s Law is the ultimate reductionist statistic which is predictive of sustained company outperformance. Long’s Law states that long-term free cash flow margins (FCF/revenue) in any industry over a multi-decade time frame tend towards the inverse of the number of competitors in that industry. Dozens of seemingly predictive statistical ratios really collapse causally to one number – the number of competitors in the industry. And there are the added benefits of determining if the measured outperformance is sustainable, and if and when the outperformance is threatened (the entrance of meaningful new competition, etc.). For example, in an industry with three competitors, FCF margins will tend towards 33.33% or 1/3. However, Economic “Laws” should best be termed Economic “Tendencies.” The rule roughly holds across a vast array of industries. But why is this important? FCF margins directly impact the sustainability of high long-term Return on Assets (ROA) rates. And longer term, sustained high ROA numbers dictate the unlevered return of a business. But the key word is “sustainable”. And high FCF margins, according to Long’s Law, are only sustainable longer term in industries with few substantial competitors. But what are examples of publicly traded companies that might rank very highly under Long’s Law? Here is an illustrative, but by no means complete, list below: Major Payment Networks (Network Effect Businesses) Visa (NYSE: V ) MasterCard (NYSE: MA ) Major Futures Exchanges (Network Effect Businesses) CME Group (NASDAQ: CME ) Intercontinental Exchange (NYSE: ICE ) CBOE Holdings (NASDAQ: CBOE ) Major Credit Rating Agencies (De Facto Regulators) Moodys (NYSE: MCO ) McGraw-Hill Financial (NYSE: MHFI ) Get the picture? Don’t predict earnings. Measure the number of competitors in the industry. Longer term, margins and sustained earnings growth follow the lack of or the brutality of competition in an industry. The robber barons understood this, and you should too. And you don’t even need to pick stocks, but if you’re going to, pick oligopoly businesses with few competitors. You’ll earn much higher returns than the major equity indices over time, but without the need to guess quarterly earnings. Why are these 3 lies so persistent and widespread? It’s because they are partially true. But if we want to optimize returns, we need to discard these lies, and replace them with evidence-based thinking. Thanks for reading. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Plan To Survive: Be Systematic! (Part 4)

My favorite strategy indices have a low correlation to both stocks and to bonds. As always, our cutting-edge strategy indices are only available to subscribers, but I hope that some of the strategy indices presented here will provide inspiration for readers to create their own methods for dealing with an increasingly difficult investment environment. Remember, hope is for people who do not use data. Wise investors plan using evidence-based methods. The logic behind this strategy index is that we can generate return from exposure to a leveraged S&P 500 position which only risks 30% of our capital. The position almost acts like a synthetic call option on the S&P 500. We can hedge this exposure imperfectly, but somewhat effectively, by buying leveraged long duration government bonds, getting short leveraged Euros (deflation anyone?), and by buying leveraged gold in case of monetary instability or inflation. I think this strategy could struggle if stocks and bonds drop simultaneously, with the dollar weakening vs. other currencies. Please note that even though the rules of this strategy index have been publicly released, like any other index, we require the execution of a licensing agreement with ZOMMA LLC for any form of commercial use, whatsoever. ZOMMA Quant Warthog II Rules: I. Buy UPRO (NYSEARCA: UPRO ) with 30% of the dollar value of the portfolio. II. Buy TMF (NYSEARCA: TMF ) with 20% of the dollar value of the portfolio III. Buy EUO (NYSEARCA: EUO ) with 40% of the dollar value of the portfolio. IV. Buy UGL (NYSEARCA: UGL ) with 10% of the dollar value of the portfolio. V. Rebalance annually to maintain the 30%/20%/40%/10% dollar value split between the instruments. Here are the results of a backtest of these rules in a log scale: (click to enlarge) Click to enlarge (click to enlarge) Click to enlarge This strategy index has powered through recent market volatility largely unscathed. Its Sharpe and MAR decimate the S&P 500 over the same period, with true multi-asset class exposure for both return generation and hedging. This helps the strategy achieve a lower volatility than that of the S&P 500, with a CAGR which exceeds the S&P 500’s by approximately 6% per year. Thanks for reading. We feature even more impressive strategy indices in our subscription service. If this post was useful to you, consider giving it a try. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in UPRO, UGL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.