Rico Silvetti

Rico Silvetti
Contributor since: 2011
Side street question, but what is your advice for someone considering converting from heating oil to natural gas heating in a forever home? The payback appears to be within 5 years, however I'd like some assurance that those in the know think natural gas heating will be lower if not substantially lower long term. Long term let's define as 20 years.
Great article. Couple constructive clarifications:
1. I got slightly confused in the allocation regarding US, foreign, or global. Ie, did you mean US REITs, or global? I define global as US+Foreign, but I realize some do not and state global to mean world without US.
2. Regarding 5% in global energy, if you advocate reducing energy exposure, why not instead of 5% global energy have 5% S&P index?
The tickersense sentiment poll is 40% bearish vs 32% bullish. Also, a quick scan of money.cnn.com and it's almost exclusively bearish news. I don't personally hear any people in 'normal' life talking about how they're getting into stocks and riding a hot streak. This is pretty far from 1999 from a pure sentiment point of view.
I bought an approximately 4k engagement ring there in 2010, and in addition to the sales tax I noticed a huge disparity in the quality I could get there vs a physical store. My recollection was that the exact particulars of my stone would have cost me approximately 6k in the physical store. Also, the physical store appeared to have very little wiggle room in the price, which I was expecting given my explanation of what could be had on blue nile. I (we) came out of the blue nile experience very pleased overall.
I wouldn't necessarily view my experience as making me bullish or bearish, just my 2c.
A great article and very informative. I wonder if there is a way to extrapolate this data to foreign markets. For example, Gurufocus has a tab where it shows similar projections for the US market as in this article based on Shiller PE. However it also shows a similar figure using marketcap/GDP or a similar ratio to that, which matches the projected returns for the US but shows stellar returns for several developing and developed markets. I would like to hear the author's recommended portfolio allocation given his conclusions. Even a 0% market over the next 20 years might beat Bonds and Cash given the dividends. A total market ETF produces about 3.3% dividends as of now, and like I've said, foreign markets may very well be the drivers of the next 20 years and return very close to the standard 6% after inflation returns. Someone correctly brought up this effect on the S&P, and how the new integrated world economy may make these historical data points meaningless. I'm not saying this time it's different, but it's a worthy discussion.
I'm 32 and have about 30% of my portfolio in emerging markets.
Great article, very well written. My only comment would be to diversify internationally. The past 100 years have obviously seen the USA go from one of many strong global powers to the sole superpower. Despite this, the US only represents about 45% of the global stock market. The best part is that you can get the rest of the world in one index fund with most providers such as vanguard, fidelity, etc.
The question I've long wrestled with regarding REITs and the advice to hold an amount such as 10% of portfolio, is in regards to the fact that these individual REITs such as Simon Property are represented in the indexes. In other words, putting 10% of my portfolio in REITs and the rest of my stock portion in say the S&P500 index simply means I'm going overweight REITs. While I understand that REITs have components which set them apart such as stability and yield, the same can be said of many other sectors of the market. I can put 10% in a European stock index and yield 6.5%, and make a perhaps wise contrarian bet that even the dissolution of the Euro will still result in a world that puts BP gas in their car, while calling a friend on their Vodofone service, and agreeing to meet for some Nestle chocolate.
Aren't I better off, assuming efficient market theory, putting my whole stock portion in large indexes which span the globe and leaving sector selection to the pros?
Did the same with JNJ due to their 19.7BN acquisition during the quarter. JNJ was a slight loser in alpha so it offsets KMI nicely. Both have been deleted from our sample.
Clearly in the past I have added stocks that I shouldn't have based on acquisitions. But since previous buys have been held since the pros continued buying this most recent quarter, my data is still intact for purposes of our analysis.
In the future, stocks with major acquisitions that completed during the quarter will be removed from consideration for buying.
Sold KMI today after realizing much of their new shares are part of the acquisition of El Paso (EP). KMI had a marginal positive alpha at this time so deleting it from the data is the best way to keep the data relevant.
Just to clarify the auction house issue, there seems to be some confusion. What I and I believe others meant by saying you have to buy things in the auction house was referring to buying with D3 gold, not real money. So in effect, I paid $60 for the game but didn't spend any real money in the auction house. However, I definitely HAD to spend D3 gold to buy more suitable items in order to progress in the game. This most certainly has not been reasonably fixed with the latest patch. My point in regards to this is that it's possible their thinking was that if they all but require you to buy in the gold or auction house in order to progress, you'll be less likely to want an illegal copy and also more likely to get stuck playing the illegal copy and be unable to progress.
