Is MPT and buy and hold DEAD?
124 RepliesJump to last post
Funny you should mention MPT practicioners and alcholics, I believe that there is a connection between MPT practicioners and alcoholism, especially if the market keeps going south. I know I'll be one of those.
Okay Icey–if MPT works for you, that’s fantastic. If your clients are happy, and you are, what’s there to complain about?
I honestly don’t understand your metaphor. Are you saying that you use MPT, but don’t rebalance? Or that rebalancing and MPT are mutually exclusive? Or that do use one and the other is just coincidental? Because I’ve had to sit in these silly Asset Allocation conferences in my wirehouse days, where the gospel of MPT and portfolio rebalancing was preached all day long. Thought it was stupid then, think it’s stupid now. But I’ve always been an active manager.
So different strokes for different folks, I guess.
Stoxandblondes:
You are having a blonde moment...Yes it is correct that the Nikkei has not shown any sustained growth for 20 years plus. It did what is known as a full technical retracement after going "VERT", and has flatlined ever since . . . . . just like our market as measured by the broad indexes went VERT and has imploded with a 50% crash that has not officially bottomed.
There are very real and striking technical parallels when you overlay the S&P or Nasdaq or Dow on top of the Nikkei chart.Isn't is spelled Icie? Been a while since I was in a 7-11.Okay Icey–if MPT works for you, that’s fantastic. If your clients are happy, and you are, what’s there to complain about?
I honestly don’t understand your metaphor. Are you saying that you use MPT, but don’t rebalance? Or that rebalancing and MPT are mutually exclusive? Or that do use one and the other is just coincidental? Because I’ve had to sit in these silly Asset Allocation conferences in my wirehouse days, where the gospel of MPT and portfolio rebalancing was preached all day long. Thought it was stupid then, think it’s stupid now. But I’ve always been an active manager.
So different strokes for different folks, I guess.
[quote=Bodysurf]The fallacy of the false choice. Markets don’t have to “go to zero”, and your clients who wonder if they should be in cash temporarily shouldn’t be confronted by a touchy FA who tells them instead to buy gold, shotguns, and canned goods.
Sometimes the sky is falling. Once every hundred years or so, the banking system falls apart, resulting in deflation everywhere. Every asset class gets wiped out. Maybe you're right--maybe all we need is a heavy dose of Obamanomics and a few more hearings and everyone will be excited to be lending again. Maybe the home price data put out half an hour ago is the last shoe to drop, and we're up--up-and-away from here in real estate markets. Maybe the annihilation we've seen in base commodities are a head-fake, and world demand is going to be picking up any day now. Maybe businesses are just itching to hire back millions of people they've just gotten through laying off, because they've got a big pile of new orders rollling in. Or maybe this is one of those events where prudent people sit back, and keep their powder dry, and absorb the big picture. Just because I'm short the market doesn't mean I'm short America, or I'm not a long-term optimist. I am. And when the smoke clears, my clients will be able to sift among the rubble, and buy whatever they want at fire sale prices. 40% short ETF's with out-of-the-money covered called; 35% long equities with deep-in-the-money covered calls with sell stops; 25% cash. And no phone calls from concerned clients--those ended back in September.[/quote]Well I will say that I respect your conviction, although I think you're absolutely wrong.
When a portfolio such as yours can be considered as rational by any measurable number of people, and the largest mutual fund in the country is a Fidelity money market fund(paying less than 1%), and the 10 yr Treasury is trading with a 2 handle, that's about as close to a bell the bulls are going to hear. (Oh - and sentiment indicators are at all time bearish records too.) But too many of them are hiding under their desks right now. That's fine...it takes a little time (and emotional distress and sideways trading) to put in a bottom. I'm gladly picking up bargains a little bit at a time.
The covered calls make some sense to me, and maybe even 10-20% in some short ETF's in the weakest sectors, but that's about as far as I'd go.
Why cant the government just insure the loans in the troubled CDO’s,CMO’s etc?
(or say insure to 70%)
bac,c etc balance sheet become so much stronger instantly.
s and p’s open limit up
government only pays on ACTUAL homeowner defaults.
simple. problem solved. confidence back
banks pay into insurance fund or something to pay tax payers back.
WTF am I missing?
The covered calls make some sense to me, and maybe even 10-20% in some
short ETF’s in the weakest sectors, but that’s about as far as I’d go.
* * * *
The short ETF’s are in the sectors I’m long equities. For example, for March expiry I’ve picked up a lot of Alcoa, Reliance Steel, AKS, and Freeport, all with covered calls written against them two strikes into the money. The premiums are really rich here, by the way. To anchor that, I’m long the SMN, double-inverse materials ETF with an out-of-the-money covered call, again with enormous premiums. So if the sector gets annihilated, I can still make it back on SMN. And if it rallies hard, I’ll forego the extra profits on the covered call positions, and see a big loss on SMN. Which is why on all of them I use trailing sell stops.
I hope I’m wrong too. Hopefully this will pass, soon. But I don’t think so. Our clients expect us to make money in good markets or bad, and to get creative if necessary. It’s the best I can do, for now, and lately that’s been pretty good after all.
[quote=CDO Squared] Why cant the government just insure the loans in the troubled CDO’s,CMO’s etc?
(or say insure to 70%)
bac,c etc balance sheet become so much stronger instantly.
s and p’s open limit up
government only pays on ACTUAL homeowner defaults.
simple. problem solved. confidence back
banks pay into insurance fund or something to pay tax payers back.
