The Vegan Growth Portfolio.

Updating “What do investors really want?”

Two years ago I began to write conceptual articles based on “What do investors really want?”.   At the time the vanilla stock-centric approach to investing was working fine and there was no way to distinguish our philosophy from any other traditional investment adviser.  Bear markets in stocks are a fact of life and rather than being a cheerleader with the hopes of eternally rising prices we’re realists who accept the investment cycle. But how times have changed!  Our interpretation of “What do Investors really want?” is that investors really want steady returns without dramatic drawdowns if they can be helped.   Big annual returns are nice and they will happen from time to time but if those returns come with -40% or -50% pullbacks just as frequently then investors would have no part of it.   However, this type of volatility is exactly what you get if you’re a stock mutual fund/Index fund “long term investor” who’s strategy is to “buy and hold”.   The chart above shows that the real rate of return for the SP 500 is a mere 1% per annum since 2000 which simply isn’t worth the risk if you’re a long term buy and holder. Our primary issue with mutual funds or vanilla style advisors is that regardless of asset or style is that they’re all single direction oriented (they need a bull market to make money).   Mutual funds don’t adapt and consider changes into the macro economic environment to adjust their holdings which would remedy the dramatic declines and sharply increase the chance that the investor will be a true long term investor but...

Indexing comes with heavy risk

Investment in stock index funds dwarfs prior secular peaks.  When you own an Index Fund you’re also indexed to take major losses along the lines of 30% or more on average in a sustained bear market. Active managers can switch gears and realign portfolios to benefit from bear markets....

The attraction of Earnings Yield for acquirers: WIBC

The underlying methodology of our quantitative equity models is to identify companies/stocks that are very attractively priced – including debt- so as to be potential targets for acquisition. One such holding Wilshire Bancorp symbol WIBC announced today that it will be acquired by BBCN Bancorp for $13 a share. Lets take a look at the valuation of WIBC pre-merger: Enterprise Value: $651m EBITDA (trailing 12 months): $101.3m Earnings Yield: 15.5% On of the factors that made WIBC so attractive and why using Market Capitalization as the basis of valuation incorrect was the fact WIBC has $6.52 a share in cash and very little debt.  The cash can then be used to reduce the cost of acquisition. No longer long...

October is the new September, our September letter

Hello all This is our latest monthly letter.  We’re essentially positioned for what we expect to be a strong stock market into December while anticipating a probable recession in 2016. 9.29.15 monthly letter All the best,...

Our bearish base case scenario

Its a great feeling to wake up to the realization that our anticipation and planning for several months comes to a very fruitful conclusion this morning..  We had watched the sea of red in the futures market over night but was still amazed to see a fall of 1000 Dow points in the first hour of trading. We have been anticipating a bear market for about a year and positioned our clients in a very conservatively in July, but didn’t expect this crash so soon.  I remember back in August of 1987 that it was a rough month as well but the real crash didn’t occur until October.   September could be another bad month as well. This morning we sold our profitable short positions in China A shares “CHAD” and Emerging Markets “EUM”.   We’ll revisit them and others at a point later in time.  We do expect some sort of big equity rally at any time now.  We remain holders of our largest positions in long dated US Treasury bonds. Our base case scenario is: There is no good reason to own stocks right now.  Despite this month’s crash we believe that stocks have entered a Bear market and we expect this to last in the range of 1 1/2 years.    We expect that this month’s crash is only the first leg down for the Bear, we anticipate a very strong reaction rally which is why we’ve sold our Emerging Market and China short positions.   The anticipated reaction rally will be short lived and eventually fail where a prolonged decline in stocks will take hold...

Positioning for a Bear Market

We have spent the last month positioning our client portfolios for what we believe is an emerging bear market in US stocks. 8.15 monthly letter

June update

Its been so long since a substantial market pullback occurred we can easily forget that market weakness is inevitable and part of the process.    We do not see any significant reason to pull away from stocks as the factors necessary for a substantial market pullback are just not present.  In the old days (facetiously written) an investor could expect 1 or 2 10% pullbacks and an average of 3.5 5% pullbacks a year. All recession indicators are saying we are quite a ways off from an economic peak and recession.    Recessions don’t occur while employment is improving, they occur after employment stagnates during an economic boom. The strength of the economy remains consistent with leading indicators showing a pickup in economic strength in the second half of the year.  Market valuations are on the high side which can be expected after a five and a half year run.  Economic growth continuing and the expected Fed rate hikes to be incremental and soft, we think the market will continue to move higher later this year. What really has our attention is the sell off in US Treasuries aka the Yield Curve moving higher.    All Treasuries are now quite oversold and are beginning to become attractive once again. We do believe the Fed will begin to raise rates and likely do it this year.  In previous cycles, rate hikes have eventually led to a flattening and eventually inverted yield curves.   We believe this time is no different, hence the widening of the yield curve created by the Treasury market sell off represents an opportunity. What does make...