Debuting the Market Timing Portfolio

In 4 Steps to Retiring a Millionaire I talked about some ways to use valuation to time markets.  I thought it would be useful to follow a portfolio on the site with some market timing trades.

Before we start, I’ll hedge with the fact that I don’t expect this portfolio to wallop the market.  In fact, I wouldn’t be surprised if it does poorly.  To start I won’t be using any trend or momentum indicators and deeply undervalued assets tend to get even more deeply undervalued for a while.

The From-the-Book-Ones

ProShares Short High Yield

Interest rates are at near a generational low, as they go up bond prices will go down – especially junk bonds.

Platinum & Palladium

Historically, platinum has traded at a premium or slight discount to its precious metal cousin, gold.  Right now, gold trades for $1,208/oz and platinum trades for just $925.50.

Uranium

The Uranium price has fallen 80% since Fukushima five years ago.  In the mean-time nuclear power sources have turned to secondary sources to purchase uranium.  Eventually the secondary sources will run out and the price will necessarily go up to allow producers to earn a profit.  We will use Cameco.

Coal

The price of Coal has fallen 64% in the past five years and 76% since July 2011.  Much of this is due to the attempted creation of alternative energy sources and the increased regulations on the industry.  Regardless, of how this works out, it is likely the price of coal is too low.

Some CAPErs

CAPE stands for cyclically adjusted price to earnings ratio.  The ratio is calculated by dividing the current price by the average earnings over the past ten years.  Averaging out ten years of earnings smooths any cycles that are either artificially inflating or deflating earnings at the current time.  We’ll include all countries with current CAPEs below 10x.

The current countries are: Russia, Brazil, Czech Republic, Poland and Turkey.  Unfortunately, there isn’t a good option for investing in the Czech Republic.

As always, the portfolio will be tracked on the portfolio page.

 

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Book Notes: DIY Financial Advisor

I loved Wes Gray’s book with Tobias Carlyle: Quantitative Value. I have been thinking about becoming a financial advisor and have been fooling around with different asset allocation models.  Imagine my surprise and delight when I found out he had another book (with Jack Vogel and David Foulke) combining the three.

The book is a very easy read (especially when you skip over the all the studies/back testing) and the authors do a great job simplifying complex strategies and creating solutions for investors at various skill and risk levels.

While this post will serve as notes for me to return to, I always recommend reading the book yourself, which you can do here.

Problems with The Experts

  • Successful experts must constantly acknowledge the potential for them to be wrong – this is very hard to do in practice.
  • Experts typically focus on short-term results and complexity when they should focus on long-term results and simplicity.
  • Simple models will typically defeat experts who are slaves to emotional issues.  Human decisions are instinctual and heuristic-based whereas processes are calculated and analytical.
    • The three main reasons experts fail in this way are: coming to different decisions with the same facts as the model, being overconfident and using story-based and not evidence-based decisions.
  • Anchoring – Humans tend to rely too heavily on an eventually irrelevant piece of information, which is referred to as an anchor.
  • Framing – The way information is presented (or framed) can evoke emotional responses that lead to different decisions.
  • Availability Bias – The mind overvalues recent or easily recalled information.
  • Physical State – Physical factors like if the expert is a morning or night person (or if they’ve had their coffee) affect decisions.
  • Overconfidence – self-explanatory, this leads to experts using far more leverage or participating in far more risk than is appropriate.

How to Choose an Expert if you Must

Use FACTS:

  • Fees – Find the effective all-in fee number and assure it is based on a percent of assets managed – not commissions on investment products purchased. Don’t pay more than 1% per year and lean toward not paying for investing prowess. Instead, pay for things like insurance, wealth planning and other bonus features.
  • Access – Find out what the liquidity provisions are with the investment (is there a lock-up period, are there fees to get your money back) and lean toward more liquidity.
  • Complexity – The more complex, the more opportunities to potentially screw up.
  • Taxes – Look for advisers and instruments that are good at tax efficiency.
  • Search – Consider the time and cost of identifying and monitoring managers.

