Tag: t_regimeChange

From one era to another

[19]U.S.beat`all markets over3Y+ #Nsdq

Posted on by tiger40490

Alan Tan … said U.S. stock market shows self-renewal.

see also the older blogpost [14] long-term +ve trend: U.S.only

My conviction is based on 1) data 2) explanation.

  • Data: I guess U.S. market dwarfs Europe and Japan markets, among the established, mature markets.
    • Explanation: Hkex, in my view, is dominated by China-themed stocks [H-shares, P-chips] and viewed with suspicion except in Chinese-dominated communities [like SGP, MYS]. Globally, I think China stocks are perceived similarly to India stocks, Russia stocks, Korea stocks, Latam stocks.
  • Explanation: global mind share — U.S. equity enjoys disproportionate mind share among the investing public as well as the professionals. When a new investor think of stock markets to invest, U.S. stocks and indices are the first to consider and often the default choice. If investors form a pyramid, then the base layer (largest number) investors would choose US stocks in addition to their homeland stocks. The base layer won’t bother with Europe or Japan stocks.
  • Explanation: passive investing — Increasingly more investors choose passive index funds. I believe there are many more index funds for U.S. market than non-US markets. Also the U.S. index funds are more mature and have longer track record, attractive to the less confident base layer of investors.
  • Explanation: optimism — majority of U.S. stocks are owned by Americans. Americans are more optimistic. Even non-Americans are more optimistic about U.S. stocks than their homeland stocks !
  • hypothesis: global herd instinct — I now believe that herd instinct is in America’s favor.
  • hypothesis: Many professional funds [offered by banks, insurers, pensions] have a theme like regional theme or sector theme … I think they invest in U.S. stocks more than non-U.S. stocks.
  • Explanation: hot money — There’s more hot money than before, such as those BRIC citizens. Hot money follows mindshare
  • Explanation: Majority of the symbols listed in the U.S. are U.S. companies. They are often more profitable than companies in other countries.
  • Explanation: in a down turn, some U.S. blue chips are perceived as safer, defensive.
  • Explanation: USD — is perceived as a safe haven currency and a default currency. JPY and EUR? no big stock market to match America’s

I’m slightly more “independent” in my thinking. For yeas my U.S. allocation among my equity holdings was around 10% to 20% no more than 25%. I also flipped through the influential [[irrational exuberance]] written before the dotcom crash.

==== shorter trough, faster recovery
I like Jay Seide’s summary — the broad U.S. stock index always rebounds after a big correction. See [[irrational exuberance]]. Using whatever arbitrary criteria, let’s say there have been 20 crashes over 20 years. Among them, this rule has seldom been broken — recovered within 3 years, usually within a year.

However, Longest trough in Nsdq100 is 17Y

Q: why U.S. stocks show better trough i.e. faster recovery?

— reason for China’s long trough: retail investors tend to bid up the price too high, resulting in a super-long trough. In contrast, U.S. market has more institutional investors. Vance of DBS pointed out that China markets are increasingly open to foreign institutional investors
— [warning] data sample size is very small
There are not 500 regions where only one region (US) is head and shoulders above the rest (like Linus Pauling who twice won Nobel prize unshared).

There are not 90 (non-overlapping) trough periods in a data sample where the shortest 5 all belong to the U.S.

— [warning] regime change
— [warning] index composition differences ..  Vance of DBS believes the index component is one reason. He said STI has mostly sunset-sector stocks. However, I would say hot tech stocks tend to become overhyped leading to longer trough.

[21] %%G9 strengths as Investor #specifically

Posted on by tiger40490

k_investor_selfEval

The more specific/unusual the better. I hope to develop more strengths, and give my kids and younger friends.

