Asset classes can sometimes get beaten down at or near the end of a cycle. No asset class has been as universally unloved in the last three years as much as commodities, but does the sell off mean that the asset class is cheap? William Bernstein, a noted author on efficient frontier investing, is adding precious metal equities to his strategic asset allocation to further diversify his portfolio and take advantage of a cheap asset class.
Bernstein: You can look at it from two perspectives. One is the simple mean-variance perspective, which is that when you add in 1% to 5% of precious-metals equity to a normal portfolio–in normal times at least–you get a bit of a bump in return and you get a bit of a reduction in risk. What are you protecting against? You are obviously in a more heuristic sense protecting against inflation.
Source: What Looks ‘Good and Cheap’ Today?
Living through a track record is very different than viewing it on paper. Even the most efficient track records in history have periods where they would have been very uncomfortable to stick with. Warren Buffett has had multiple 30-50% drawdowns in his career. In the world of indexing, there is nothing magical about the S&P 500. Yet it’s well known how difficult it is for a fund manager to beat it over the long term.
Source: Lorintine CapitalWhy Simple Isn’t Easy – Lorintine Capital
Cliche´ – “Make Hay When the Sun Shines”
For my son and daughter: The sun is shining right now, but some days are rainy. You have to appreciate the good days and prepare for the inevitable bad ones. Now that you have a job, you need to begin a lifetime of saving.
I love cliche´s. The dictionary defines them as: a phrase or opinion that is overused and betrays a lack of original thought. But I see them as useful pearls of wisdom from experience that are easily remembered and used to convey a valuable lesson.
What are some of your favorite cliche´s? Why do you like them and how do they relate to business, investing or life?
Let me know by sending an email
When rates start to rise what will happen to the bond mutual funds? Could the lack of liquidity in bond markets and a market structure of requiring a broker to execute trades lead to a liquidity crisis?
There is a difference between owning individual bonds and owning a bond mutual fund.
When it comes time to sell, it can
be hard to find a buyer, and vice versa. PIMCOs
chief investment officer for U.S. core strategies, Scott
Mather, has compared the bond market to that for real estate. Few people list their houses on a website and expect to find a buyer. Instead, they pay an agent, who may
know a young couple interested in a fixer-upper next to the
railroad tracks. Both bonds and houses are far from
homogeneous. Real estate brokers have maintained their grip on
their market, despite consumers buying everything from
groceries to puppies online. “You can’t force every
house to be the same or force every issuer to issue the same
bond,” says Mather. Since the financial crisis, though,
players in the bond market have become more receptive to
technology and new solutions. They’ve had to as banks have
been regulated out of playing their traditional role as market
makers and, in a pinch, providers of liquidity.
Source: On Liquidity Anxieties and a New Bond Market
An interesting article by Jason Zweig in the Wall Street Journal brought up an important concept that most investors pay little attention to, the current yields on the bonds in their portfolios, and which yield should be considered when deciding what bonds to purchase.
There are several different yield calculations for different kinds of bonds. For example, calculating the yield on a callable bond is difficult because the date at which the bond might be called (the coupon payments go away at that point) is unknown. There is the yield to maturity, which is the yield from holding the bond to maturity (assuming that you can reinvest all the coupon payments at the same rate as the bond’s current yield.) And there is also the current yield, which is the one a bond buyer should use when comparing different bonds to purchase.
The current yield is defined as the ratio of the coupon interest to the current market price and is what you can expect to receive by buying that bond today at the currently quoted price.
Current Yield = Annual Cash Flow / Current Bond Price
However, if the bond were to be sold at a capital gain or loss, or if the bond is called (bought back before maturity by the issuer) then the current yield would not be realized by the holder.
In today’s low rate environment I would favor evaluating bonds based on their current yield, using the yield to maturity measure may not be an accurate representation of the return the holder will receive given that it will be difficult to reinvest the cash flow from the annual coupon at the same rate.
Source: How Muni Bonds ‘Yield’ 4% in a 2% World