31 Jul 2008
Two Value Portfolios
I want to run some back testing on a couple of value portfolios. They're both based on picking relatively small cap stocks with a low PB, preferably below 0.5.
The first portfolio holds the stock for a year and if the criteria are no longer met (cap too large or PB too high) I sell, otherwise I hold for another year.
The second method buys the same stocks but holds them until the PB reaches 1, regardless of cap. Will this outperform the first method or will I just end up holding a bunch of stocks that are going nowhere, i.e. never reach par? Only back testing and time will tell.
This could be mixed in with the sliding cash holding method of the last post, or I could just be strict with the criteria and if the market is overpriced then there won't be many if any stocks with a PB of 0.5... there certainly weren't many between 1999 and late 2001.
The first portfolio holds the stock for a year and if the criteria are no longer met (cap too large or PB too high) I sell, otherwise I hold for another year.
The second method buys the same stocks but holds them until the PB reaches 1, regardless of cap. Will this outperform the first method or will I just end up holding a bunch of stocks that are going nowhere, i.e. never reach par? Only back testing and time will tell.
This could be mixed in with the sliding cash holding method of the last post, or I could just be strict with the criteria and if the market is overpriced then there won't be many if any stocks with a PB of 0.5... there certainly weren't many between 1999 and late 2001.
24 Jul 2008
Sliding cash ratio based on index p/e
I had an idea today that I might do some back testing with. It's kind of a slant on MPT with a dynamic cash allocation. What if instead of having a fixed cash allocation of say 30% which you re-balance to each year, you instead use the p/e ratio of whatever indices you're invested in (S&P, FTSE100 etc) to determine that allocation?
Assuming a p/e of 14x is fair value, 7x is very cheap, 21x is very expensive and 28x is an insane bubble, what if you used double that number as the cash %? So each year, if say the FTSE100 had a p/e of 14x you'd set your cash allocation at 28%. If the p/e was 7x you'd have the cash allocation at 14% and if the p/e was 28x you'd have the cash allocation at 56%.
This seems reasonable at first glance since at 14x, 28% cash is a reasonable safe amount. At 7x the stock market is historically cheap (with a better than average probability of going up) and yields are high so you load up on it with only 14% cash. At 28x the stock market is historically very expensive (with a better than average probability of going down) with low yields so you don't want much exposure, i.e. 56% cash.
I think I'll do some back testing if possible and see what history says.
Assuming a p/e of 14x is fair value, 7x is very cheap, 21x is very expensive and 28x is an insane bubble, what if you used double that number as the cash %? So each year, if say the FTSE100 had a p/e of 14x you'd set your cash allocation at 28%. If the p/e was 7x you'd have the cash allocation at 14% and if the p/e was 28x you'd have the cash allocation at 56%.
This seems reasonable at first glance since at 14x, 28% cash is a reasonable safe amount. At 7x the stock market is historically cheap (with a better than average probability of going up) and yields are high so you load up on it with only 14% cash. At 28x the stock market is historically very expensive (with a better than average probability of going down) with low yields so you don't want much exposure, i.e. 56% cash.
I think I'll do some back testing if possible and see what history says.
3 Jul 2008
July Investment update
The UK and US economies are still heading for recession caused by the credit bust and high food and energy prices. The rest of the world is affected to greater or lesser degrees. So mainstream equities are a bad idea and today they went into bear market territory with 20% drops from the peak last October.
Oil is $146 so oil related stocks are still looking like the place to be. I don't see how that's going to change for the next few years, if not a decade. China and India are still growing, non OPEC supplies are still falling and demand still equals supply. If OPEC starts to decline in the next decade we're in for a hell of a rough time.
This only makes 'climate change' stocks and funds look more attractive since most of the responses are the same for peak oil and climate change. Fuel efficiency, renewable energy, electric cars, lightweight materials, insulation, energy efficiency, etc.
As things stand I might up the climate/renewable % of the fund to 20% from the current 10%.
Just to remind myself, the breakdown is currently:
cash 10%
renewables 10%
oil/gas related 30%
industrial mining 30%
gold miners 20%
Oil is $146 so oil related stocks are still looking like the place to be. I don't see how that's going to change for the next few years, if not a decade. China and India are still growing, non OPEC supplies are still falling and demand still equals supply. If OPEC starts to decline in the next decade we're in for a hell of a rough time.
This only makes 'climate change' stocks and funds look more attractive since most of the responses are the same for peak oil and climate change. Fuel efficiency, renewable energy, electric cars, lightweight materials, insulation, energy efficiency, etc.
As things stand I might up the climate/renewable % of the fund to 20% from the current 10%.
Just to remind myself, the breakdown is currently:
cash 10%
renewables 10%
oil/gas related 30%
industrial mining 30%
gold miners 20%
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