  • —  my strengths, half-ranked by importance and rarity/uniqueness:
  • [a] compound return — some insights into projected exponential growth based on compound return
  • [a] eq regime change — some insights into market regime change, which cast doubt on a lot of stock market analyses, including published research papers
  • CPF knowledge — more than most people.
  • favor incremental small amounts in each investment decision. Most people commit too fast too much into risky investments. I made the same mistake many times (FXO, commodities 1997). Small amounts allow me to quickly get my feet wet, without a lengthy due diligence including (for stocks) last-minute news-analysis.
    • Compared to mutual funds, PE etc, I feel ETF/REIT/Stocks support faster, safer learning curve.
  • NAV-erosion of high-yield mufu
  • some observation about U.S. vs non-US stock market
  • SDXQ property — most people don’t realize the low NGRY due to large sqf, perhaps because they don’t care about rental yield.
  • NGRY and haircut — most people barely look beyond NGRY without knowing the magnitude of the haircut.
  • mutual fund annual fee — some wisdom (insight) about mutual funds cf stock-picking
  • my math/analytical skill to compute actual PnL taking into account of all costs + gains known to me. This may not be 100% all-encompassing, but better than the PnL analysis by the lay public. The small costs + gains are small IFF you are (naively) fixated on windfall, but not small when you come to terms with the small return rates.
  • stable burn rate — gives me quiet confidence during my long-term investment planning.
  • [a=academic theories]
  • — Below are not “strengths” per-se, more like preferences or personalities, but each is an important feature that define me as an investor.
  • my focus on current income when most fellow investors focus on total return which is usually dominated by asset appreciation. Though not a strength, this gives me a higher current income for the capital amount.
  • risk appetite (and some limited experience) with overseas properties
  • my aversion towards endowment products

— significance of these strengths? Not to be exaggerated or belittled. I want a fair assessment of the significance of these strengths.

However /tempting/ it is to derive and assign some numeric “value” to each strength, such numbers would likely be extremely unscientific and un-objective. Instead, it’s more useful to ask questions:

Q: Will these strengths grow in significance as my income drops in older age? I am 90% certain.
Q: Will these strengths grow in significance as my asset grows? I am fairly certain.
Q: Will my “worldly” wisdom grow with experience, in this and other domains? I hope so. Look at grandpa.

Investment loss can be devastating, not to be taken lightly.

gold^bccy^U.S.eq^rEstate: long-term strength #w1r4

Posted on by tiger40490

For the purpose of legacy planning (including inflation hedge), this blogpost is 51% about gold, 30% about stocks.

  • I see the strength in gold over a 200Y horizon. It has proven its strength over 2000Y. CB (Central banks) slowly build up and carefully transport gold reserve precisely because gold provides time-honored, enduring, strength to the respective currencies.
  • I see the strength in properties over a 70Y horizon, but this strength is location-specific. Discussed below.
  • I see the strength in U.S. stocks over a 30Y horizon, considering numerous regime changes.

— large holders of gold tend to be central banks. In comparison, here are the largest holders of other asset classes:

  • gov bonds — similiarly held by governments, banks, insurers, corporations. gov bonds provide strength and stabilization.
  • Commercial and large rental buildings — held usually by corporations and governments .
  • individual residential properties — held by individuals + corporations.
  • stocks — bought and sold by individual investors, buy-side institutions

Boom-n-bust … describes stock and residential property bubbles, not gold. However, gold can become overvalued.
— typical holding period

  • stocks — months, up to 5Y for retail investors
  • residential properties and long bonds — decades
  • gold — generations. I believe most large holders of gold don’t sell often. Say price is now $2k/oz. If a CB decides to sell 1% of its holdings, it would probably impact the market right away. Therefore, I suspect the large movement is due to small investors.

— Since the invention of money, gold has held its strength, so what could derail gold’s strength?
Disruptive technologies threaten to destroy the special position of petrol, but is there a disruptive technology against gold? I don’t see any sign.

gold offers inflation hedge only over the long term. https://www.cnbc.com/2021/06/08/gold-as-an-inflation-hedge-history-suggests-otherwise.html “If you look at the very long term, gold should hold its value against inflation. But in any shorter period, it may or may not be a good hedge”

==== other inflation hedges
Actually, I don’t worry too much about SG inflation.
— bccy

How about bccy as a long-term inflation hedge? Any proven inflation hedge must be stable. Gold is much more stable than BTC.

https://www.channelnewsasia.com/commentary/crypto-ftx-sbf-bankrupt-crash-binance-3068201 says
The value proposition of crypto was supposed to be a hedge to the dollar or more conventional parts of the market.

Or that it would hold up in value if everything else fell. But an asset that offers that kind of hedge is rare; most assets are somewhat correlated, especially when the market drops. Rareness normally means an expensive asset that offers a lower return, possibly negative yield. You pay a big price for that kind of safety and it’s hard to find. The fact that crypto offered such high returns indicated it was never a good hedge.

