Seeking Alpha

TCB Capital Advisors

View as an RSS Feed
View Jim Pyke's Comments BY TICKER:
Latest  |  Highest rated
  • Housing Stocks: No More Outsized Returns [View article]
    I would agree on most sectors, but think housing in particular is subject to caution. (Financials would also come to mind). On housing the interesting comparison would be around valuation metrics today vs. the past vs. the 2005-2007 period and then working with the notion that housing will return to mean level somewhere in the future. The other key question is will profitability be similar or did profit margins expand in 2005-2007 vs earlier periods. Also are there any other trends that overlay - are people buying smaller homes now - quite possibly yes. This too would impact profitability.
    Jan 4, 2013. 01:26 PM | Likes Like |Link to Comment
  • Seeking Refuge From Market Turbulence With Low Beta Opportunities: Part 1 [View article]
    The beta calculation is the exact same whether stock, bond, etf.

    There is an explanation here:

    This shows a table with some calulations

    The parameters, volatility and correlations, are calculated from monthly returns for both SPY and the select security. Let me know if this answers your question.
    Jan 3, 2013. 08:02 PM | Likes Like |Link to Comment
  • Applying The Sharpe Ratio To Low Beta Investments [View article]
    This is interesting and something I'll have to look into. Thanks for sharing.
    Nov 19, 2012. 09:33 PM | Likes Like |Link to Comment
  • Applying The Sharpe Ratio To Low Beta Investments [View article]
    I think the interesting point in this type of analysis is to ask the question - "Are there some interesting types of securities that might have attractive risk return characteristics that I could consider for my portfolio?"

    I would agree that trying to determine specific return projection is simply a lesson in futility. Furthermore, if someone could really figure out future returns were, they wouldn't worry about the risk component, just choose the highest return. But that is not the case so we have make educated comparisons and balance what we think returns are against the risk of the investment.

    Backing up further, there is a question of what you think about the future and what good investments could look like based on that. How strongly do you hold those beliefs - are you all in or going to hedge a bit? Sharpe ratios and many other analytical finance tools provide ways to help understand and discern which types of investments might be good depending on your world view. I buy emerging equities not because I believe they will do well when the U.S. markets do poorly (they are generally pretty well correlated, there is some diversification benefit here, but not as much as conventional intuition might say), but because I believe they are home to most of world's future economic growth. (It is true though that many companies are multi-national in nature and so can prosper by that dimension as well). Just my opinion.
    Nov 19, 2012. 09:32 PM | Likes Like |Link to Comment
  • Applying The Sharpe Ratio To Low Beta Investments [View article]
    "Risk free" is a somewhat fuzzy concept since nothing is truly "risk free" The proxy often used in finance is U.S. treasury bond of appropriate duration. For stocks it would be the 10-year or arguably 30 year treasury bond yield. For other investments, one might choose a 1-2 year bond yield. The longer the duration the higher the yield, hence one can construct a yield curve.

    So your next point about negative returns. I'll first clarify between rate and return. In my calculation, return was a historical measure. It looked at the return on IEF from three years ago to present time. Due to declining interest rates and flight to safety the security appreciated substantially accounting for much of the return. If one is looking around to compare yields or future expected returns, it would make most sense to take the treasury bond yield, which was something like 1.6% today. Possibly, if I buy IEF today and wait 3 years, I might have a negative return due to deprecation in the security if interest rates go up (not down).

    From a practical point of view, what should a small, casual investor view as the risk free rate of return? Do they really have access to Treasury Bonds due to minimum size purchases - Not always. they can perhaps purchase the ETF or at least get a savings rate. So this then links back to my earlier point, that even if you move the risk free rate around some, the relative rankings remain quite similar.
    Nov 19, 2012. 09:21 PM | Likes Like |Link to Comment
  • Applying The Sharpe Ratio To Low Beta Investments [View article]
    This is a great common and one of practical significance. The "risk free return" that was used was the IEF ETF which is the 7-10 year collection of Treasury bonds. The return was composed of the yield and the appreciation in the ETF which makes it much higher than just looking at the yield of a 7-10 year treasury. So it is more of the return from the "risk free" investment than a risk free rate. However, on a historical comparison basis, I think this is the appropriate take.

    On a looking forward basis, one typically uses the risk free rate as noted in a treasury bond which is just the yield. This is a yield to maturity and ignores the ups and downs of security appreciation and depreciation as rates change. Once purchased you've locked in a set rate that is risk free to the extent that the U.S. government does not default or have other issues.

    In terms of choosing an appropriate benchmark, large differences can shift the results in a few position. Note that for example it is possible for the excess return to shift from postive to negative if it is near teh risk free rate of return. However, large positives typically remain large positives, etc.. Since it is a relative ranking system it would take very different risk free rates of return to alter the ordering.
    Note the table with some substitutes for the RF. In general if a security ranked near the top with one rf, it did well with others, not always, but reasonably close. Note it is a relative ranking.