Asset Allocation

Asset Allocation allows investors to gain exposure to different asset classes and reduce volatility and drawdowns.  The book covers three different approaches and recommends the third:

  1. Yale Endowment model from David Swensen’s book Unconventional Success: 30% US stocks, 20% foreign stocks, 20% real estate, 15% inflation-protected bonds and 15% treasury bonds.
  2. William Bernstein’s portfolio from The Intelligent Asset Allocator: 25% domestic equity, 25% foreign equity, 25% small caps and 25% bonds.
  3. Meb Faber and Eric Richardson’s Ivy Portfolio: 20% US stocks, 20% foreign stocks, 20% real estate, 20% commodities and 20% treasuries.

Risk Management

There are five main buckets of techniques for risk management:

  1. Fundamentals
  2. Technicals
  3. Sentiment
  4. Volatility
  5. Combo

The book recommends using a simple moving average (buy when the price is higher than it has averaged over the past one year) and time series momentum (buy when the asset’s 12-month return is higher than a risk-free asset’s).

Security Selection

There are two simple models to pick securities: value and momentum.  For value, pick stocks with a high EBIT/TEV yield (EBIT is earnings before interest and taxes, TEV is the amount it would take to purchase the entire company).  For momentum, buy the top decile of stocks based on the past 6 or 12 months of returns.

To combine the two, either buy the top decile of high EBIT/TEV firms each month or split a stock portfolio 50/50 between the two strategies.

The DIY Solution

Start with the Ivy Portfolio, use the security selection tools for the stock portions and apply the risk management tools to each portion, holding cash when necessary.

Last note: Wes’s site Alpha Architect assists with all components of the strategy and is great for both financial advisors and individual investors.   

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4 Books to Become Wealthier than a Game of Thrones House with a Cool Animal Sigil

Before you can choose an asset allocation strategy or start actively trading or even start earning money online you need to get your financial situation in order, start saving and figure out how you’re going to save enough money to forsake your grandchildren in retirement.

I Will Teach You to be Rich

Ramit Sethi wrote the most effective personal finance book I’ve read.  Seas of the typical personal finance tomes begging readers to never use debt for any reason and to hoard all their cash in CDs to save it from the evil stock market probably have a net negative on society.  Ramit’s book takes the opposite approach.

He tells readers not to budget, tells them to use credit cards and shows how a beginner can get involved in the stock market.

Rich Dad, Poor Dad

Where I Will Teach You to be Rich establishes a mindset for managing your finances, Rich Dad, Poor Dad establishes a mindset for creating wealth.  Employees rarely become wealthy and Robert Kiyosaki reinforces this time and time again.

Money: Master the Game

Though Money: Master the Game has the typical number of worn platitudes, the sections on how to live like a millionaire without being a millionaire and risk parity portfolios are worth the read.

Seven Years to Seven Figures

Michael Masterson has a mixed reputation on first Google.  As a long-time marketer, this is to be expected.  His book is second to none as far as introductions to motivation, strategies for getting promoted and getting raises at work, starting a business and investing in real estate.

Bonus: Four Steps to Retiring a Millionaire

How could I do this list without my own book (which is only $2.99, what a deal!) which, as far as I know, invented a savings concept called forced savings.  How could you not read a book that created a new concept?

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11 Books to Rewire Your Online Business Instincts

For whatever reason, most people who read these books will feel enlightened, be filled with plans for future success, come up with tons of ideas to make money online and never do anything about it.

There innumerable ways to make money online regardless of your individual talents and niche knowledge, and these books will explain how, but the most important step is not what email provider you use, how much time you spend on SEO or even who your target audience us but just sitting in front of a computer and doing the work.

Will it Fly

This site is modeled on Pat Flynn’s, so his most recent book must be included in the list.  Flynn teaches entrepreneurs how to not only come up with successful product idea for their business but test it to make sure they won’t be wasting hours and dollars on a dud.

