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  • Buy-And-Hold Can't Die, Redux [View article]

    I always enjoy your perspective, your humility, and your prose ("...a balance between hypertrading and permafrost").

    Personally, I think that some investors prefer buy-and-hold simply because it suits their personality. There's no accounting for taste. Marc Gerstein once said that many of us do research because we enjoy it, and not because it was profitable or cost-effective.

    Likewise, I think that many of the debates here on SA are really just matters of taste: active vs. passive, growth vs. value, fundamental vs. technical, etc. I say this because I have never seen an investor change his or her fundamental approach after seeing a mathematical proof.

    But that's just my opinion--I don't have proof.

    Mar 7, 2012. 02:55 PM | 1 Like Like |Link to Comment
  • When The TIPS Bubble Bursts: A Cautionary Tale From Argentina [View article]
    Cprouse: Housing is included in CPI via "owner equivalent rent", and energy prices are included directly, and through transportation costs. The challenge to the CPI is the weight for housing, and the emphasis on "core" CPI rather than "headline" CPI. This is offensive to the working class, who don't have a choice about eating and driving.

    The CPI assumes some degree of substitution when prices rise, but there is no short-term substitute for gas and ethanol. Likewise for food, since you're stuck with the market price.

    Unless you grow your own vegatables, as Tack suggested above.

    When I was in Spain, one family had a milk cow right next to the kitchen. I thought it was funny at the time, but now the joke's on me: I paid $4.50 yesterday for a half-gallon of Lactaid milk. Now I know why the "Laughing Cow" laughs.

    Mar 7, 2012. 09:06 AM | 1 Like Like |Link to Comment
  • When The TIPS Bubble Bursts: A Cautionary Tale From Argentina [View article]

    The accuracy of the CPI is hotly debated, but I am careful not to attack it without specific disagreements about their methodology and statistics. I'd also want a robust alternative from a third-party research firm. Otherwise, I'm jumping from the frying pan into the fire, from one set of inflation assumptions to the other. The CPI may be flawed, but it's reasonable, and its assumptions are public.

    The point of my article is that Argentina has experienced wholesale manipulation at a level that we have not seen in the U.S. I think it's naive to say "That can't happen here." But I also think it's alarmist to say "It is already happening here." There is a big difference between flawed assumptions and outright fraud.

    The investment vehicles you mentioned all serve as GREAT inflation hedges, and I think they are attractive for a lot of investors. So we agree on some of the ideal ways to hedge risk.

    But I am an RIA, and I have to be mindful of suitability, and of the limitations of my research capabilities. The securities you mentioned are great for sophisticated investors like yourself, since you understand and manage the volatility and idiosyncratic risks. As an RIA, I recognize my limitations when acting as a fiduciary agent for 401ks: It's one thing to buy agricultural stocks for myself, it's another thing entirely to buy them in a 401(k) plan for a client. That makes a little more complicated to manage for the average investor, and potentially unsuitable for their fixed income exposure.

    Having said that, I probably need to expand my research into the areas you mentioned. This is good stuff, and I agree with your logic.

    Mar 6, 2012. 10:04 AM | 1 Like Like |Link to Comment
  • When The TIPS Bubble Bursts: A Cautionary Tale From Argentina [View article]

    It is tough to hedge inflation, though you can own energy and agricultural commodities, which I believe will drive cost-push inflation this decade.

    I've also adapted by cutting costs in my business (cheaper location & shorter commute), and by changing my rate schedule (lower fees and hourly rates). I also do consulting, both as a consultant and as a business owner (via interns). Finally, I blend alpha and beta using ETFs, which streamlines my business and my value proposition.

    You have to be flexible, and the big, old, bureaucratic firms have a hard time adjusting to an ETF world.

    Thanks for the comments,
    Hillsborough, NJ
    Mar 6, 2012. 09:02 AM | 1 Like Like |Link to Comment
  • When The TIPS Bubble Bursts: A Cautionary Tale From Argentina [View article]
    Untrusting & winningtrader: Some people would argue that the U.S. already manipulates the CPI for political reasons. Today I read the back-to-back articles about Argentina and Greece, and it just made me think of how things might play out in the U.S. Default by any other name is still deceit.
    P.S. They have dating sites in the UK CPI? I'm speechless.
    Mar 5, 2012. 10:15 PM | 1 Like Like |Link to Comment
  • Surviving Market Crashes: The Global Debt Crisis [View article]
    Dr K,

    I read the link you provided to oscillators, and it was very helpful.

    It noted that oscillators are best used in range-bound markets. "Because it's an oscillator, the CCI used by itself works best in sideways markets; in trending markets the CCI alone will lead to false buy and sell signals." So this seems like a good tool for a security or an asset class that is stuck in a range.

    I like the Commodity Channel Index, which identifies overbought and oversold conditions. This would make a good tool when rebalancing portfolios, and it makes intuitive sense to me.

    Rebalancing portfolios generates its own alpha, of course, and I'm sure your system capitalizes on it. Scott Willenbrock wrote a great article on "Rebalancing alpha" for the Financial Analysts Journal last year. Here's the link
    I called Scott to discuss it and he's a very cool guy. He teaches physics at the University of Austin:

    I met Scott when I was doing work on post-modern portfolio theory, which is a rather poorly defined field of work. It seems to include everyone who recognizes the limits of MPT, and who is working on an improvement. Much of my work lately has shifted to alternative assets, since that's where much of the action seems to be in PMPT.

