Saturday, December 05, 2015

Greetings From Zug - December 2015

Greetings From Zug

Have made the trans-atlantic trip.  Dozed off a bit this afternoon, but a strong coffee has revived me as the sun sets over Lake Zug (romantic description, actually quite foggy).

The magic formula continues to struggle in 2015.  The average open stock in my 12 tracking portfolios is down by 3.2%, versus the R3K being up (on average)  by 1.6%.  If we look at my dividend stocks, it is atrocious, down 7.8%. If we look at "new" stocks,  it is a gut wrenching -11.5%.  The only thing working are the "dogs", up 15.0%.  Helped greatly by WTW (in 6 of the dog portfolios and up an average of 313%!). Paging up and down the list of "dogs" very few others are successful, so it is a high risk approach.

So the differential between the open MFI tranches and the benchmark is 4.8 points. That seems  pretty wide.  BUt looking back at history, it can get much much worse.  I show the worst differential over 12 straight portfolios is -11.9 percentage points.  No wonder I gave up on MFI back in 2011!

But to give both sides of the coin, there have been stretches of massive outperformance (over 17 percentage points over a rolling 12 tracking portfolios).  This is clearly what Greenblatt meant when he said it would be difficult for institutional investors to stay the course.  Everyone would withdraw their money during the drought.  Of course, I still don'r recall him talking about it being "streaky" many good months in a row followed  by many, many bad months.

The Magic Bullet

I know we are all looking for the magic bullet,  the holy grail that would enable us to optimize our MFI results.  I have intimated that dividend stocks greater than 600m market cap may be that bullet.  And of course as soon as I started that approach, like a will-o-wisp, it has vanished.  We have hypothesized that the outperformance of the dividend stocks was driven by prolonged low fed rates. It may also not have quite the breadth we'd like to see.  I still think it is a solid approach.

But another potential  "magic bullet" would be recognizing when you are in a cyclical upturn in MFI versus a cyclical downturn.  If you could  recognize a downturn early, you could avoid low performance.

I have never been good at any sort of market timing.  Here are the bad stretches (defined by portfolio start date):

August 2006 to March 2008.
January 2010 to May 2012.
March 2014 - ?

Hmmm, I got nothing.  I am not sure what happened in those stretches.  I may have to go back and do some reading.  Ken Fisher wrote an interesting book (I think it was like,  "The Three Questions"). One thing he did that was interesting was broke the market into 4 components, Growth vs Value and Large vs Small.  He argued that at certain points of the cycle large growth companies did best and at other points of the cycle small value did best etc. I wonder if that is in play here?

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