    Ticker Sharpe Ratio (rf = 0%) Sharpe Ratio RF = 27% Sharpe Ratio RF = 10%
    PCY 18.1x 7.6x 15.0x
    MCD 12.4x 5.5x 10.4x
    GLD 8.0x 3.5x 6.7x
    LQD 17.2x 1.6x 12.6x
    SPY 6.9x 1.5x 5.4x
    XLU 9.2x 0.9x 6.8x
    IEF 14.0x 0.0x 9.9x
    TIP 18.5x -0.8x 12.9x
    PCG 1.6x -4.4x -0.2x
    VXX -4.8x -6.0x -5.1x
    SHY 0.5x -104.9x -30.5x

    Inflation is a separate consideration and in theory is reflected within the risk free rate which in concept is a real risk free rate as well as an inflation component. Hence looking at todays 10-year treasury bond yield - it is most likely insufficient to cover inflation looking forward. However, this notion should not impact the relative ranking created by the sharpe ratio, it simply says that you are effectively paying to have a safe "risk free" investment.
    Nov 19, 2012. 09:05 PM | Likes Like |Link to Comment
  • Why Did Warren Buffett Sell Johnson & Johnson? [View article]
    That is a good point to raise. The question would be to dig deeper into the acquisitions and sales and see their relative performance.

    Mr Roche's comment is quite interesting. In any case, he has been clearly disappointed by JNJ. I highlighted book equity, since that is often a favorite aspect for Buffett. I would agree that ROE is another important metric, especially in that it is related. If ROE is dropping and book equity is growing very slowly that suggests future growth will be anemic as well. I would wager that from Buffett's perspective the inability to grow book equity is a sign that the stock will underperform. Will be interesting to see what happens going forward. Alternatively, Buffett might think that there are better places for his capital and ultimately JNJ could still do well.
    Nov 18, 2012. 10:45 PM | Likes Like |Link to Comment
  • Electric Cars: A Matter Of Cost [View article]
    I rode in the Model S a few weeks ago - pretty nice ride with amazing acceleration - not quite as good as the roadster, but still impressive. Very spacious interior too, with good space for storage. A very well engineered car and clearly why it won car of the year.
    Nov 17, 2012. 09:42 PM | Likes Like |Link to Comment
  • 7 Investments With Low Correlation To The S&P 500 [View article]
    Thanks for the comment. I think it is interesting to broaden one's understanding of different types of assets. Best of luck with your investing.
    Nov 16, 2012. 12:34 AM | Likes Like |Link to Comment
  • 7 Investments With Low Correlation To The S&P 500 [View article]
    Thanks for the suggestion. I added in VXX to my follow up article. It has a pretty strong negative correlation.
    Nov 16, 2012. 12:33 AM | Likes Like |Link to Comment
  • Looking For Low Beta Investment Opportunities [View article]
    As you noted in your other comment, I think you are advocating more of a contrarian stance to conventional views. I think your third point advocating increased exposure when the perceived risk is lowest is the exact opposite of a contrarian view though. If no one thinks there is any risk in an investment, then in theory t it is going to be bid up to a price where the expected return is around treasuries. This is not a place that I want to be investing in. Looking at history - think housing in 2007 and 2006, internet stocks in 1999 - these are period were conventional wisdom was that the sky was the limit and there was no downside. I would agree with the notion in looking at areas that have been neglected or out of favor. This aligns more to the notion of value investing than some sort of momentum play.
    Nov 13, 2012. 12:38 AM | 1 Like Like |Link to Comment
  • 7 Investments With Low Correlation To The S&P 500 [View article]
    You are correct, question is why do that change. I;ve looked at this for some select stocks in the past over all their correlations and betas change over time:

    Thanks for reading my arictles.
    Nov 4, 2012. 02:44 PM | Likes Like |Link to Comment
  • 7 Investments With Low Correlation To The S&P 500 [View article]
    To be precise, day to day is more of a literary construct. But in some ways similar to your comment. As noted in the article the calculations look at monthly returns. If you look at daily returns, the correlations would typically be lower. Negative correlations would possibly be higher since one would expect more randonmess in drivers of price changes over individual days.

    You are correct on the notion of how certain asset classes can correlate together in extreme time periods, while others maintain their independence. While emerging market equities, have lower correlations (albeit not low by my metric) their correlations did ramp up post 2008 when everyone was shunning most "risky" assets.

    I do have a few articles that look at the topic you mention:

    This is another take on low correlation investments from march 2011 that I wrote. Allows you to compare correlations from today with those from the past.

    Here is a link to a list of my articles grouped by topic:

    Check under beta and diversification. This is still a work in process.
    Nov 4, 2012. 02:42 PM | Likes Like |Link to Comment
  • Using EBITDA Multiples To Compare Steel Companies [View article]
    Thanks, one of the key challenges in stock analysis is that making a conclusion on single dimension is tough. I wanted to introdcue EBTIDA multiples and talk a little bit about them. As I note in the article, to have a good understanding on this dimension, you need to understand growth and risk. It is also possible that someone might say, boy EBITDA has quite a few limitations, perhaps I'll not use it as a metric when evaluating a stock. Best of luck with your investment.
    Nov 3, 2012. 01:16 PM | Likes Like |Link to Comment
  • 7 Investments With Low Correlation To The S&P 500 [View article]
    That is a good add. TIP iShares Barclays TIPS Bond provides access to TIPS (treasury inflation protected securities) - slightly different from normal treasury bonds with interest payments linked to an inflation index. TIP itself has about $23 billion in assets and good liquidity.
    Nov 3, 2012. 01:13 PM | Likes Like |Link to Comment