I had an enjoyable time playing and sold approximately $150 worth of items in the real money auction house, so in some regards there is potential for earning a tiny income playing the game. And I certainly approached the game knowing I would only spend $60 and nothing in the real money auction house. I would have broken that promise to myself had the logistics of buying and selling in the auction house not been so poor. What I mean is, I'd frequently see items for sale for $2 (buy it now) that I knew were likely $10-20 items. Simply buy low sell high. I did that constantly and to profit using D3 gold. And for a person of my investing interests, that aspect of the game was right in my wheelhouse.
Again, was D3 a poor runout from a fan perspective, absolutely. But I would say that a brilliant game with great auction house and great logistics is a definite path forward for profitable gaming.
I think any discussion on D3's profitability is incomplete without discussing the online-only aspect of the game. By online-only, I mean the game requires you log in at all times while playing, in an effort to eliminate illegal copying of the game for mass download. Most of the bad user reviews could easily be by gamers who simply do not pay for PC games because of the ease with which they can be stolen from sites like piratebay.
Call of Duty Modern Warfare 3 was released last November, and right now about 3000 people are downloading it illegally on piratebay. That's not a business model I want any part of. At the very least, the crappy game and logistical run out of D3, which still resulted in a profitable game should be seen as a potentially bullish forward indicator. I overheard the following sentence at least a few times in talking to gaming friends: "first PC game I paid money for in 5 years". Judging from piratebay, there is still no working illegal version of D3 to even play the game in single player mode. Cooperative play with strangers from around the globe is by far the most fun aspect of the game, and that's long been a very difficult thing for the illegal versions to create.
In addition, it's clear to me a game that all but requires you buy and sell specialized items in the auction house is trying to make a stolen version of the game unplayable and not fun. In other words, you don't find the items you need walking around like you do in other role playing games. I wouldn't call it a conspiracy, but the whole game screams to me "let's try to make a game that avoids piracy at all costs".
To sum up, I wouldn’t call D3 a bearish indicator for the future. And while I’m not a buyer either, with proper execution, the model of a role playing game with an auction house could easily be the path forward for video game company profits.
Added 80sh BP @$36.62 with VT @$43.29 to my data. Will reflect in next quarters results table.
Appreciate the comment.
It definitely concerns me that from quarter to quarter, there are plenty of changes in opinion among the experts. Take Amazon: it was purchased greatly at the last update (3 months ago), but this update showed a lot of hedge funds exiting the stock. I wouldn't expect that, given my assumptions about my system. Put another way, I'd be more convinced in my system if there were less stocks I buy and then have to sell 3 months later. I do have the ability to look at individual funds and can therefore select funds aiming primarily for long term value to better interpret the results. That helps me to hold onto several stocks given that my hypothesis is that they, in the opinion of long term value fund managers, are long term holdings.
You said:
"Wrong on #2. Contrarianism depends on what segment of the market you are looking at. If you are looking at short-term traders, being long stocks may be contrarian. However, the vast majority of individual investors are still psychologically in the grips of the notion that they should be invested at all times.
The bottom is not in when short-term traders have all sold or are short. The bottom will be in when this segment of the market - the putatively "long term investors" -- starts unloading."
My response:
I suppose there are many definitions of market bottom while viewing it in the moment. I strongly disagree that most people are still fully invested in the stock market. I don't have the exact stats and I can't find the article with a search, but I've seen references to the fact that this is a historically low exposure to the stock market for US citizens. I can't state whether this is a more contrarian signal than traders being short, I'm not sure how you'd quantify that. The bottom line for me is that if you want to be contrarian and do the opposite of what the mainstream investor or trader is doing, you'd be long stocks.
Two comments:
1. If buying and holding is too difficult for the average investor, then advocating market timing into cash now and then into equities at some vague future time seems like a much harder proposition. I think you underestimate the abilities of the average investor to sock money into a 401k, put it in 60/40 stocks/bonds and forget about it.
2. It's indisputable that the contrarian play is to actually be IN equities right now. The news is reporting nightly on the bad state of the economy and the risks of European collapse. We have mass protests in US cities and more severely around the globe. Mauldin sends his pants crapping emails daily. Arguing for cash is arguing that there's not "blood in the streets". Clearly there is. For money the average person doesn't need for 10+ years, something in the range of 60% global equities is the right play.
