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Michael Dever

 
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  • Why Index Fund Portfolios Win [View article]
    This study has the same problem as every other study I've ever seen in the passive vs. active debate. As I mentioned in a different, but related, post: they start their analysis by limiting the investment opportunities to just a few “asset classes.” If you start with such a constrained sub-set of the potential investment opportunities you will naturally end up with the conclusion that portfolios should be constructed of low-cost passive funds. So the problem isn't with the analysis, it’s with the framing of the question. The reason passive is better in this study is because when you are trying to capture just a single return driver, the best way to do so is to do so in the least expensive manner possible. As I point out in the opening chapter of my book, the return from owning stocks is dependent on a single dominant return driver. So yes, go with a "passive" fund to most efficiently capture this return driver. (In the 4th chapter I also explain why "passive" is just a different form of "active" investing).

    But if you want to attain the benefits of true portfolio diversification you need to diversify across multiple return drivers. Unfortunately you can't do that using passive funds, for the simple reason that passive funds only employ public domain return drivers. And the best return drivers are NOT in the public domain. These return drivers produce returns that are completely uncorrelated with the 'known' return drivers. Just as you'd pay up for an Apple phone as opposed to a more generic mobile phone, you need to pay up to access the unique (non-public domain) return drivers.

    None of the "studies" on passive vs. active investing that I've seen and read over the years appear to understand this, primarily because they focus on asset class investing and fail to acknowledge the existence, let alone the importance, of return drivers.

    I'd be happy to provide any interested readers with links to the relevant sections in my book that cover this topic. I'd do that here but don't want to be 'commercial' (even if I'm giving it away for free!). Send me a note and I'll send you the links.
    Sep 27, 2014. 05:47 PM | 2 Likes Like |Link to Comment
  • Why I Am Becoming A Passive Investor [View article]
    You're correct about the short term explanation being overly simplified. There are actually dozens of stock market return drivers, depending on the time frame you're looking at and other factors; but sentiment dominates, on average, for periods of less than 20 years.

    There are a lot of what are referred to as "alternatives" that aren't. For example, most hedge funds are simply leverage long equity traders. Most commodity ETFs are static long futures funds. There really are very few options available for retail investors that are based on truly unique, relevant and effective return drivers.
    Sep 27, 2014. 05:26 PM | Likes Like |Link to Comment
  • Why I Am Becoming A Passive Investor [View article]
    Alan, A Return Driver is the primary underlying condition that drives the price of a market. With liquid, public equities, the primary return driver over the long term (more than 20 years) is corporate earnings growth. In the shorter-term it is people's sentiment for owning stocks that drives their prices. I show the results of my research on this in the opening chapter of my book. (I’m happy to provide this complimentary link to the first part of my book, which includes both the Introduction and first chapter): http://tinyurl.com/qxt...)

    Private equity (in response to the comment above) does introduce other return drivers as the performance of a private company's stock is more dependent (than is a public company) on individual factors related to that company than to the overall sentiment towards stocks. But overall stock market performance is still a major driver in whether a private company’s value can be realized (just look at the dearth of IPOs during stock market downturns). The fact is there are potentially hundreds of additional return drivers that are even more independent. I give an example of one related to equity markets in chapter 3 of the Action Section for my book, which is on the book's web site.

    The concept of return drivers extends well beyond the equity markets however. There are return drivers that can be exploited to capture returns from bond markets (such as those that exploit yield curve differentials) and commodity markets (such as those that profit from markets trading at or near their marginal cost of production) as well. By ignoring all these diversification opportunities, the proponents of passive investing start their argument by framing the issue in such a narrow way that of course they reach the conclusion they reach. I would come up with the same conclusion if I framed the issue in the same way as they do.

    This, unfortunately, is the state of investment "research" today. Thousands of academics and industry gurus (such as Bogle) espousing a view without really understanding the issue. I realize this is heresy. But every "industry" tends to reach a point where entrenched dogma become accepted as fact and even the most brilliant practitioners in that industry "lock-in" to such an accepted way of practice that they can't see beyond the trees of their forest. That’s where the investment “industry” has been for quite a long time.

    When you look at investing without prejudice or acceptance of the preordained conclusions reached by the vast majority of what passes for investment research today, you can see the tremendous opportunities that are available to create truly diversified portfolios. Understanding return drivers is a required fundamental step towards realizing those opportunities.
    Sep 27, 2014. 10:29 AM | Likes Like |Link to Comment
  • Why I Am Becoming A Passive Investor [View article]
    The reason passive appears better than active is because when you are trying to capture just a single return driver, the best way to do so is to do so in the least expensive manner possible. As I point out in the opening chapter of my book, the return from owning stocks is dependent on a single dominant return driver. So yes, go with a "passive" fund to most efficiently capture this return driver. (In the 4th chapter I also explain why "passive" is just a different form of "active" investing).

