How Renaissance’s Medallion Fund Became a Money Machine

The fabled fund, known for its intense secrecy, has produced about $55 billion in profit over the last 28 years, according to data compiled by Bloomberg, making it about $10 billion more profitable than funds run by billionaires Ray Dalio and George Soros. What’s more, it did so in a shorter time and with fewer assets under management. The fund almost never loses money. Its biggest drawdown in one five-year period was half a percent.

Source: How Renaissance’s Medallion Fund Became Finance’s Blackest Box – Bloomberg

REITS Look Alarming

REITs have been the darling asset class for the last few years, they out performed all other asset classes in 2010, 2011, 2014, 2015 and the first half of 2016.  After being up 13.7% through June 30th of this year they have almost entirely wiped out that gain and are about to go negative for the year.

The Vanguard REIT ETF which tracks the MSCI US REIT index is currently yielding 3.92%, not much of a premium over the riskless US 10 year Treasury at 2.35%.

REITs have benefitted from investor’s search (reach) for yield and low borrowing rates on properties.  That could be coming to an end with the rise in the 10 year Treasury, a looming rate hike by the Federal Reserve in December, and rising defaults on commercial mortgages.

Buyer beware, we could be looking at a repeat of the Master Limited Partnership (MLP) debacle in the second half of 2015.

WSJ -Trouble Brewing in Commercial Real Estate

Meb Faber Interviews Larry Swedroe – A Must Listen

Head over to the Mebfaber.com website and listen to a master class on factor investing (smart beta).  Two of the best quantitative researchers on the subject do a deep dive into their findings and how most investors don’t implement the strategy correctly.

Larry believes there are 5 rules to help you evaluate factors: 1) Is the factor “persistent” across long periods of times and regimes? 2) Is it “pervasive”? For instance, does it works across industries, regions, capital structures and so on. 3) Is it “robust”? Does it hold up on its own, and not as a result of data mining? 4) Is it “intuitive”? For instance, is there an explanation? 5) Lastly, it has to be “implementable,” and able to survive trading costs.

The guys then switch to beta. Larry mentions how valuations have been rising over the last century. He references how CAPE has risen over a long period, and points out how some people believe this signifies a bubble. But Larry thinks this rising valuation is reasonable, and tells us why. Meb adds that investors are willing to pay a higher multiple on stocks in low-interest rate environments such as the one we’re in.Next, Meb directs the conversation toward a sacred cow of investing – dividends. He asks about one particular quote from Larry’s book: “Dividends are not a factor.” Larry pulls no punches, saying, “there is literally no logical reason for anyone to have a preference for dividends…” He believes investors over overpaying for dividend stocks today. He thinks it’s unfortunate the Fed has pushed investors to search for yield, inadvertently taking on far more risk. Dividend stocks are not alternatives to safe income. There’s plenty more on this topic you’ll want to hear.

Source: Episode #28: Larry Swedroe “There is Literally No Logical Reason for Anyone to Have a Preference for Dividends” | Meb Faber Research – Stock Market and Investing Blog

Global Inflation-Linked Bonds: A Primer

So what are inflation-linked bonds? They are most typically debts issued by sovereign nations whose nominal interest rate is adjusted, either up or down, by an inflation measure.Despite the obvious allure of this kind of debt — it eliminates a risk: inflation, duh! — there are not many issuers worldwide. Total global issuance is $3 trillion. The United States, with $1.2 trillion, and the United Kingdom, at about $800 billion, are the principal movers, though there is growing issuance in France, Italy, Spain, Germany, and Brazil, among other markets.

Source: Global Inflation-Linked Bonds: A Primer

A Squandered Opportunity

This is from the Wall Street Journal this week and it is absurd.  Millennials are missing out on the greatest edge they have investing – time.

Source: Start Now

What We Can Learn from Warren Buffett’s Tax Returns

In response to Donald Trump’s claims in  the second US Presidential Debate that Warren Buffett uses the same tax loss carryforward that may have allowed Mr. Trump to avoid paying Federal income taxes, Warren Buffett has released his own tax data disputing that claim.  The takeaway from the data released shows an important strategy that has allowed him to accumulate so much wealth.

First, Mr Buffett doesn’t report much taxable current income for a man with a net worth of over $60 Billion.  In 2015 he reported an adjusted gross income of $11,563,931.  While that represents a sizable income, investing that alone wouldn’t get him to a net worth of that level.

Delay, Delay, Delay

However, what we can learn from his reported income is that once you have a steady source of income that supports your lifestyle you can make time and the tax code work for you.  Compounding over a long period of time by owning shares in a company and not selling has allowed Mr. Buffett to increase his wealth dramatically.  Building wealth requires long-term thinking and a willingness to deny instant gratification.  Look for businesses  that can’t be disrupted, have a big addressable market, and have a competitive advantage that bars new entrants from wanting to compete.

Once you decide to invest in a business make your holding period the same as Mr. Buffett’s, “forever”.  Compounding, delaying or never paying  any taxes on the increase in the value of the investment, and long-term thinking has built Mr. Buffett’s fortune and can provide a roadmap for us all.

Some Tax Facts for Donald Trump

Third Quarter 2016 Asset Class Returns

Asset Class Index Performance YTD 2016
Emerging Markets MSCI EM 13.8%
REITs NAREIT Equity REIT Index 13.13%
High Yield Bonds Barclays Global HY Index 14.49%
US Bonds Barclays Aggregate 5.8%
US Large Cap S&P 500 7.84%
Commodities Bloombery Commodity Index 8.63%
Developed Intl. Markets MSCI EAFE -.85%
US Small Cap Russell 2000 11.46%

Stock Splits are Going Extinct

A split “wouldn’t change the intrinsic value of the company and doesn’t provide any real benefit,”

“we want shareholders who focus on the investment itself, rather than on the currency it’s denominated in.”

Source: Death of the Stock Split: It’s Value Not Price That Matters – MoneyBeat – WSJ

Quant Who Coined Risk Parity Says Wall Street Has It Wrong 

Nowadays, it’s a rare selloff that isn’t blamed on the growing heft of a strategy called risk parity.

Source: Quant Who Coined Risk Parity Says Wall Street Has It Wrong – Bloomberg

Valuation Expert Finds Fault with Tesla/SolarCity Deal

I’m not the only one who thinks the combination of Tesla (TSLA) and SolarCity (SCTY) is “ludicrous“.  Aswath Damodaran, a Professor of Finance at NYU and one of the leading experts in corporate valuations, has taken a hard look at the valuation used by the bankers in order to justify the deal and come away outraged at the hijinks of the process.

In fact, it is far easier to make the case for reverse synergy here, since adding a debt-laden company with a questionable operating business (Solar City) to one that has promise but will need cash to deliver seems to be asking for trouble.

Source: Musings on Markets: Keystone Kop Valuations: Lazard, Evercore and the TSLA/SCTY Deal