— “real asset”.. Some investment salesmen (or economists?) use “real asset” to refer to precious metals + rEstate. They find something in common between those asset classes — anti-inflation, and not based on a paper document like stocks and bonds.

Actually, I think SP500 ETF is also anti-inflation, but for a different reason. The Achilles’ heel of stocks as long-term inflation hedge (bold claim) is the short history of stock market .. 50Y vs 2000Y for gold. Regime change is rather frequent.
* I feel the price chart before 1945 is largely irrelevant.
* Due to high inflation high interest,, the price chart before 1980 is also largely irrelevant.

— property market is extremely location specific.
Eg: Beijing/Shanghai growth has been exceptional and unreasonable.

If your location is not a tier 1 city or attractive to the property-loving Chinese investors, then long-term capital protection is questionable.

##6ppa realistic longTerm return across asset class

Posted on by tiger40490

Q: What’s a realistic, reasonable expectation of long-term annualized compound return?

%%%%%%A: primarily depends on the historical period you are looking at, assuming we use historical return as a basis for forecast. Regime change is rather common. For example, real estate growth was very high for some time, but now … slower.

Rental yield is more stable and resistant to regime change.

%%%%%% A: depends on the asset class

  • My FundSuperMart equity investment averaged 3-5% over 4 years
  • GIC 20Y return is 6.1%.
  • hedge funds — if a fund can consistently deliver 6% (to their customers) it’s considered pretty good, according to an insider
  • insurance — I think 4% posted return is a common, conservative expectation.
    • CPF Life annualized return? Perhaps, presumably 5-7% with severe illiquidity .
    • Insurance as an asset class has poor liquidity and long lock-in period, but only 3% – 5% annualized return. Insurance companies typically achieve negative 10% to positive 20% investment return each year on their internal portfolio.
  • Property
    • My Blk 177 flat? roughly 10%+ excluding rental income.
    • top cities in Asia? roughly 10% – 15%
  • alternative investments
    • [a] 24% achieved over 2Y — German property private high-yield bond
    • [a] 28% achieved over 2Y — Brazil property private high-yield bond
    • [a] 33% per year to be delivered — Asian property private high-yield bond
  • [a=not compound annualized)

GIC 2015report: realistic20Y return #w1r2

Posted on by tiger40490

One of my A-list investment firm is the Singapore GIC. They publish annual report on their performance, including rolling 20Y performance metrics. I glanced at their 2015 metrics. The preceding 20Y (1995 – 2015) had some major ups and downs including dotcom boom and bust, 1997 Asian financial meltdown, the 2008 GFC, the boom leading up to it and the spectacular recovery afterwards.

If you look at a 5Y horizon you could see oversize annual returns (like 20%/year return) or negative returns…. all smoke and mirrors! I really want to see a long-enough window showing the cumulative effect of all of those short-term ups and downs. Well, 6.1% was the annualized return GIC achieved, which is comparable to a 6.9% return in their “reference portfolio” — 65% global stocks and 35% global bonds. (I think insurance products can deliver 3-4%.) 6.1% is considered high, so it’s probably unrealistic to achieve higher return than 6% over 20Y.

Other findings in the report:

  • property – GIC managers see it as an inflation-hedge. I see it as good diversification from stocks and bonds.
  • GIC portfolio is believed to be S$350b in total. 34% of that is allocated to US, 25% to Europe but not only stocks and bonds.

A fundamental implicit assumption in my comments above is ..

.. no regime change. In other words, the assets’ growth/devaluations are treated similar to natural phenomena like temperature, rainfall… that follow a consistent trend. There are random factors but the source of those factors are stable.

This is a fundamentally questionable assumption. Regime change is frequent and drastic IMO. If we look at equity return figures in U.S. stocks, the post-WW2 returns are very different from pre-WW2. Also, the equity returns in the 30 years after the war (reconstruction boom) were much higher than the recent 30 years. Yet another factor is technology (and energy) stocks, which occupy a significant position in U.S. equity indices. Did these growth factors exist in the 60’s? Regime change! The evidence in developing markets (Asia, Latam, BRIC…) are even “worse” i.e. too many regime changes. The volatility level is much higher now than N decades ago (N > 2). Therefore, I always feel cheated when a research uses 100 years of return data.

I think all serious economists know the limitations of “models” which ignores regime change, but I feel they can’t throw away most of the data and only use the last 20Y of return data.