    But if you want to attain the benefits of true portfolio diversification you need to diversify across multiple return drivers. Unfortunately you can't do that using passive funds, for the simple reason that passive funds only employ public domain return drivers. And the best return drivers are NOT in the public domain. These return drivers produce returns that are completely uncorrelated with the 'known' return drivers. Just as you'd pay up for an Apple phone as opposed to a more generic mobile phone, you need to pay up to access the unique (non-public domain) return drivers.

    None of the advocates of passive investing that you mention appear to understand this. They start their analysis by limiting the investment opportunities to just a few “asset classes.” If you start with such a constrained sub-set of the potential investment opportunities you will naturally end up with the conclusion that portfolios should be constructed of low-cost passive funds. So the problem isn't with the analysis, it’s with the framing of the question.

    Now more than ever, because of the low returns people will earn from fixed income and high correlations among the world’s equity markets, any portfolio constructed by first limiting opportunities to “passive” funds will both dramatically underperform versus historical returns and do so with increased risk. Return driver based investing is a better way and can enable you to achieve true portfolio diversification.

    I show research results in my book but this isn’t just theoretical. I can point readers to real-lie examples of how this approach can create a “Free Lunch” of both greater returns and less risk than the conventional diversification approaches.
    Sep 25, 2014. 05:25 PM | Likes Like |Link to Comment
  • Stop Chasing Yield: Seek Diversification And Allocation [View article]
    I provided the links to the chapters because the length of the comment that would have been required to describe the difference between conventional "Poor-folio" diversification and true portfolio diversification would have swamped the discussion. I strongly believe though that it is THE most important discussion we should be having, not simply which stocks to buy. Because as soon as long stock positions take up more than 10 or 20% of a portfolio, it's not diversified, regardless of which stocks you hold.
    Feb 6, 2014. 02:02 PM | 1 Like Like |Link to Comment
  • Stop Chasing Yield: Seek Diversification And Allocation [View article]
    I realize you may not be open to new ideas, but I think it'd help you the most to read the book before resorting to name-calling. It was my intent to add to the dialogue with some innovative thinking. Per your suggestion, if your readers would like a complimentary book they can contact me through my SeekingAlpha profile page.
    Feb 4, 2014. 12:29 PM | Likes Like |Link to Comment
  • Stop Chasing Yield: Seek Diversification And Allocation [View article]
    I guess I should have been SPECIFIC. the book was the #1 best-selling mutual fund book on the kindle for more than a year. Even today, it's still the 4th best-selling mutual fund book on the kindle.
    Feb 4, 2014. 11:31 AM | Likes Like |Link to Comment
  • How I Can Explain 96% Of Your Portfolio's Returns, Part 2 [View article]
    There's way too much discussion about the finer points of MPT, risk management, etc and it all misses the point. Discussions of portfolio diversification don't discuss portfolio diversification at all. They merely talk about spreading money across stocks, bonds or some other "asset classes." That's not diversification. True portfolio diversification can only be achieved by diversifying across "Return Drivers." A Return Driver is the primary underlying condition that drives the price of a market. What market is used to exploit each Return Driver is secondary. Instead, the traditional investment literature (and almost 100% of financial discussions) revolve around the topic of asset classes. Market cap, P/B and other "factors" can be used as Return Drivers for selecting stocks, so that's a start. But why stop there? Why not identify Return Drivers that affect currency cross rates, soybean prices, and the myriad of other markets that are available to be traded? Doing so enables you to create true portfolio diversification and create a Free Lunch portfolio; one that can earn greater returns with less risk of achieving those returns.
    Feb 4, 2014. 10:53 AM | Likes Like |Link to Comment
  • Future Returns From Stocks And Bonds [View article]
    Thanks for your comment. I don’t disagree with what you’ve written regarding the assumptions used in my analysis. They assume a central tendency and if “this time is different” the results will be different from what I show. So I appreciate your view that this time it is different and therefore you should expect a different result from that shown in this article. That said, I would like to correct a few points.
    You state that the article “misses the point on real growth, which runs 2% per year or better.” We actually incorporate a nominal growth rate of +4.7%, which at today’s inflation rate implies a 3% real growth rate. What you believe is different this time is the profit margins. If margins remain at today’s level, rather than decline to the longer-term average, the performance of the S&P 500 over the remainder of this decade rises to 4.3% from the 2.3% projected in the article. I could argue every assumption in the article myself as well. My goal was to project based on central tendencies. But I have no objection to you believing in a different profit margin. Also, the CAPE used in the 2020 ending value for the S&P 500 uses a 10-year look-back so doesn’t include any of the write-downs that you mention were made in 2008. It simply compounds earnings from today’s level. With regards to the 10-year treasury yield, the article does take this into account in that a person placing money today will receive over the next seven years the approximate yield from a mix of bonds (corporate and sovereign) that will mature in seven years. That projection is actually the most transparent of all in the article.
    But that’s all secondary, and extremely minor, when compared to my concern with one comment you made:
    “Anybody that listened to them for the past five years is in a world of hurt.”
    If a 12-year (as of five years ago or 7-year now) projection of what returns would be earned by passively putting money into the S&P 500 has a significant impact on the performance of a person’s portfolio - if it resulted in them being in a “world of hurt” if they were wrong - then they’re not an investor. They’re a gambler. They have far too much riding on one single decision.
    The performance of the S&P 500 should have no greater impact on the performance of a person’s portfolio than that of the sugar market, or dollar, or Korean stocks or any number of the hundred plus other active global financial and commodity markets. There are legitimate Return Drivers that can be exploited to profit from trading in those markets as certainly as there are Return Drivers to be exploited to profit from trading in the S&P 500.
    This is a major theme throughout my book and if there is one takeaway from this comment to my article, that is it.
    Feb 3, 2014. 10:44 PM | Likes Like |Link to Comment
  • Future Returns From Stocks And Bonds [View article]
    I believe you are referring to the performance displayed on the http://bit.ly/1gI0GoX web site. When we launched the actual trading of Brandywine’s globally-diversified Symphony program in July 2011 we provided two ‘risk’ options. The lower-risk Brandywine Symphony program, which targets 1/6th the drawdown risk of the S&P 500, and the more aggressive Symphony Preferred, which targets approximately ½ the drawdown risk of the S&P 500.
    Since its launch with real money in July 2011, Symphony Preferred has returned +56% (which exceeds the S&P 500 total return index’s +42% over the same period). So, despite the strong S&P 500 performance over that period, Symphony Preferred has exceeded S&P 500 returns and its global diversification across more than 100 financial and commodity markets and use of dozens of Return Drivers has allowed it to do so with substantially lower event risk than that of the S&P 500.