    Thanks again for the links and the discussion,
    Mar 5, 2012. 03:52 PM | Likes Like |Link to Comment
  • Surviving Market Crashes: The Global Debt Crisis [View article]
    Dr. K,


    I guess I was talking about the limitations of MPT and mean variance optimization. I discussed these in detail when I reviewed Paul Kaplan's Book last month: "Frontiers of Modern Asset Management". Paul has been working on improvements to MPT, which he calls "Markowitz 2.0". Paul even has the blessing of Harry Markowitz, as he notes in the book. Here's a link to my 2-part book review:

    In the book review I mentioned one of the subtleties of resampling. It is common, for example, to compare stocks and bonds over 30-year periods. These periods are used to measure the probability of retirement success in Monte Carlo simulations. So, even though we don't actually have all that many 30-year periods to feed into our optimizer, we can recreate them by resampling past data.

    The challenge to this, however, is that we are removing the data from its historic context. Bonds have beaten stocks over the last 30 years, which is a period when long-term interest rates fell from almost 20% to about 2%. The returns from one year were related to the returns in prior years (serial correlation), so it would not be an accurate use of the data to resample the annual returns while ignoring history, and while ignoring serial correlation.

    This is just one example of what I meant. I believe in portfolio optimization, but I have a lot of respect for its limitations.

    I hope this clarifies the issue I raised. Now I'm going to check out the link you sent!

    Thanks, and all the best,
    Mar 5, 2012. 03:38 PM | Likes Like |Link to Comment
  • The Importance Of Differentiating Between Historic And Implied Probability [View article]
    I haven't read the book, and I'm going to order it from the local library.
    Mar 5, 2012. 03:13 PM | Likes Like |Link to Comment
  • Equity Multiples And Interest Rates: Is The Current Risk Premium Sufficient? [View article]
    LOL. I gotta try that on a client.
    Mar 2, 2012. 12:47 PM | Likes Like |Link to Comment
  • The Importance Of Differentiating Between Historic And Implied Probability [View article]

    Kudos to you for citing Quantum Mechanics vs. Newtonian Physics.

    Like you, I often ponder the mystery of whether a certain bet was a trade or an investment. Fortunately, I don't wrestle with it at 3am on sleepless nights.


    I did not find solace in the wave/particle duality, but rather in Godel's incompleteness theorum, which posits that no mathematical system can ever create a complete and consistent set of axioms that describe reality. There are statements which are formally undecidable in any mathematical system. Therefore, no system is a complete description of reality, even in principle. For more on Godel, click here:

    http://bit.lynIjJstGödel's_incom... (link to Wikipedia appears broken. Sorry)

    The duality between trading/investing is like the duality between core/satellite or active/passive. Most investors blend all of these approaches, depending on the situation.

    What DOES keep me up at 3am is how quantum mechanics violates causality. After all, transitors, fiber optics, and semiconductors relay on quantum effects.
    It works, but we don't understand it. Weird.

    Mar 2, 2012. 12:42 PM | Likes Like |Link to Comment
  • Time To Add VIX? A Negative Roll Yield Makes It An Expensive Form Of Insurance [View article]
    "Short-fuse bombs of daily inverse trackers." Gotta love it.
    Thanks for the kind words,
    Mar 2, 2012. 12:26 PM | Likes Like |Link to Comment
  • The Importance Of Differentiating Between Historic And Implied Probability [View article]

    Thanks for highlighting the difference between historic and implied volatility.

    This highlights the weakness I see in certain mathematical models (such as mean variance optimization and momentum based on past prices). Both of these ignore implied volatility.

    Mar 2, 2012. 10:35 AM | Likes Like |Link to Comment
  • Surviving Market Crashes: The Global Debt Crisis [View article]
    Dr. Kris,

    Thanks. I appreciate it, since I wasn't able to find the oscillator info you mentioned.

    The mathematics of how you use the oscillator might be more of an off-line discussion. It's a complex thing, and easy to misconstrue. The subtleties of backtesting, resampling, and mean-variance optimization can be easily lost in translation.

    Thanks again--all the best,
    Mar 2, 2012. 10:05 AM | Likes Like |Link to Comment
  • 5 High Yield Oil Plays For The New Oil Age [View article]
    Plan B:

    I agree with your thesis on oil. Some might call it Peak Oil, but the definition is fuzzy, and means different things to different people.

    As you noted, the price signal is a warning. How can oil be at $110 with the G7 economies flat on their backs? Part of it reflects the shift in growth to emerging markets, which are still energy intensive economies. Then there is drilling economics, which has become more and more technology driven, and pushed further and further into frontier areas (either literally or because of political danger). Perhaps I should write an article: "What peak oil means to me." I think it is an interesting topic, and would make a good post. What do you think?

    BTW, I saw this article in the email from the CFA Institute
    Mar 2, 2012. 09:49 AM | 1 Like Like |Link to Comment
  • Why Conventional Commodity Indexes Will Likely Disappoint [View article]

    I think we are on the same page. I used backwardation when I managed energy stocks at Schroders to give me a feel for sentiment, and I'd check it against what the stocks were discounting. I am very cautious about using a quant signal in isolation, whether it's futures prices or momentum.

    I'm surprised that Morningstar hasn't responded to this thread. That's rule #1 in social media: be responsive.
    Mar 1, 2012. 03:19 PM | Likes Like |Link to Comment