Buy sell hold? Willy
The market is too volatile to make any near term predictions but I can say with no uncertain certainty that we are within 14.27384% of an EFA bottom. This is “THE” bottom, never to be penetrated again. This is an “it” bottom. We may not ever hit that bottom. The bottom may have been on Friday. It’s a good risk/reward to bet on some now. I’m not a bottom person but I do enjoy a good bottom now and then. My wife certainly has a nice bottom. But i digress. I’ve heard from many places that EFA is doomed, Europe follows u.s., etc. etc. but I haven’t heard anything to make me question it fundamentally. I put the top 50 holdings in a spreadsheet and the cashflow is good. The top 50 holdings make up 50% of the 817 names. The future estimates are high but the market clearly doesn’t believe them (around 10x!). The index has 25% financials according to yahoo and the euro is tanking so that’s the best bear case I can find that makes sense. Obama is pro-europe so he won’t cut off trade or do anything silly. I’ve mentioned this before; a compelling case can be made for EFA if you study it’s historical returns. It hardly ever sells off as much as it already has. In fact, if you backtested what would have happened at any time since 1970 had you bought EFA after a -22% year, your 4 year average annual return following the bad year would be 18% (that is 7% higher than it’s average return since 1970). Even more interesting… if you bought EFA after an above average year (any year it returned more than 11%) your average annual return for the following four years would be 9% (half the return of buying after a bad year). This is God’s own way of punishing all those silly people who pile on to investment that have been doing good. I believe God is a contrarian value investor like all of us here. The one big hitch in my statistics, and what would probably concern a fund manager worried about near term performance, is that 1 out of 4 bad years is followed by another bad year. Buying at $50ish would be the same as 2 bad years in a row so it’s like a statistical condom. It protects you but it limits the fun & heroic feeling you get when you cheat the stork. I compare it to buying something, watching it tank, then celebrating as it goes up. (That’s why I called $50ish a likely bottom). I’m not a daytrader but I bought a ton on Thursday because it hardly ever goes down 3.5% like it did that day. I sold it this morning at the open at 9 cents under the high. I had a sell order in. I was sleeping when it sold. I’ll admit I was lucky. I still have EFA in my IRA and some accounts that I manage that are a pain to access (thus don’t get much attention). I think EFA is a fine investment for the right person but you may see it go 14.235235% lower over the next year or so.
EAFA is basically the developed markets less US. Too many structural problems with Japan & Europe which makes up the bulk. Europe is a dog. Japan is a dog with flees. Can’t get excited. You’re taking on higher volatility with pretty high correlation to US, so you gotta go for growth (gdp, population, participation rates, investment, surpluses/reserves, trade, productivity, etc) - much better prospects in emerging markets/Asia, if you’re looking at regions.
I suppose as a long term investment EAFE might not be bad, and although I am impressed by all the statistics that Virgin has, I’m not sure I’d buy based on the fact that “it’s almost never gone down this much.” I’m not entirely against technical pattern analysis, but there’s just too much change going on in the world economy to rely almost entirely on historical technical patterns. EAFE might be better done as a pairs trade vs the US economy. Long EAFE / Short Russel 1000. This depends on how tightly coupled you think the markets are with the US, and how long the lag is between US down performance and EAFE. BTW Virgin, I admire your dedication even if I disagree with your conclusion. What backtesting software do you use?
null&nuller Wrote: ------------------------------------------------------- > EAFA is basically the developed markets less US. > Too many structural problems with Japan & Europe > which makes up the bulk. > Europe is a dog. Japan is a dog with flees. > Can’t get excited. You’re taking on higher > volatility with pretty high correlation to US, so > you gotta go for growth (gdp, population, > participation rates, investment, > surpluses/reserves, trade, productivity, etc) - > much better prospects in emerging markets/Asia, if > you’re looking at regions. it is not about dogs and cats…it is just that we are in an a “one non-perfect” global market…highly correlated…so I would more say “cats and dogs which bite their tails”
I backtested with Excel. I put the historical returns in a column then created a matrix off to the side of all the returns after each year, for various periods. You can then easily see the returns following the really bad years, or the good years. It’s an interesting way of looking at data. I agree that a lot of stuff is changing. Who knows what stocks were included in that index in 1970? I just know that a lot of crazy stuff has happened over the last 37 years and some of it was arguably crazier than what we’re going through right now. I wouldn’t do this kind of investing on anything but a low expense, broad market index (that happens to have a nice yield, too) in a passively managed account. Remember how index construction sort of works. Figuratively, an index fund is like a fish net. The strings in the net are the companies. Every year those strings are adjusted, replaced, repaired, etc. but the idea is that the net will be in the stream regardless… catching fish (dollars) as the water (the economy) moves through the net. The fish may get skinny, the water may move slowly, etc. but the net will catch more fish than the guy on the sidelines with a shotgun (hedge fund) or the fishing pole (stock picker) or the value investor (waiting for the river to run dry so he can just walk out there and pick them up and eat them) or even the growth investor (off behind a tree, quivering until everyone else come back).
That’s true. And the composition of the index will change as companies are added/dropped from the index. Barring nuclear war, internal revolution, or total economic devastation, an index pretty much can’t go to zero, whereas individual stocks can and do.
virginCFAhooker Wrote: ------------------------------------------------------- > I backtested with Excel. I put the historical > returns in a column then created a matrix off to > the side of all the returns after each year, for > various periods. You can then easily see the > returns following the really bad years, or the > good years. It’s an interesting way of looking at > data. > > I agree that a lot of stuff is changing. Who > knows what stocks were included in that index in > 1970? I just know that a lot of crazy stuff has > happened over the last 37 years and some of it was > arguably crazier than what we’re going through > right now. I wouldn’t do this kind of investing > on anything but a low expense, broad market index > (that happens to have a nice yield, too) in a > passively managed account. > > Remember how index construction sort of works. > Figuratively, an index fund is like a fish net. > The strings in the net are the companies. Every > year those strings are adjusted, replaced, > repaired, etc. but the idea is that the net will > be in the stream regardless… catching fish > (dollars) as the water (the economy) moves through > the net. The fish may get skinny, the water may > move slowly, etc. but the net will catch more fish > than the guy on the sidelines with a shotgun > (hedge fund) or the fishing pole (stock picker) or > the value investor (waiting for the river to run > dry so he can just walk out there and pick them up > and eat them) or even the growth investor (off > behind a tree, quivering until everyone else come > back). Now that is classic …on a side note what do you guys think about SPDR’s GOld trust ?
A report I read a few years ago said that goldbug hoarders only account for 16% of demand (these are people who might buy in response to silly gov’t monetary policy, inflation protection, etc.). So, if that other 84% of demand is deciding they’d rather have something else… then gold prices drop. So, i’m not crazy about gold. Statistically, it does provide some diversification benefits in a passive portfolio but I think it’s an illusion because it has no fundamental expected return like an index of stocks or bonds.
I’d be curious as to the amount of revenue which the companies in the ETF derive in the United States.
Perhaps I mis-spoke. The iShares MSCI Canada is what I had meant: not the EAFE. Sorry that was my bad. The Canada is basically Potash, Rim, RBC, Encana and the usual Canadian equity suspects. With today’s pull back I basically have a flat position. Willy