Invest Better Than a Hedge Fund Manager


I started the Purposeful Investing Course December 2015 when I realized that odds are you can , very easily and simply manage money better than a hedge fund manager.  

In 2015, an Economist article “Roaring Head” (1) explained that since the early 2000s ETFs (non active funds) had performed better than hedge funds.   For a decade hedge funds managers had been under performing ETFs.

hedge fund chart economist

Chart from Economist article about ETFs versus hedge funds “Roaring Ahead”.

A half decade later nothing much has changed.

In 2019 the top hedge funds did perform better than the top ETFs, but a look at three year performance shows that ETFs are still superior investments when it comes to increasing wealth.

Here’s a comparison of top performing hedge funds and ETFs for 2019, but showing their three year instead of just one performance.

Hedge Fund                   Three Year Performance             ETF                                  Three Year Performance

Kerrisdale Advisers                     32.85%              Market Vectors-Rupee/USD (INR)             81.57%

Sylebra HK                                       28.9%                 Invesco Solar (TAN)                                      76.03%

Whale Rock Capital Mgt.            27.48%             iShares US Home Construction                    68.15%

Aisling Capital                               27.42%              VanEck Vectors Semiconductor (SMH)      95.95%

Scge Management                         25.64%              SPDR S&P Semiconductor (XSD)                 84.84%

Dorsey Asset Management          25.15%              Aberdeen Std Physical Palladium (PALL)  145.83%

Night Owl Capital Management 24.16%            iShares PHLX Semiconductor (SOXX)        104.10%

There are a variety of important investing conclusions we can draw from these results.

First and foremost… low cost inactive ETFs still provide better medium term performance overall.  All seven of the best performing hedge funds for 2019 strongly over performed the top performing ETFs for 2019, but once you start looking at longer periods of performance, the ETFs have greater strength.

Second we can see that picking the correct sector makes a huge difference.  Anyone who selected palladium, semiconductors or US home construction as their sector of choice three years ago… looks like a genius.

Obviously it was non of the hedge fund managers.

How do we choose the correct sector?

Therein lies the problem . We cannot know which sectors will perform best in 2020.

Due to our experience, we may know something about something that helps us select a sector that will do well in the year ahead.

For example, someone in the car manufacturing business might have known something about catalytic converters that would increase demand for palladium (more than half the supply of palladium is used in catalytic converters).  Or a person in the semiconductor might know something that would cause a price increase in semiconductor shares.  Ditto for those in the US home building industry.

You might have insights into some particular situation that suggests a promising sector in the year ahead.

Yet seeing the future is like predicting the weather.  The further you see, the poorer the vision.

The future is unknown… hence value investing.

“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”  Warren Buffett

We cannot see into the future, but we can depend on nature seeking the path of least resistance.  We can see the price we are paying for future profits now.

Gary

Here’s ten most important words (and numbers) for the 2020 decade…  MSCI World Index All-Time High Valuation December 31, 1999.

Keep these word and numbers in mind when thinking about the stock market this year.

Here is the all time high valuation for this index.   Price to book 4.23.  Price Earnings Ratio 35.7. Average dividend yield 1.30%. 

Those were the all time high valuations for the Morgan Stanley Capital World Index in December 1999, just before the dot.com bubble burst.

Here is a chart from macrotrends.com (2) of the Dow Jones Index for the past three decades.  You can see that bubble pop just before the beginning of the 2000 decade.

microtrends.com

Let’s compare some valuations.

                                                                                 Price to Book       P/E       Average Dividend

The All World MSCI World Growth Shares           5.22                28.4                 1.28%

MSCI  US Index                                                               3.65                 23.1                  1.83%

MSCI Word Index                                                           2.57                 20.0                  2.33%

MSCI World Index All-Time High                            4.23                  35.7                  1.30%

MSCI USA Index                                                            3.65                  23.1                   1.83%

These valuations create some important investing questions.

“Will the 2020 decade be more like the 2000s decade or the 2010 decade?”

“How close can the USA Index come to the all time high watermark before there is a correction?”

“Will the poor valuation of growth shares globally lead to a shift from growth shares to value shares?”

“Do shares world wide still have plenty of room to rise?”

Ask me again in January 2030 and I will know, but since no one knows the answers now, proceed with caution.

For the past four years, my strategy, to protect against the next stock market crash and yet gain from rising share prices is to invest in an equally weighted  of the value based portfolio of country ETFs we invest in and track in our Purposeful Investing Course is formulated.

The valuation of the top value portfolio we use as the basis of our portfolio is  now price to book  1.41, P/E ratio 14.4 and average dividend yield of 3.78%.