How to Start a Successful Blog in One Hour, Your first $1,000, Email Marketing Blueprint and Authority Affiliate Marketing

This list is mostly going to be a Mike’s internet-business-role-models books.  The first is Steve Scott.  Scott has built two simultaneous eBook based empires.  One with habit books and one with online business books, mostly on how to sell eBooks.  These are my favorite online business ones by him.

The Side Hustle Path Vol 1, Vol 2, Vol 3 & Vol 4

The next is Nick Loper.  Loper’s site, Side Hustle Nation is more about ways to add income on the side of your normal day job.  He details the side hustles he experiments with on his site and has interviewed experts at many more on his podcast as well.  These four volumes introduce readers to the most successful ideas.

The Fire Path & Podcast Launch

John Lee Dumas and his wife Kate Ericson run one of the best online business resource sites, with monthly income often in excess of $1mm.  In The Fire Path, Kate tells the story of how they started their business and draws the map for you to follow.  Podcast Launch is self-explanatory.

Bonus: The Altucher Report

James Altucher is one of the leading entrepreneurship and self-improvement authorities.  His monthly newsletter introduces passive income opportunities, interviews with leading entrepreneurs and analysis of the most important technological trends.  Plus (!) if you do a lifetime subscription you get a bunch of monthly book recommendations.

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Top 7 Underground Value Investing Books

Every year brings 80 or 90 new value investing books from fifth-rate fund managers and analysts that haven’t seen a promotion since the Bush presidency.  Among the normal buy quality at a low-price drivel are some true hidden gems.  Here are my favorites.

The Entrepreneurial Investor

Kinkos founder Paul Orfalea used the money he gained selling Kinkos to seed a value-based hedge fund called West Coast Asset Management which has since acquired by something called Lucia.  Anyway, in the book the four authors teach how to focus on businesses and analyze things like culture in your investing.  Plus, it’s only 170 pages.

The Intelligent Option Investor

This one has been one of my favorite reads over the past year or so.  Kobayashi-Solomon starts with the basic of options and teaches investors how to use implied volatility to find the expected and high and low prices of a stock over the term of the option and then value the stock and compare it to the implied volatility.  Where the valuation is higher than the option implies the options is worth purchasing.

Trade Like Warren Buffett

I try to get James Altucher’s take on Warren Buffett into book lists every few months.  Especially now that he’s constantly bagging it on Twitter and in his podcasts.  Altucher works through the various arbitrages Buffett has taken advantage of (fixed income, relative value, merger and closed-end fund), private investments in public equities and all kinds of other fun stuff.

Applied Value Investing

Applied Value Investing is the investing book that has most surprised me with its greatness.  Calandro went to a Bruce Greenwald seminar at Columbia and uses Greenwald’s asset value and earnings power valuation technique to produce case studies of various Warren Buffett and Eddie Lampert investments.

But that’s not all!  He also integrates typically incomprehensible George Soros investment theory with Austrian Business Cycle Theory to create a framework for following and predicting business cycles.

Mosaic: Perspectives on Investing

Mosaic is a collection of the article Mohnish Pabrai wrote in the early days of his hedge fund when he was returning something like 25% annually.  The articles are well written and have each been read by me at least 14 times.  Perfect for short reading, like in waiting lines, on a bus or during a BM.

The Investment Checklist

Most value investing books suffer from too much commentary and too little actionable information.  This book is the direct opposite.  The entire book is a voyage through the author’s investment checklist (imagine that).

Invest like a Dealmaker

Chris Mayer has been one of my favorite investment writers since about 2007.  His typical investment is an asset heavy and low-debt business run by an owner-operator.  The so-called dealmaker’s ratio in this book is anticlimactic (it’s just EV/EBIDTA), but the collection of writings at the end about various investors and strategy is well worth the price.

Bonus: How to Hack Wall St.

You can’t get more underground book than my first which has sold something like 37 copies.  I talk about all kinds of exciting special situation strategies and create a portfolio that I still follow to this deal.  Buy seven copies!