I found IBM and VTR (Ventas) after I submitted this article. Bought similar 1% positions in them. Will include in analysis for next quarter's article.
I'm not sure cherry picking 3 countries with high bond returns that have beaten stocks is what I'd consider a strong argument. The global stock market has beaten the global bond market over the past 80 years.
You seem to also fail to distinguish between 2 different arguments: 1. buy and hold vs active investing, 2. Stocks vs Bonds as an asset class. The bond returns you quote, I assume you mean to buy and hold those bonds. If that's the case, then you're not actually arguing against the buy and hold investing thesis, you're arguing bonds beat stocks return as an asset class.
Bought 1.24% of portfolio worth of CTL and 1.37% of CSX this morning. Will reflect their results next quarter.
Bob, thanks for the comment. You bring up some good and accurate points. My approach is far from optimum, particularly as you've said due to the time lag.
Stock screening and its usage for value investing is something I've thought long and hard on also. The unfortunate reality of layperson value investing is that there's a lot more to learning about whether a company is a good value play than the statistics. Take MMI. It pays no dividend, Buffet doesn't understand how it works, and it hardly had any feature that hugely differentiates it from its competitors. A Graham screen would miss it, Buffet wouldn't touch it, and yet Google needed it for its patents and it returned 60% during a 15% stock market correction. That is the kind of analysis I don't have the ability or means to perform as a layperson. What makes hedge fund and investment fund managers better than us is their unparalleled access to the kind of information the layperson simply doesn't have. Like it or not, these hedge fund guys talk to very important people inside of companies, have frequent dinners with each other where they exchange information, and also have access to discussions with government regulators. I trust their purchases a lot more than insider transactions which tend to be biased. The aggregate net buying by hedge managers and investment managers is an undeniably powerful buy signal for us laypeople.
I plan to keep this article serious going and post each quarter, so eventually we'll have a meaningful sample size. Anyone have any idea what a meaningful sample size of stock returns vs an index would be for say 95% confidence? 100 stocks? 500?
Are you using the allocation from the 10% row in your "myth of diversification" article: seekingalpha.com/artic... ?
RE price drops, yes I do some due diligence on the 2-3 companies that had drops. I would certainly get weary and likely throw a stock out if it went through worse than a 20% drop. But since these are mostly large cap and established companies, I view price drops in the order you see with google, motorola, and wells fargo as fairly standard and all the better from the buying perspective. I fully understand that many investors might interpret this as wanting Baidu and Neilson since they had a lot of money come in and are rocketing upward since.
RE MV bought, I should have clarified better but the MV bought figure is actually net MV into the stock. So it includes all the buys and subtracts all the sells for a net influx of pro investment dollars. Regarding your question, it becomes clear that MV net bought is a function of that company's size. The pros clearly accumulate more google than AMD in total market value. One could certainly prefer using the % influx of market value rather than the net total influx. So you might prefer a company whose market value owned by hedge funds increased by 30% vs google's 14%. There are many ways to interpret it. I like established, large companies in this case (and therefore my net market value added figure) because our info is so delayed that it makes little sense to try to chase small companies that are inherently more volatile. I want a company bought with the kind of time horizon of a value investor, such as Buffett. And that seems to lead me towards larger companies, and towards a scenario where I reward the largest sheer amount of net influx of investment money. By market value of stock, the pros portfolio's are about 1.0% google. That makes me want to own around 1.0% google, particularly given they've bought a lot more recently and the price I'm getting is even better than the price they got.
Great article.
One note: DJCI isn't a commission free trade whereas DBC and DJP are on some brokers. I'm only certain about TD Ameritrade. For smaller accounts or rebalancing fans, that's often trumps.
What % of your portfolio do you have in silver and gold individually? Care to throw a recommendation for what you think a typical person should aim for?
Great article.
What's your recommended total portfolio allocation to emerging markets? 10%? 20%?
What percentage of a long term growth portfolio would you recommend allocating to silver? All metals?
What percentage of a total portfolio would you recommend for a long term investor to put in SLV?
For typical US long term retirement investor, is it better to hold your foreign equity funds or your US equity funds in a Roth? I'm not clear on the foreign capital gains tax issues.
What I've noticed is that all the biggest companies in vanguard's REIT index are also included in their total market index (VTSMX/VTI). I've always wondered why go overweight into real estate? Is that really diversifying?