An equally weighted combination of top value markets offers the highest expectation of long-term risk-adjusted performance and the valuation of the top value portfolio is now undervalued by 37% compared to the MSCI World (Standard) Index, by 50% compared to the MSCI USA Index and by 62% compared to the MSCI World Growth Index.

Since no one knows what the future will bring, investing in value makes the most long term sense.

Our Purposeful Investing Course (Pi) teaches an an easy, simple and effective approach to zeroing in on value because little time, management and guesswork is required.  You are investing in a diversified portfolio of good value indices.

Sticking to math based stock market value and country ETFs eliminates the need for hours of research aimed at picking specific shares.   Investing in an index is like investing in all the major shares of the market.  You save time because all you have to do is invest in the ETF to gain the profit potential of the entire market.

To achieve this goal of diversification the Pi portfolio consists of Country Index ETFs.

Country Index ETFs are similar to an index mutual fund but are shares normally traded on a major stock exchange that tracks an index of shares in a specific country.  ETFs do not try to beat the index they represent.  The management is passive and tries to emulate the performance of the index.

A country ETF provides diversification into a basket of equities in the country covered.  The expense ratios for most ETFs are lower than those of the average mutual fund as well so such ETFs provide diversification and cost efficiency.

Here is the Pifolio I personally hold at the beginning of 2020.

70% is diversified into developed markets: Australia, France, Germany, Hong Kong, Italy, Japan, Norway, Singapore, Spain and the United Kingdom.

30% of the Pifolio is invested in emerging markets: Brazil, Chile, China, Colombia, the Czech Republic, South Korea, Malaysia and Taiwan.

iShares Country ETFs make it easy to invest in each of the good value markets.

For example, the iShares MSCI Australia (symbol EWA) is a Country Index ETF that tracks the investment results the Morgan Stanley Capital Index MSCI Australia Index which is composed mainly of large cap and small cap stocks traded primarily on the Australian Stock Exchange mainly of companies in consumer staples, financials and materials. This ETF is non-diversified outside of Australia.

iShares is owned by Black Rock, Inc. the world’s largest asset manager with over $4 trillion in assets under management.

There is an iShares country ETF for almost every market.

How you can create your own good value strategy.

I would like to send you, on a no risk basis, a 130 page basic training course that teaches the good value strategy I use.   I call this strategy Purposeful Investing (Pi).  You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

When you subscribe to Pi, you immediately receive a 120 page basic training course that teaches the Pi Strategy.   You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

You also begin receiving regular emailed Pifiolio updates and online access to all the Pifolio updates of the last two years.  Each update examines the current activity in a Pifolio, how it is changing, why and how the changes might help your investing or not.

Included in the basic training is an additional 120 page PDF value analysis of 46 stock markets (23 developed markets and 23 emerging stock markets).  This analysis looks at the price to book, price to earnings, average yield and much more.

This year I will celebrate my 52nd anniversary of global investing and writing about global investing.  Our reports and seminars have helped readers have better lives, with less stress yet make fortunes during up and down markets for decades.  This information is invaluable to investors large and small because even small amounts can easily be invested in the good value shares we cover in our seminar.

Those five decades of experience have taught me several incredibly valuable lessons.

The first lesson is that there is always something we do not know.

The second lesson is that stock market booms and busts always eventually return to value.

Third, the only sure way to succeed is to use time not timing.

Time is your friend when you use a good value strategy.  The longer you can hold onto a well balanced good value portfolio, the better the odds of outstanding success.

A 45 year portfolio study shows that holding a diversified good value portfolio (based on a  good value strategy) for 13 month’s time, increases the probability of out performance to 70%.  However those who can hold the portfolio for five years gain a 88% probability of beating the bellwether in the market and after ten years the probability increases to 97.5%.

Subscribe to the first year of The Personal investing Course (Pi).  The annual fee is $299, but to introduce you to this online, course that is based on real time investing, I am knocking $102 off the subscription.

Guarantee

Enroll in Pi.  Get the basic training, the 46 market value report and access to all the updates of the past two years.

 I guarantee you’ll learn ideas about investing that are unique and can reduce stress as they help you enhance your profits through slow, worry free, easy diversified investing.

If you are not totally happy, simply let me know in the first two months for a full no fuss full refund.

You have nothing to lose except the fear.   You gain the ultimate form of financial security as you reduce risk and increase profit potential.

Subscribe to Pi now, get the 130 page basic training, the 120 page 46 market value analysis, access to over 100 previous Pifolio updates, plus begin receiving regular Pifolio updates throughout the year.

Subscribe to a Pi annual subscription for $197 and receive all the above.

Your subscription will be charged $299 a year from now, but you can cancel at any time.

Gary

(1)  Roaring Ahead

(2) www.macrotrends.net/1319/dow-jones-100-year-historical-chart