WTF am I missing? [/quote]
I must have been in a cloud of smoke the last few months. This is simple and brilliant. Kudos.
[quote=daytradah]
Stoxandblondes:
You are having a blonde moment...Yes it is correct that the Nikkei has not shown any sustained growth for 20 years plus. It did what is known as a full technical retracement after going "VERT", and has flatlined ever since . . . . . just like our market as measured by the broad indexes went VERT and has imploded with a 50% crash that has not officially bottomed.
There are very real and striking technical parallels when you overlay the S&P or Nasdaq or Dow on top of the Nikkei chart. [/quote] Give me an example of a US broad market index that is down 50%. Please.from market high:
% down
russell 3000 -52.65%
s&p 500 -52.55%
kbw bank index -77.90%
[quote=jkl1v1n6] The Hooker index!
US broads going down 50% of the time![/quote] Post of the day.Stoxandblondes....
You must be true blonde.....Do you have to get bent over on the casting couch yet again, before you see the reality of your 'staring role". My god, get the hell out of the advisory biz if you are having trouble locating broad market indexes that are down 50%
The DOW JONES is at 7000....How the hell do you measure that decline from the top...That looks like 50% to me and everyone else who failed 3rd grade math. And it is 100% when you look up from the bottom and want to make it back to the top. You are a doooofuss.But "there's a bull market in our future," says John Mauldin, president of Millennium Wave Advisors.
That's the good news.
The bad news is Mauldin, who selects active fund managers for his high net worth clients, says any 1990's-style bull market that rewards passive index funds and "buy and hold" investors is unlikely to arrive before for another five-to-six years.
In the interim, the investor and author of the Thoughts from the Frontline e-letter says investors should focus on:
Staying conservative and preserve capital for the "great opportunities" that will emerge when the dust settles. Be active with your portfolio and only buy stocks if you're both a good stock picker and an astute trader. Avoid index funds: "Buy and hold was always a bad idea," he says. Own some gold as a hedge: But he is not a gold bug or major dollar bear, as detailed here. Seek income in quality munis, corporate bonds and dividend paying stocks but (again) you have to be smart with your selection, or find a manager who is.As the name of his firm implies, Mauldin's market-timing work focuses on the market's "big" cycles - like 15-25 years - from bull (i.e. 1982-1999) to secular bear (2000-present). Price-to-earnings ratios are key to determining when the cycles switch, and Mauldin believes stocks are not "cheap" today based either on trailing 1- or 10-year P/Es, or by market-weighted P/Es as "Stocks for the Long Run" author Jeremy Siegel curiously argued in The WSJ this week.
Mauldin's baseline prediction is for "another leg down" this summer that takes major averages to new lows but sets the stage for a "1974-type bottom"; the key here is to recall the Dow bottomed in price in 1974 but then spent the next 8 years flip-flopping in a wide range around 1000, before beginning its historic rise to 10,000 (and beyond) in 1982
Bodysurf, forgive me i did not read the entire thread, i’ve been off the boards for a few days, so maybe i missed something but…
I agree with you that at the very least, the buy and hold approach, MPT all that sh*t is not exactly appropriate right now.
I’ve been moving from a managed money/asset allocation model to a “i manage the money” model, for some time now and am at a point where i have most of my clients out of the old model and putting their money in my hands (you know this as we’ve talked about it).
Here’s my question - whats your process for getting back to being invested so you dont miss the up?
So I’m with you.
Mauldin’s baseline prediction[/URL] is for “another leg down” this summer that takes major averages to new lows but sets the stage for a “1974-type bottom”; the key here is to recall the Dow bottomed in price in 1974 but then spent the next 8 years flip-flopping in a wide range around 1000, before beginning its historic rise to 10,000 (and beyond) in 1982
Mauldin's work is solid.
Here’s my question - whats your process for getting back to being invested so you dont miss the up?
* * * * *
I acknowledge that I’m going to miss the first 15% of the next bull market. That’s okay with me. I tell my clients that is already baked in to our portfolios, but that it’s better to miss the first 15% or so of the next bull market rally–which might last another 20 years–rather than miss the next 10-50% heading down.
It was funny, but after I left SB in December my clients were getting calls, telling them they’re crazy to be in cash and short ETF’s heading into the new year. Haven’t they ever heard of the January effect? Or the Santa Claus rally? Or the idea that the market rallies on tax issues, when companies match their 401k’s? And we had our worst January ever. And we’ve just finished one of our worst Feb’s ever.
You can be a hero by not trying to be a hero, IMHO.
To state MPT is dead is the equivalent of saying “In Obamamerica the Laws of Supply and Demand have been repealed”.
What is MPT as encapsuated by the CAPM? Simply the recognition that the price of a security will be determined at the point where S=D, and the owners will be compensated for the risk of that particular security. (And portfolio risk can be diversified away if the total world market portfolio is held. The later is impossible to find, of course, and finding the combination of asset weights that min variance reqwuires a little calculas and a big computer). Buy and hold is an investment strategy and has nothing to do with MPT. The fact is that heretofore, every market timing / pick winners based on some crazy theory has failed to beat a B&H afrter fees and transaction costs. This is an empirical proposition only. If any broker type on this board claims to have extraordinary foresight and some secret 'model' he would NOT be a stock broker but managing a hedge fund.Its not about foresight, its recognizing a bear when its staring you in the face and reacting accordingly. I dont think anyone is saying to engage in swing trading, its just about recognizing the big picture. Capital Asset Pricing Model aside…