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Top 4 Books for Accepting Proper Asset Allocation into your Heart

Intelligent asset allocation is a simple strategy.  You pick several different non-correlated or lightly correlated asset classes and diversify among them.  The little return loss from the diversification is more than made-up for by the limited drawdowns.

The Ivy Portfolio

I’ll start with my favorite, Quant extraordinaire Meb Faber takes investor down a road of mimicking the portfolios used by the Harvard and Yale endowments.  The end portfolio not only allows individual investors to get in on the same returns as Harvard, but also blends in momentum and trend following excitement.

Fail-Safe Investing

Harry Browne’s permanent portfolio has been widely adapted from financial newsletter writers looking for an easy to follow and recommend asset allocation.  The portfolio divides equal amounts into US stocks, treasury bonds, cash and gold.

The cash, gold and treasury bond allocations are probably a little too high and I would recommend allocations in real estate, natural resources and foreign stocks as well.

DIY Financial Advisor

Wes Gray and Jack Vogel started by destroying the active investment management industry and then show how to use momentum and value to improve upon the portfolio established in The Ivy Portfolio by Meb Faber.

Global Asset Allocation

We’re back to Meb Faber!  In this book, he compares several different allocation strategies put forth by famous investors (including the permanent and ivy portfolios) and back-tests each.  Spoiler alert: they all have returns around the same level and an average fee amount makes the highest returning strategy the worst.

Bonus: 4 Steps to Retiring a Millionaire

Here’s my book!  In addition to the portfolio I follow on the site, there are tons of other amazing and life-changing tidbits.

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Top 6 Books for Learning Economics

The wrong-headed and emotion-based economic policies of both parties drove me crazy for the past month.  What better way to drown rage in knowledge than with beginner economic books?

Choice

Bob Murphy is one of the most prominent current Austrian Economists as far as relating complicated economic theories to the lay person.  In his most recent book, he translates Ludwig von Mises’s opus Human Action.

Economics for Real People

This was the book that made Austrian Economics click for me.  Gene Callahan starts with a strange Survivor character and moves into all branches of economics, including supply and demand, interest rate theory and even the efficacy of QWERTY keyboards.

Interestingly, Callahan has since disavowed Austrian economics and written a couple of novels.

Economics in One Lesson

Premier old right journalist wrote Economics in One Lesson decades ago.  He argues that in all areas of economic study it is imperative that one seeks not just the first level results but each consequential level as well.

The Price of Everything and The Invisible Heart

These two are genuinely interesting fictions that work to explain economics.  In the first he uses so-called price gouging to explain how Adam Smith’s ‘invisible hand’ allocates resources.  The invisible heart is a romance tail between a free market economist and an English teacher.  They fall in love through arguments on economics.  Can’t beat that for romance.

The Politically Incorrect Guide to Capitalism

This is Bob Murphy’s more pop economics book.  It works through all kinds of fun free market economic arguments.  I like to use it to compare the statements of politicians to the realities of the universe.  Take that politicians.

Bonus: The Church and the Market

I saved Tom Woods’ only pure econ book for last because it is for a focused audience.  Woods, who is staunchly Catholic, compares various encyclicals and other statements from Catholic leadership to economic principles and explains the reality of things like a living wage.

Though it is written from a Catholic perspective the book works for any religion or non-religion based ethical system.

Double Bonus:Tom Woods’s Liberty Classroom

When I did Mises University several years ago I septupled (I think that means 7x) my knowledge of economics, history and general fun social science stuff in just a week.  Tom Woods has brought together the best of the Mises U professors and several other great PHDs to teach Austrian Economics from the ground up, the history of economic thought, interest rate theory and if you’re into it, libertarianism.

 

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Jockey Stocks

For decades Jack Bogle was a voice in the wilderness.  Boggle bought into the so-called efficient market theory which argues that there is no way to consistently beat the market.  If you can’t beat the market why not just invest in the whole thing?  Choosing to invest in the entire stock market instead of chasing market beating returns with Harvard MBAs and insanely high fees, Bogle gave a normal people the ability to safely invest and sleep at night.

