Geoff Considine

Tactical Asset Allocation, Part II

Oleg:

QPP uses three years of data to initialize the model as the baseline input--but projections have been extensively tested out of sample over decades. Black Swans may exist that defy the model---no one did well with 9/11 or 1987 crash---fair points. I have written about testing for extreme tails in a range of articles if you are interested.

Why Volatility and Beta Matter

I wonder if The Motley Fool has published a retraction or a Mea Culpa?

finance.yahoo.com/echa...;range=1y;compare=ivv+...

Yes, Beta and volatility matter. Just ask people who invested in Morgan Stanley!

Monte Carlo Analysis of Major Berkshire Hathaway Holdings

Buffett's holdings exhibit very low correlation between them. I found GSK because it is low Beta, large cap, reasonable risk, and low R^2. Once I had gone throught this process, I tested in GSK in my total portfolio, looked at financials, and various valuation metrics. Then BRK disclosed they bought it in Q4 of 07. The yield was high (6% or so). QPP liked GSK and I bought it for less than Warren Buffett did and I got a 6% yield or so. Not bad.

Monte Carlo Analysis of Major Berkshire Hathaway Holdings

Roger:

IMHO, really low allocations don't make sense. If you don't know enough to want to own more than 1-2%, why not just buy something in its sector index via an ETF?

I have found the Monte Carlo analysis of Buffett really interesting ever since I did it--and this is ongoing. I have found more and more instances in which QPP and Buffett like the same things. Recently, this was the case with GSK.

Geoff

Monte Carlo Analysis of Major Berkshire Hathaway Holdings

To User 173687:

To answer the question of why analyzing the ticker for the a fund might give different results than anayzing the individual holdings, please see this article:

seekingalpha.com/artic...

Geoff

Why Volatility and Beta Matter

Beta measures the degree to which the market drives return---but it is a tendency and the strength of the tendency is also determined by R^2. Beta is not, strictly speaking, a measure of volatility--it is a measure of the degree to which something follows the market. Mr. Hanson's point that these high Beta stocks have done really well in a 12-month period when the market has rallied is meaningless--we fully expect that high-Beta stocks will have high returns when the market has been going up. I am not saying that you can predict market direction--I am saying that his observation just doesn't tell us anything. If you COULD predict market direction, you would want want high Beta in a rising market, etc. as you indicate---but I am not in any way advocating such a thing.

Why Volatility and Beta Matter

Hi FIG:

In the case of JNPR, this was an anecdote. In the case of analyzing Buffett's equity holdings using a quantitative portfolio tool and finding that the tool and Buffett agree on what makes a good portfolio, no tweaking was used--all default inputs on a tool that is used by many users. My analysis has been supported by work that followed by two other experts---I'd be happy to refer you if you wish. A good portfolio tool using quantitative methods is actually in very good agreement with Mr. Buffett, even coming from different angles. There is no proof in my article--I agree with that. This article shows a few examples. There is no proof in investing theory anywhere.

Why Volatility and Beta Matter

To make this whole story even more bizarre, this article was just posted on The Motley Fool:

www.fool.com/personal-...

This article is by Tim Hanson, the same guy who told us to ignore volatility, but this one says that you need to avoid things that are too risky...um, volatile...have Betas that are too high, etc.

Why Volatility and Beta Matter

Hi Jordan (part 2):

Also, neither QPP nor Mr. Buffett would have thought that JNPR looked like a great deal at $100---I think that Warren Buffett inherently balances risk considerations in his portfolio management. I don't know how he does it because he eschews quantitative methods, but BRK's holdings look great in QPP, as I mentioned.

Why Volatility and Beta Matter

Hi Jordan:

First, one of the problems with the word 'risk' is that it means different things for different people. Volatility equates to risk if you cannot get a decent return over your investing horizon. MBA's probably think of risk differently from many individual investors--you are correct. Volatility aligns with risk when you have some chance of needing your money when your portfolio is not in a good position. If you are saying that you think of risk only as default risk (permanent loss of capital--as you say above), they are actually still related. If you read about the methodology of credit ratings in modern practice, volatility and default risk are related.

Second, I am a Buffett fan (Warren and Jimmy, actually). Mr. Buffett (Warren) unfairly discounts Beta and volatility as meaningful metrics--that is my point. A big decline in price may have a positive, negative, or even no impact on volatility.

Foreign Investing and Diversification Lessons From Berkshire Hathaway

Mr. Buffett has just doubled the holdings of JNJ in BRK! This is consistent with the themes discussed in this article. JNJ has delivered anemic returns over the past year or so but the diversification value is huge.

Portfolio with Substantial Single-Stock Concentration

Yeah, there is something a bit paradoxical in all this. I pick individual stocks that I feel are good firms and that have good portfolio effects (Buffett). What I was trying to say is that you need to commit to one route or the other. If you are going to go with small positions in various firms, you will end up with less than ideal results. If you don't want to analyze stocks, go with asset class allocations (Bogle). If you do analyze stocks, take a smaller number of decisive equity positions (Buffett). If you read my articles you will see that I am a fan of buying individual equities in real concentrations--not trying to replicate an index. If you are nervous enough to go with 1-2% allocations to things, you may as well go with asset class investing. Thats what I was trying to say.

But Cramer? Haven't you seen the analyses showing the performance of what he pitches? He is the antithesis of rational portfolio construction :)

Foreign Investing and Diversification Lessons From Berkshire Hathaway

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:

etf.seekingalpha.com/a...

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.

Foreign Investing and Diversification Lessons From Berkshire Hathaway

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.

Foreign Investing and Diversification Lessons From Berkshire Hathaway

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.