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Geoff Considine  

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  • Roger Nusbaum's Market Crash Shelter [View article]
    Hi Roger:

    A couple of things. First, my article looks at portfolios with low R^2 and Beta in aggregate. Looking at a single stock is not the right way to do this. The portfolio that I show in that paper weathered the bear market quite nicely. This should always be about portfolios. You need to combine a series of stocks or funds which are each relatively volatile but exploit low correlation among them. If one stock goes down 25% over two years, that is kind of irrelevent---it is about the total portfolio. Also, I make the point in my article on low Beta strategies that you must also set the total volatility (risk) that you can live with. You will be able to find the right balance of portfolio components once you know how much risk you want to bear.
    Nov 21, 2006. 01:00 PM | Likes Like |Link to Comment
  • Roger Nusbaum's Market Crash Shelter [View article]
    Hi All:

    An alternative approach is just to build a low Beta / low R^2 portfolio:


    Similarly, I have pointed out that Warren Buffett's equity portfolio exploits these kinds of effects. The kinds of low Beta / dividend yielding stocks mentioned in the article above have lower correlation to the U.S. markets than most broad foreign ETF's: EWA (the Autralian ETF) has a 60% correlation to the S&P500. That is lower than something like EFA, but still not the best you can do. EWA also has 86%+ correlations to EFA and EEM. By contrast, consider than KO (one of Warren's favs) has a correlation to the S&P500 of 36% and to EFA and EEM of 27% and 11% respectively. There are many more good examples with low Betas and decent yields. You can easily build a portfolio with higher yields than the dividend yielders and that are largely de-coupled from the S&P500.

    For providing the best de-coupling from the U.S. market but staying in equities, the broad country-specific ETF's are not, IMHO, the best solution.
    Nov 21, 2006. 11:10 AM | Likes Like |Link to Comment
  • Learning From The Harvard & Yale Endowments [View article]
    Nice article. This is a very nice example of the power of basic asset allocation, too.
    Nov 20, 2006. 11:26 AM | Likes Like |Link to Comment
  • Risk Outlook for Country-Specific ETFs [View article]
    By way of an addition here: the correlation between all of these ETF's is much higher than most people expect. I am writing an article on this now. It may seem counter-intuitive, but simply buying equal amounts of each of these ETF's will not result in a well diversified portfolio.
    Nov 14, 2006. 05:52 PM | Likes Like |Link to Comment
  • Understanding Single-Country ETFs [View article]
    By the way, I do agree with Roger's basic premise. Saying that 'international' is a single asset class/sector sounds foolish, but I have not read the article.
    Nov 14, 2006. 11:56 AM | Likes Like |Link to Comment
  • Foreign Investing and Diversification Lessons From Berkshire Hathaway [View article]
    Hi FIG Guru:

    It is very easy to look back and say that there are ways that Buffett could have done better in the last ten years by doing something different. You simply look back and say that a manager should have invested in whatever the best performing asset classes were over that period. With perfect hindsight, I can outperform Buffett. With looking forward, I can dream of that. Now, Buffett has always been unashamedly biased towards the U.S. in terms of investing and people who have put money into emerging markets have outperformed over recent history. That said, Buffett has lived through the downside of emerging markets when overall market volatility swings up--thats the payback. Many foreign markets--developed and developing--have historical volatility that is vastly above what we have seen over recent years:

    You don't need to take my word for it. See the links in the articles above to Campbell Harvey (Duke U.). He has performed a range of studies on country risks.

    So...who knows who will be right. There will always be a way to look back and find a strategy that would have been better. Emerging markets and many foreign economies have a higher expected future return than the U.S. but also have considerably higher risk (in general). There is no free lunch. U.S. investors are wise to invest where their is growth but also need to be congizant about the risks. BRK's conservative approach to foreign investing has some appeal.
    Nov 14, 2006. 11:52 AM | Likes Like |Link to Comment
  • Understanding Single-Country ETFs [View article]
    Ohh--forgot to note: the options markets for SPY and EEM both imply reversion to historical (and much higher) volatility levels.
    Nov 13, 2006. 06:46 PM | Likes Like |Link to Comment
  • Understanding Single-Country ETFs [View article]
    Yes--and that is a key point. We are in a period with low volatility globally. VIX and other measures of volatility are in a major low and have been low for a couple of years. If you look at a chart of VIX;t=my