Over the past 80 years or 100 years or 150 years; any measure of time that includes and up and down cycle the stock market has performed better than just about any other asset class accessible to normal people.

As time went on more and more investment companies jumped on the bandwagon and the 401(k)-benefit plan made passive investing an option for millions of Americans.  The invention of Exchange Traded Funds (ETFs) and the proliferation of online discount brokers cut the time and effort it took to invest by somewhere between 40 and 94%.

Individual investors went from CDs and savings accounts to ETFs focused on gold miners or ETFs giving you 3x leverage on the S&P 500 or ETFs that only purchase undervalued stocks with good momentum that are run by CEOs who are in at least three different secret societies in a generation.

In response to a decade of 0% returns ETFs following single or multi-factor strategies (but still employing no active management) sprung onto the market.  The strategies focus on companies that are small or undervalued or show good momentum or buy back stock or have raised their dividend for 37 straight years.  Many of these strategies are legitimately good and have academic studies backing them.  Many more glom onto the most recent fad in the market (like the Bitcoin ETF the Winklevoss twins tried to start) and produce nothing but endless sadness.

As with all seeming free lunches the passive investing trend seems to have formed somewhat of a bubble.  As billions upon billions gets transferred out of active funds, that have underperformed for decades, into passive strategies the success of passive strategies is priced away.

So, what is the individual investor to do?

The answer I pursue is to meld active and passive investing together.  In prior books and on my website, I have written about special situation strategies (How to Hack Wall St.) that allow enterprising individual investors to find profits in areas where big institutions cannot and about using technical analysis and trend identification to time when to enter and leave markets.

My favorite strategy, however, is to focus on ‘Jockey Stocks.’  Jockey stocks are companies run by genius capital allocators.  Managers who can identify the right place to be in a bull market while also snatching up distressed assets on the cheap in bear markets.

The origins of these capital allocators runs the gamut.  Some have beat the market with a hedge fund for decades, some simple combine an insurance companies with solid investing and some aren’t even based in the finance industry they have just proven that they know how allocate capital efficiently.

In this book, I will profile each of the Jockeys I have chosen as well as the vehicle(s) they currently utilize.  Each profile will detail the history of the Jockey and what returns they have produced to date and produce a back-of-the-envelope valuation of the company or companies they run.

Our goal is to create a rock-solid portfolio of jockey stocks that will perform just as well as the electric car producing con-men in bull markets but also weather the certain but impossible to accurately predict financial crises to come.

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Austrian Economics and Investing Intro

Throughout middle school and most of high school I thought of myself as fairly well educated politically.  I was a run of the mill reactionary neoconservative following 9/11.  As I believe is typical among young people I had horse blinders on in anything political.  The right-wing radio position at the time was the one with which I identified.

As is also typical among young people, I eventually underwent a massive change politically from what I had believed and from what my parents believed.  It started with a couple books.

First, was the Politically Incorrect Guide to Capitalism.  To this point my economic opinions consisted solely of: if the government cuts taxes, businesses will be able to invest more and the economy will improve – the classic supply side/Reganomics view.  Robert Murphy[1] showed how the free economy can manage the allocation of all resources and how government intervention always takes away from the natural profit/loss mechanism.

Next, was Somebody’s Gotta Say It by right-wing talk radio host Neal Boortz.  Boortz’s foreign policy and immigration takes preclude him from the land of libertarianism but his was the first book I read that categorically questioned the motives, morality and effectiveness of government.

From there I started reading about free market economics, starting with Milton Freidman and graduating to what is now known as the Austrian School.  The weekend before I started my freshman year of college I spent the time that I had allocated to doing an assigned college reading assignment glued to Atlas Shrugged and my neo-conservatism was history.

My college career from then on was spent arguing with Keynesian economics professors or Communist Spanish professors and my free time was spent reading every book I could find from the Mises Institute and eventually visiting it for their week long ‘Mises University,’ program.

