Yesterday I sent you an Outside the Box from Paul McCulley who supports the government and Fed activity (in general) in the current economic crisis. Today we look at an opposing view from Bennet Sedacca of Atlantic Advisors. He asks some very interesting questions like:
- Shouldn't the consumer, after decades of over-consumption, be allowed to digest the over-indebtedness and save, rather than be encouraged to take risk?
- Shouldn't companies, no matter what of view, if run poorly, be allowed to fail or forced to restructure?
- Should taxpayer money be used to make up for the mishaps at financial institutions or should we allow them to wallow in their own mistakes?
I think you will find this a very thought-provoking Outside the Box.
This week in Outside the Box we take a gander at the always-insightful research of good friend James Montier, who poignantly addresses the pertinent topic of portfolio diversification and the pitfalls that ensue on account of benchmarking, wherein investors obsess over relative performance and their respective tracking error. James asks the question, why does the average US mutual fund hold 160 stocks, when diversification could be achieved with around 30-40 stocks. The answer in word, benchmarking.
James Montier posits that the average portfolio manager is focused upon short-term relative performance, paying scant attention to total portfolio risk, rather, the inclination of the average PM is to be primarily concerned with tracking error, that being stock specific or idiosyncratic risk. This misguided focus Montier suggests, leads the PM to manage very large portfolios in their attempt to control stock specific risk, holding nearly 4 times the number of stocks needed to meet diversification targets.
The solution you may ask? Montier suggests the utilization of Monte Carlo simulation to construct a universe of potential portfolios subject to construction rules that define your respective investing universe, thus permitting the measurement of skill to a comparable universe and impelling the manager to focus on absolute return performance.
Does the concept of retirement sound scary? If it does don't feel that you're alone. A lot of issues and concerns come along with the subject, the most familiar of which is financial freedom. Even after you have saved a substantial nest egg, it can be difficult to plan out your withdrawal strategy when presented with several unknown variables such as life expectancy and rate of return.
Today's Outside the Box is by my good friend and the always fascinating analyst, Ed Easterling. Ed has written a very well researched article on how to structure a portfolio and plan for retirement. How much of your retirement portfolio can you withdraw each year? It may not be as much as you think if you want to be sure that your money outlives you. Ed covers some of the inherent risks and describes several scenarios that people face. For those of you unfamiliar with Ed, he is the author of Unexpected Returns: Understanding Secular Stock Market Cycles, President of an investment management and research firm, and a member of the adjunct faculty at SMU's Cox School of Business. You can read more about him and his research at www.crestmontresearch.com.
Whether young or old, retirement is a point in life that we all must face. I believe that you will find Ed's article to be an engaging view on how to properly prepare for and plan out your retirement.
I am pleased to present to you a thoughtful piece by good friend and business partner Jon Sundt in today's "Outside the Box." Jon is the President of Altegris Investments and a very insightful thinker.
In his article "Lost in America? Asset Allocation and the Old Brain," Jon takes a look at some of the psychological challenges we face in investing. He further goes on to discuss why asset allocation is such an important component to any investor's strategy amidst of an increasingly global and complex investment platform.
For those of you unfamiliar with Jon and Altegris Investments, they are my domestic partners headquartered in La Jolla, California. They provide high net worth investors and institutions with specialized alternative investments including managed futures, hedge funds and fund of hedge funds.
May you all enjoy this year's kick off of the festive season with great family, loved ones and friends. I trust that you will find Jon's piece to be very "Outside the Box."
In my Friday letter, Thoughts from the Frontline (you can view it here), we looked at how valuation and prices change over market cycles. As I mentioned and have written about extensively in my book Bull's Eye Investing, market cycles should be viewed in terms of valuation and not prices. But how does one capitalize on such a way of thinking? Today's "Outside the Box" will show how several valuation styles and categories have performed over different time intervals, how each styles compares to the other and how each style meshes with the other.
The piece titled "Just a Little Patience" is written by my good friend and fellow investment colleague, James Montier. James is the Director of Global Strategy at Dresdner Kleinwort Watterstein, a London and Frankfurt based investment bank. He is also a prolific writer and author of the book "Behavioral Finance - Insights into Irrational Minds and Markets."
Aided by data from the Quant department of his firm, James dissects a large amount of information in order to present a well-researched report on how value and growth strategies work over time. His conclusions show how patience (defined as a longer time horizon) favors the value investor and hurts the growth investor. One particular note of interest is where James shows the results of a value component in a growth strategy and vice versa.
A key insight to gain is that the prudent and disciplined investor is rewarded for not wavering in his investment methodology, while those that do achieve lower returns. This is one of the more in-depth editions of the year and I trust that you will find it to be "outside the box."