    you will note this. When VIX resurges--assuming that market volatility will eventually move up to historical levels again--this has some important implications. Among them, a lot of fairly low-volatility investments will probably get more volatile again, both U.S. and international. Many investors are implicitly assuming that volatility will stay low. I bet that it will not.
    Nov 13, 2006. 06:41 PM | Likes Like |Link to Comment
  • Foreign Investing and Diversification Lessons From Berkshire Hathaway [View article]
    Also, I will acknowledge that Mr. Buffett does not discuss total diversification as a focus and does stock to 'what he knows.' What I find interesting is that the equity holdings of BRK are, in fact, so attractive when you look through the filter of portfolio analysis. I am emphatically not saying that he uses this kind of analysis. Yes, he is heavily 'concentrated' but we must be areful in thinking what that means. BRK's equity holdings are in a number of companies that have very diversified business activities, so are these actually 'concentrated.' Mr. Buffett derides unthinking 'diversification' when that means that people simply buy some of everything. The BRK portfolio shows a different kind of diversification. BRK's top 20 equity holdings result in a portfolio that is better 'diversified' from a quantitative standpoint thanmany portfolios with many more holdings that may appear (qualitatively) better diversified.
    Nov 13, 2006. 02:51 PM | Likes Like |Link to Comment
  • Foreign Investing and Diversification Lessons From Berkshire Hathaway [View article]
    With all due respect to Mr. Guru (above), it is hard to argue with BRK's long-term performance. It is not about doing everything right, but doing more things right than wrong. It may be the case that he does not worry explicitly about diversification, but it sure looks like he does a good job to me.
    Nov 13, 2006. 02:40 PM | Likes Like |Link to Comment
  • WSJ's Two Low-Beta Stocks (Not) [View article]

    Low Beta does not mean low volatility. Correlation is a measure that is independent of volatility. I will grant that if the screen is for 'safe' stocks then perhaps there is a problem here. The lesson, however, is that you need to look at numbers. These may reduce risks in someone's portfolio---but you would have to look at the portfolio in question.
    Nov 13, 2006. 12:44 PM | Likes Like |Link to Comment
  • Understanding Single-Country ETFs [View article]
    Hi Roger:

    Correlation of 0.6 is not that impressive as a diversifier. Warren Buffett argues that it is a good idea to invest in U.S. firms with big overseas sales, and this applies to diversification too:


    Coke (KO) has a correlation of 0.36 to the S&P500 (monthly returns). JNJ has a correlation of 9%. Both have low correlations to EEM and EFA, too. Both are major BRK holdings.

    Also, many investors have no real idea how risky individual countries are. The last few years have been pretty tame in terms of overseas risk. Historically, individual countries have been far more volatile:
    Nov 13, 2006. 11:44 AM | Likes Like |Link to Comment
  • Low-Beta Portfolio Strategies: Devising A Low Risk Game Plan For the Current Market [View article]
    Also, here is an article about the phenomenon that some stocks and sectors seem to get more correlated when they have negative returns:

    The authors suggest an additional interesting idea: that this correlation, which increases total portfolio downside is the risk that investors take when they try to use momentum investing strategies. This is an interesting idea.
    Nov 10, 2006. 12:55 PM | Likes Like |Link to Comment
  • Alpine Global Dynamic Dividend Fund: Solid Low-Risk Strategy [View article]
    I really don't like it when people call a strategy 'low risk' while presenting no information on tha actual risk. Covered call funds have been called 'low risk' but many have enormous volatility. ADVDX is certainly not 'low risk'. Over the past three years, SDVDX has been 29% more volatile than the S&P500. Is this low risk? Not by my thinking. Now you are calling a new fund that follows the same strategy--except emphasizing foreign assets--Low Risk??? Huh? Overseas markets are typically higher volatility, so I would expect that applying the same strategy to overseas markets will lead to more volatility. Then we add in high turnover and related costs. How can this possible be called a 'solid low risk strategy'??
    Nov 9, 2006. 12:09 PM | Likes Like |Link to Comment
  • A Long/Short ETF Portfolio For Emerging Markets [View article]
    An investor would have to be nuts to go long/short emerging markets unless he or she has really solid quantitative tools to help estimate risk. You could easily build a portfolio that will have enormous risk. You would need tools that generate forward-looking volatility estimates for all of these countries. Yipes. The idea of people trying this without being exceptionally capable quantitatively is really scary. What is the risk of being long Brazil and short India? Etc. See this article for some plausible risk outlooks for emerging markets:

    On top of risk, you would need to capture correlations. There is a lot of basis risk here.
    Nov 8, 2006. 12:14 PM | Likes Like |Link to Comment