    The lower-risk Brandywine Symphony program, which targets 1/6th the drawdown risk of the S&P 500, returned just 12% over the same period. I believe this is the performance you are referring to. This is below our longer-term expectations for the program, which targets double-digit annualized returns (I’m obliged to state here that PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE).

    So you’re right in that the Symphony program has underperformed its expected performance over the past 2 ½ years. But its volatility has also averaged about 25% below expectations for the same period. (A brief explanation for both figures is that there have been slightly fewer ‘opportunities’ over the past 2 ½ years than in the prior period.) Neither figure is out of line with expectations over a 2 ½ year period. And in fact, after periods of low opportunities we often see greater than normal opportunities.
    Feb 3, 2014. 09:11 PM | 1 Like Like |Link to Comment
  • The Correlation Conundrum [View article]
    I think we agree that a portfolio should be risk-balanced; but my approach is to make sure every trade is based on a logical "return driver."
    Aug 5, 2013. 09:47 PM | Likes Like |Link to Comment
  • Bonds As Dinosaurs (Part 2): Diversification At What Price? [View article]
    Steven, in follow up to my comment made here shortly after you posted, I recently published this article that shows my math on what to expect from stock and bond investments over the remainder of this decade: seekingalpha.com/artic...
    Jul 25, 2013. 01:15 PM | Likes Like |Link to Comment
  • The Correlation Conundrum [View article]
    James, your statement that "Progress in the art/science of asset allocation arrives incrementally, if at all, once you move beyond the easy and obvious decision to hold a broad mix of the major asset classes." is correct only because people constrain their asset allocation process with the use of "asset classes." In actuality, progress has made a revolutionary leap, although few people are yet aware of it.