Meanwhile, the value investing world in which I had immersed myself starting at age 13 began to slowly slip out of my grasp.  Time that I had before spend reading an annual report or projecting future cash flows went to watching an economics lecture or trying to figure out what I really thought about abortion.

I did not forsake investing totally, however.  I began to move into the land of shady newsletter writers and gold bugs.  Gold was one of the few assets at the time (2010) that had a materially positive return over the past decade.

The arguments of luminaries such as Doug Casey or Porter Stansberry that one could effectively use good economics to predict the results of government intervention and speculate thusly made a lot of sense.

The main argument was and still is that never ending “printing” of money by the unrestrained central banks of the world would lead to inflation.  This is a fairly straight forward concept which we will discuss more later on in the book: if the amount of things you can buy in an economy stays constant and the amount of money in the economy increases, the prices of things you can buy will go up.

On the face of this doesn’t seem like much of an investing strategy.  However, when you can find assets who will hold their value during inflationary periods you can use them to protect against that inflation.

So I dedicated a very large portion of my portfolios and those that I managed to gold and silver and the miners of both.

This went well for a while and I thought of myself as very smart and agile as an investor.  Unfortunately, I did not use many of the investing principles discussed later in this book to safeguard my assets and when the QE’s kept happening and the banks refused to lend, inflation did not happen and many investors left gold thinking it had been in a bubble.

It then collapsed from prices over $2,000/oz to less than $1,200/oz and my portfolios mostly went with it.

This book is the result of a lot of soul searching and book reading over the past five years to discover how I could have invested differently and how I could have adapted to changing scenarios while still utilizing the backbones of Austrian Economics and Value Investing.

We will start with Austrian Economics, going from the statement, ‘humans act,’ to supply and demand, interest rates, the consequences of government intervention, business cycle theory and the virtues of gold as a currency.

Austrian economists alone have predicted every major US financial crisis (and many of those in foreign markets) in advance since before the Great Depression.  Austrian theory can be used to explain the fall of the Roman Empire, the Tulip Bulb Bubble, why housing prices inflated to the point of no return in the mid 2000’s and even why textbook prices and college tuition are skyrocketing.

Then we will move on to investing looking at: how to take advantage of knowledge about supply/demand both in consumer products and commodities and in stock volume, predicting which industries will benefit from free market forces and ole faithful – protecting ourselves from inflation.

[1] Whose book Choice I eventually used to produce the economics portion of this book.

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Confessions of a Teenage Investor Intro

As this eBook has a very tenuous link to being necessary I thought I would write a quick introduction explaining my thoughts on publishing it. I had a wealth (like 107 pages worth, high five) of old blog articles and message board posts and I thought it would be stupid to try not to utilize them in some way.  And it’s just fun (and at times very embarrassing for me) to go through these old articles and relive that time.

Anyway, I should probably explain who I am. My name is Mike Price. As of this writing (November 2016) I am a 26 year-old SBA underwriter.  I started my first investing website when I was 15. That site eventually reached 100k page views and made me a couple grand, which was nice.

Unfortunately, I lazied out in college and stopped updating it. My interests went from investing to economics and science and girls and working and several other things that eventually resulted in the site no longer being updated.

So, when a poor economy and my own lack of job getting ability landed me a job I was not 100% satisfied with I started working on building a new website. The new site, rightpriceinvesting.com, is centered around my plan to become a millionaire. I’ve written a couple eBooks on investing and becoming a millionaire and will link to them later.

For this eBook I collected every blog post and every important message board post.  Copy edited them.  And then added footnotes with quips about my personal story at the time and updates on the returns of the stocks I wrote about.

Reading through these old posts allows us to see where I made good decisions managing my portfolio and where I missed completely obvious things.  The things I did right should be replicable by any individual investor willing to spend a little time on it – if a 15 year-old could do it you have no excuse.  The mistake I made could also be made by anyone.  The obvious sum of these two statements is that only dinguses wouldn’t read this book.

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