2/26/2017 That Notorious Buffett Bet

Sector Model	XLU	6.69%
Full Model	Date	Return	Days
BT	8/11/2015	-39.56%	565
DY	10/30/2015	6.57%	485
TMK	11/23/2015	29.59%	461
UPLMQ	12/1/2015	84.79%	453
NVR	12/16/2015	16.27%	438
CMP	2/19/2016	12.95%	373
NVR	2/22/2016	21.17%	370
ENOC	3/15/2016	-22.81%	348
AMWD	3/17/2016	18.43%	346
CASY	5/12/2016	3.12%	290
AVB	5/24/2016	3.94%	278
AEM	6/7/2016	-9.44%	264
ESRX	6/13/2016	-5.74%	258
AMED	6/16/2016	-3.93%	255
FRO	6/27/2016	-11.79%	244
ASTE	7/12/2016	8.79%	229
MFC	9/1/2016	35.53%	178
SFM	9/8/2016	-1.58%	171
CFFN	9/12/2016	10.72%	167
FIG	12/6/2016	56.89%	82
(Since 5/31/2011)
S&P	Annualized	10.34%
Sector Model	Annualized	16.78%
Full Model	Annualized	13.03%
S&P	Total	75.98%
Sector Model	Total	143.78%
Full Model	Total	102.05%
Sector Model	Advantage	6.44%
Full Model	Advantage	2.69%
	Previous	2017
S&P	66.43%	5.74%
Sector Model	120.54%	10.54%
Full Model	91.27%	5.64%

In the news this week is a bet that Warren Buffett made against hedge funds – arguing that during a 10 year period the S&P would out-perform any given list of at least five hedge funds selected from the start of the bet.

The bet is notorious for two reasons: 1) the hedge funds didn’t line up to bet against Buffett, and 2) the S&P is on track to win the bet.

What it is not notorious for is that it is a fake bet.

If you want to make as much money as possible over a long period of time, the S&P will usually out-perform bonds, gold, age to retirement mutual funds, and for that matter pretty much every mutual fund out there.

A ten year time frame is usually a good two market cycles.  And if I had been Buffett I would have suggested SLY (a small cap ETF) instead of SPY (the S&P ETF).  In fact that’s exactly what I told my oldest son a few months ago when he asked about investment advice.  ETFs also have the advantage that you don’t have to pay taxes until you sell, so they are as good as an IRA account for a similar set of stocks.

So why hedge?

If you aren’t already rich, there’s no need.  And, if you have at least 10 years until retirement there shouldn’t be any need either.  It’s not impossible to lose over a 10 year period, but it’s not common.  If you were to make that wager for every 10 year rolling period in your life you’d win the bet most of the time.

And that’s the point of the Buffett bet.

But for hedge funds, it’s a fake bet.  Hedge funds are for people who are already rich and don’t want to lose too much money.  They aren’t trying to gain more than the market long-term, but lose less in a downturn short-term.

Buffett knew this when he offered the bet.  So did the hedge funds when they didn’t take him up on the bet.

But most of us don’t know it, and so the bet has a rhetorical point for us: go long – not just long vs short, but long-term vs short-term.  If you want to save for retirement, give yourself as much time to save, save as much as you can, and park it in an asset class that USUALLY outperforms the others. 

So for my 30 year old son I suggested small caps.

If he were in his early 50s I’d suggest large caps.

After that perhaps looking at bonds.  Hopefully in the next 25 years bonds will become attractive again…

But hedging?  To GET rich?  No.  Hedging is for those who have too much to lose.  That excludes most of us lower mortals.  If you’re reading a blog online that’s probably not you.

Tim

2/19/2017 There is nothing normal about a perfectly "normal" market

Sector Model	XLU	2.51%
Full Model	Date	Return	Days
BT	8/11/2015	-42.43%	558
DY	10/30/2015	5.05%	478
TMK	11/23/2015	28.87%	454
UPLMQ	12/1/2015	93.27%	446
NVR	12/16/2015	14.33%	431
CMP	2/19/2016	15.28%	366
NVR	2/22/2016	19.15%	363
ENOC	3/15/2016	-18.03%	341
AMWD	3/17/2016	13.75%	339
CASY	5/12/2016	3.26%	283
AVB	5/24/2016	1.37%	271
AEM	6/7/2016	-6.45%	257
ESRX	6/13/2016	-7.83%	251
AMED	6/16/2016	-4.84%	248
FRO	6/27/2016	-8.79%	237
ASTE	7/12/2016	20.17%	222
MFC	9/1/2016	41.12%	171
SFM	9/8/2016	-2.85%	164
CFFN	9/12/2016	11.59%	160
FIG	12/6/2016	57.28%	75
(Since 5/31/2011)
S&P	Annualized	10.24%
Sector Model	Annualized	16.03%
Full Model	Annualized	13.27%
S&P	Total	74.78%
Sector Model	Total	134.24%
Full Model	Total	104.06%
Sector Model	Advantage	5.79%
Full Model	Advantage	3.02%
	Previous	2017
S&P	66.43%	5.02%
Sector Model	120.54%	6.21%
Full Model	91.27%	6.69%

I mentioned a few days ago that the market was stuck in a parking lot.  My sector model is resting on its long term regression line, and the S&P is doing the same.

Perfectly normal, right?

Well, no.  It’s actually NOT normal for the market to be resting exactly on its long term regression line.  The problem is that no one is confident which direction the market should go in. 

On Friday the S&P closed at 2351.16.  The long term regression line is at 2298.  That’s extremely close.

One standard deviation above is 2947.  It would be “normal” for an optimistic market to be there.

What about a pessimistic market?  Well a “normal” pessimistic market would be 1767.

Just for fun I drew two standard deviations above and below, which are 3812 and 1369, respectively.  68% of the time the market should be between those!

And what are we to learn from all of this?

ALMOST nothing.  Look at those lines again.  They say nothing meaningful for investors except for the one thing they have in common: they go up.

The market goes up and down and wriggles all around at dizzying heights and pits of despair, but those investors who save in an index fund or long term investments will tend to gain over time.  To MAKE money in the market, SAVE money in the market – not by trying to avoid loss, but rather by consistently adding to your retirement account.  What about gold or bonds or stocks?  Stocks have better long term returns, but they all eventually go up.  Save early and invest long.  If it’s not enough then learn to live on less so you can save more – because if you don’t do that you’ll have to learn to live off nothing when the savings are all spent.

Are you absolutely guaranteed to live well if you save well and invest long?  Of course not.  But you ARE guaranteed to do even worse if you save poorly and invest late.

Tim