    Two weeks ago, at a Bloomberg event in Dallas, repeating what I wrote in my best-seller two years ago, I made the comment that asset classes were archaic artifacts of investing's past. By replacing asset classes with "return drivers" and "trading strategies" investors are able to create truly diversified portfolios. I mentioned in my talk that BlackRock – which was suggesting that short volatility trading should be considered an "asset class" (just one of dozens of such examples) – was inadvertently making the case that portfolio modeling has reached the Ptolemy vs. Copernicus stage. By that I mean that we have a paradigm ("Asset Classes") that is becoming more convoluted as investors attempt to diversify their portfolios using non-correlated trading strategies. Because investors want short volatility strategies in their portfolio, but have asset allocation models based on asset classes, they are forced to turn short volatility into an asset class (or create some similarly awkward construct to enable them to incorporate it in their asset allocation model). This is akin to how the ancients added epicycles and other constructs to the original Earth-centered view of Ptolemy in order to explain the observed retrograde motion of the planets.

    This new approach is a revolutionary, rather than evolutionary, change in how investors should approach asset allocation across their portfolios. Once viewed in this way most of the issues associated with MPT, mean/variance modeling and asset classes fall away. Investors are left with the opportunity to incorporate any trading strategy, as long as it is based on a sound, logical return driver, into their truly diversified portfolio.

    I walk through a lot of this in my book, but SeekingAlpha is uncomfortable with me linking readers to that through the complimentary links I have set up. And rather than repeating the chapters in their entirety in this comment, I’ll offer to let readers contact me at my SeekingAlpha page and I’ll send them the links to the relevant chapters.
    Jul 25, 2013. 12:49 PM | Likes Like |Link to Comment
  • Another View On 'Diversification Fallacies, Part 1: Asset Allocation' [View article]
    Unfortunately, the (over)abundance of academic research, "conventional" investment wisdom, and "common" knowledge spouted by financial professionals has everyone focused on the trees and not the forest. I have yet to read ANY article on SeekingAlpha that espouses TRUE portfolio diversification.

    As long as there remains a fixation on holding long equity positions as a core of most portfolios, and as long as portfolio composition is constrained by the use of "asset classes," true portfolio diversification will never be achieved.

    This lack of diversification can be highlighted with one question: Is it important to you to have the stock market go up? Does that make you feel better? Does your portfolio benefit from the stock market going up? (OK, a series of related questions!). If so, then YOU ARE NOT DIVERSIFIED.

    The performance of a truly diversified portfolio is not dependent on a single dominant market for its returns. It is diversified across "Return Drivers." There are hundreds of possible return drivers that can be exploited. To focus on just one (the one that dominates stock market returns) is akin to gambling - certainly not investing. All the discussion about spread positions across different long equity positions is looking at the trees, not the forest.

    I wrote my best-seller, "Jackass Investing," specifically because of my frustration at seeing this gambling behavior being preached and foisted on people without thought to what it really meant. (I define both gambling and Jackass Investing as the act of taking unnecessary risks with your money. Conventional investment wisdom preaches this behavior). Instead of parroting and refining the gambling behavior that is taught, real investors achieve true portfolio diversification by allocating across a diverse mix of return drivers and markets. The result is a Free Lunch portfolio that over time will produce both greater returns and less risk than a conventionally-(non)di... portfolio.

    Just because everyone is preaching or doing something doesn't make it right.

    If you’re interested in understanding more, feel free to follow these complimentary links to read the Introduction (where I introduce Return Drivers), Opening chapter (where I show the dominant returns drivers for equities) and my book’s final chapter (where I show the benefits of true portfolio diversification):
    http://tinyurl.com/q3e...
    http://bit.ly/xrz2Ur
    http://bit.ly/vxDo6v
    Jul 19, 2013. 11:55 AM | 1 Like Like |Link to Comment
  • Diversification Fallacies, Part 1: Asset Allocation [View article]
    Every position in a portfolio is dependent on one or a few primary "return drivers." Dane touches on this by mentioning the specific event risks and other factors that could affect each of the REITS he discusses. True portfolio diversification can only be achieved by diversifying across multiple, unrelated return drivers. As much as Dane points out different drivers for each REIT, though, the primary return driver, in the short term (less than 20 years) for these positions, is investor sentiment. I show the study behind this statement in the first chapter of my best-seller "Jackass Investing: Don't do it. Profit from it." (By the way, my definition of Jackass Investing is to take unnecessary risks. A portfolio that is dependent on just one or a few return drivers is poorly diversified and taking on unnecessary risk.

    I'm pleased to provide complimentary links to my book's introduction and the first chapter, where i show the two primary return drivers powering equity prices:
    http://tinyurl.com/q3e...
    http://bit.ly/xrz2Ur
    Jul 17, 2013. 09:01 PM | Likes Like |Link to Comment
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