We the lay public don’t realize the limitations. We see a long history of data and we feel reassured and emboldened. Surely if a doctor has treated 600 patients over 40 years, then she must be more trust-worthy than someone with experience on 200 patients over 10 years, right?

More and more scientists now recognize climate change is affected by human behavior so rainfall level fluctuations are different from 500 years ago i.e. pre industrialization. There are regime changes in nature too.

compound return snowball fallacy

Posted on by tiger40490

Q: How many percent of the average investor can achieve, say, 5-15% (average 10%) compound return every year over 20Y, like a snowball?
A: I would say one in 1000. Risk-free compound return rate is assumed to be 2%, so 10% is not easy and not common. More realistic is 4% compound return. Looking at the 4% CPF calc, I think the noticeable effect  of compounding requires consistent high return and a holding window of 20+ years. Most people don’t have a lot of money to put aside for so long. Therefore, I think compound return is overrated.

From now on, my focus will be mostly equities.

Most textbooks say that it’s a standard and useful (but few say “safe”) assumption to assume an investment has an average annual
return of x% (say 5% per year) and therefore we can expect to get exponential compound return if we hold it a few decades. http://www.forbes.com/sites/greggfisher/2013/03/11/savings-start-early/ and many articles quote famous people saying compound return is such a great, under-appreciated secret.

In recent years I have looked at hundreds of equity (or balanced) portfolio performance charts. Most of them are “with dividend reinvested“. All of them are supposed to exhibit ECR [exp compound return]. Now I can safely say that with equity mutual funds (perhaps due to annual fee), the Compound Return is a joke, a lie, a misleading math model and unrealistic theory.

Mathematically, if you write down the annual returns of any security, you get a series of numbers you can average. Ok 2%. So on average $1 becomes 1.02, and then becomes 1.02*1.02…. yes compounded, but that’s a mathematical procedure on paper. ECR would show an exponential growth, (slightly) curving up. In reality, I see very few such curves. For most equity funds, most often i see a flat trend i.e. up and down but no up-trend. Yes some funds show an up-trend, but nothing exponential.

I think the problem with the mathematical procedure is, taking the average return and using it to plot an exponential growth path is completely off the actual path. The 2 paths don’t match at all. The exponential path is, in my opinion, unrelated to the real path and doesn’t represent anything meaningful about the investment.

(I should include a graphical example.)

The conventional wisdom says “start investing in your 20’s to capture compounded returns“. Some investors are able to stick to a fund with $20k and see the NAV growing long term, despite short term fluctuations. Consider my GS 401k. I don’t notice any compound return.

The equity funds I have stuck to for 1 to 3 years appear directionless. Never seen anything doubling. (The bond funds slowly grow, but not showing compound return.) Therefore my real experience seems to indicate rather few sectors can give compounded growth.

DJIA (and SP500) is a poster child example. Does it show compound return in the last 20 years after the last regime change (the tech boom)? I don’t see any.

Fundamentally, listed equity prices are driven largely by herd sentiment etc, rather than corporate profit (or potential thereof). Therefore a price can surge too fast then crash. Such a path will never be exponential and therefore always surprise those who expect to see ECR.

In conclusion, if we hope to buy and hold and get Compound return of, say 5% per year, we are likely disappointed when we want to cash out. Our total return seems to depend on timing and not on the exponential formula.

— a young company’s stock price can show exponential growth, maybe for the first 5-10 years(?)

In fact, many young stocks endure a bump rise or long troughs, but over-compensated by a subsequent shoot-up phase. Therefore, the curve still looks exponential. This is explained in fake exponential due to end-stage shoot-up.

When market cap grows to 10b, it can’t grow exponentially. I think it has to do with the nature of market growth for a given product. I think few new products have its market growing exponentially more than 10Y

— Regime change in stock markets — As to the S&P growth curve in the Forbes article, exponential growth is visible in the first 20 years. After that, i don’t see any. Similarly, in most stock index charts, you could see some exponential growth in early history, but nothing exponential in the last 20 years (2000-2020).

Except young stocks, I feel ECR is now dead at a global level, including the U.S.

However, in 2050 when we look back, we may still see a fake exponential growth in 2000-2021 , iFF there is a shoot-up observation towards the end. This is explained in fake exponential due to end-stage shoot-up.