Fantasy Portfolios

We have been creating fantasy investment portfolios for decades.

These portfolios are more serious than fantasy football and have helped readers earn fortunes.  We create them to study and learn, as well as invest.

Many subscribers use them to develop their investment decisions.

I do.

Sometimes they are in the doldrums.

Other times they have huge success.

Whether up or down… from our studies of fantasy…. we learn.

For example in November 2006 working with Thomas Fischer (ENR Asset Management) we created five fantasy portfolios.  By October 2007 they were up 37.19%  – 42. 06% – 47.94% – 105.22% and 236.14%.

This scared the heck out of me.  No one is that good for long!

I issued numerous warnings.  On October 14, 2007, I sent my subscribers this note of extreme caution:

Okay it’s time to turn the burner down.  Look at the performance of the five multi currency portfolios we have formed and track.

These are really good numbers. Incredible actually…beyond world class. Especially considering that the 2006 Emerging portfolio we created and track was also up 114% last year.

The problem is that readers are beginning to think we should expect this type of performance all the time.  Don’t…please or you will be disappointed.

I am start to get requests that suggest some readers are seeing only the upside we currently enjoy.  One reader recently wrote:   “ Gary I want to set up a multi currency sandwich without risk.  I do not need the fantastic returns and can do fine with just 20% per annum.”

20% per annum is more than a fantastic return.  If you can attain this on a long term basis you are one of the best investment managers in the world!

We’ll always do our best and the year ahead could be a very good year.  Returns in equity markets have been phenomenal in the past four years…due to high GDP Growth and falling interest rates. Earnings growth has explained more than 100% of global equity returns in the past and unusual bull market.  There has not been a general expansion of P/E multiples so far.  Global P/E ratios are about the same now at 15 times earnings, about the same as 1987 before the rose all the way to 24 in 1999 which leaves the equity markets less vulnerable than normal. Equities are not expensive.

Yet keep in mind that though equity markets are efficient in the long run they are not effective short term due to human behavior.

Please remember the following rules of thumb about investing.

We should expect 7% to 10% annual return in the stock market as a function of global nominal GDP growth and long term earnings growth plus risk premium over bonds.

Getting higher growth comes from increased risk or luck.

We have increased risks through leverage at a time of strong market growth.  Our value analysis has allowed us to even enhance the returns more.

We always like to put together top performing portfolios but our mission statement is to track portfolios and learn from them as they rise and fall.  Periods of high performance are followed by times of low returns.  We never know for sure when an upwards cycle will stall.

Not all my subscribers heeded this advice.  The logic of leaving overheated markets was not in dispute.  Yet they held on.  I hated it when their overheated, leveraged portfolios collapsed.

Yet we humans are not always creatures of logic.

This is why I was happy to see Richard Thaler, of the University of Chicago Booth School of Business, win the Nobel economics prize for making economics human again.

Thayler documented the way people’s behavior doesn’t conform to economic models that portray them as perfectly rational.

People often make decisions that are not in their best interests.

This lack of logic brings serious economic consequences.  Older generations haven’t saved enough.  Americans kept buying houses at overheated prices in the mid-2000s. This created a bubble that created the biggest economic meltdown since the 1930s.

Some of my subscribers kept their inflated, leveraged portfolios in 2007…  and lost everything.

To protect our investments, we need to take our human fallibility into account.

We are busy.

We are absent-minded.

We are lazy.

We make poor economic choices.

We don’t save enough for retirement.

We refuse to cut their losses on plummeting investments because we won’t own up to mistakes.

We buy houses and stocks when prices are high, thinking that what’s going up today will always keep going up.

They won’t… keep going up… in the short term

Thaler’s research has implications for economic policy.  In the”Nudge” book, written by Thaler (and Cass R. Sunstein) the authors suggest how policymakers find ways to coax, rather than coerce, people into making the right economic decisions.

The Nudge book can help change the way you think about the world.

At this time when the value of information has been so diluted this book not only helps understand how we think when we invest, but helps us get a better grasp on public policy and politics.



Learn more about the Nudge Book at

I write and speak mostly from experience… not theory.  This means I invest in the fantasy portfolios we create so subscribers can see how the fantasy does in reality.  Learn more about our current fantasy studies below.


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