Simple Investment Strategies To Match Performance of Yale And Harvard Endowments

I was looking at the following table from the Vanguard paper: Assessing endowment performance – the enduring role of low-cost investing.

Average annualised returns of endowments

I wondered how some of my momentum strategies( Simple ETF Momentum Strategy using 4 highly liquid asset classes and Momentum Strategy Using Stocks and Gold) and investing just in small cap value stocks fared against the performance of Harvard and Yale endowments. This is shown in the table below and the data can be seen in this spreadsheet. The data for returns is taken from Simba asset class returns from the Bogleheads website.

Endowment/Strategy

Returns upto June 2013 for Harvard, Yale, other endowments, active funds and 60/40 stock bond mix

Returns upto Dec 2013 for value and momentum strategies

5 year 10 year 15 year 20 year 25 year
Yale 3.3 11 11.8 13.5 13.2
Harvard 1.7 9.4 9.6 11.9 11.5
All endowments 3.8 6.8 5.6 7.7 8.4
All active mutual funds 5.1 6 4.9 7 7.9
60/40 stock/bond index 5.9 7.4 5.7 7.6 8.3
SCV 20.32 12.73 10.01 10.72 11.46
Simple Momentum Strategy using 4 liquid asset classes 13.87 8.17 11.1 11.83 12.86
Momentum Strategy using Stocks and Gold 15.35 13 12.09 12.39 13.48
  • One can see clearly that the small cap value strategy and the momentum strategy outperforms endowments, active mutual funds and 60/40 stock bond mix.
  • The Small Cap Value matches the Harvard endowment.
  • The Momentum Strategies are right there near the top with the Yale Endowment.
  • One should however remember that there was no easy way to execute the momentum strategies or small cap value strategy in the 1990s. However it shows the power of momentum and value in asset classes and that the outperformance of Yale and Harvard may have been due to better exposure to these risk factors.

For an individual investor, these are good strategies to adopt for the long-run. One should however be aware of costs, slippages and taxes.

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The Busy Doctor’s Investment Guide: Book Notes

This post contains my notes and reflections from the book: The Busy Doctor’s Investment Guide by David Yeh.

Family, friends, work, health and community are important in our lives. But money is also equally important. What you do with the money that comes into your life is important. The main thing is to save and invest so that one can become financially free. There are many mechanical formulas of investing out there and many of them will work if we are disciplined and not get swayed by how much more the other person is making…which means, we have to ultimately have our own personal goals which are well-defined and work towards them. Continue reading

The ” Simple Magic Formula” Indian Stocks For 2016

I had previous written regarding an investment strategy of investing in simple magic formula stocks.

The returns of this strategy from July 30 2015 till now is: -3.50% compared to -3.78 for the S&P CNX 500 Index. This is a very short time to analyse the returns of any strategy. The data can be seen in this spreadsheet.

The Simple Magic Formula Stocks for 2016 are as follows. The list is sorted by PE ratio. 

Company Name PAT / Total Assets Price-Earnings Ratio PRICE
Kaveri Seed Co. 39.71 11.59 357
Sonata Software 32.39 16.18 173.25
Coal India 79.98 17.51 333.9
HCL Technologies 32.63 19.64 845.5
VST Inds. 43.91 19.64 1701.3
Infosys 25.31 19.85 1103.15
Hero Motocorp 36.47 19.96 2687.85
TCS 42.15 20.51 2416.25
Bajaj Auto 26.04 21.26 2520.05
Mindtree 26.53 21.92 1441
Hexaware Tech. 30.69 22.26 242.6
eClerx Services 33.37 24.02 1432.5
ITC 31.21 27.14 327.3
Alembic Pharma 27.9 27.51 686.15
Bajaj Corp 35.24 27.73 427.95
Zydus Wellness 26.83 29.7 860.7
Credit Analysis 38.94 33.33 1341
Ajanta Pharma 35.74 33.55 1331.4
Oracle Fin.Serv. 35.38 34.01 3796.55
Castrol India 95.53 36.46 447.05
Cummins India 27.22 36.93 1040.2
Lupin 26.42 39.32 1845.5
GlaxoSmith C H L 27.62 42.4 6361.6
Titan Company 25.79 44.38 351.05
Colgate-Palm. 72.56 45.11 976.55
Hind. Unilever 115.85 47.61 856.55
Monsanto India 28.4 49.65 2200.6
Emami 38.15 49.92 989.95
P & G Hygiene 28.17 51.34 5605.1
Tata Elxsi 36.32 52.99 2250.45
Strides Shasun 28.32 55.62 1304.9
Britannia Inds. 50.19 55.72 2991.05
Asian Paints 31.09 57.15 880.15
Dabur India 30.93 57.2 276.3
Eicher Motors 45.31 62.91 17365.25
CRISIL 29.63 64.77 1952.3
Symphony 40.12 65.61 2317.2
Page Industries 36.03 70.01 13519.05
Glaxosmit Pharma 25.43 75.69 3295.5
Rico Auto Inds 27.6 430 47.3

We shall continue to analyse the returns of this strategy over time.

Investment Strategies 13: The Simple ” Magic Formula” For Indian Stocks

Many of you must know the popular book: The little book that beats the market by Joel Greenblatt. This strategy is based on a simple formula that Greenblatt talks about at the end of the book. He says that if you are using any other screener than his magic formula website you should use the following criteria:

  1. Return on assets greater than or equal to 25.
  2. P/E more than or equal to 5.
  3. Eliminate all utilities and financial stocks (i.e., mutual funds, banks, and insurance companies) from the list.

Although this formula was written for US stocks, I think you can also apply it to any country, as the principles of value investing are universal.

Use this formula on the S&P CNX 500 which is a broad-based index of the Indian stock market like the S&P 500. This index represents about 95.77% of the free float market capitalization of the stocks listed on NSE as on March 31, 2015. The total traded value for the last six months ending March 2015, of all Index constituents is approximately 91.97% of the traded value of all stocks on NSE. So this is really a broad index.

The stocks the formula selects today are:

Company Name Price-Earnings Ratio PAT / Total Assets Index 1 yr return 3 yr return 5 year return 10 year return
Ajanta Pharma 45.92 35.74 CNX500 139.24 153.21 123.51 63.15
Alembic Pharma 51.88 27.9 CNX500 121.83 132.21    
Asian Paints 56.44 31.09 CNX500 33.05 34.1 26.49 33.92
Bajaj Auto 21.68 26.04 CNX500 19.8 16.38 13.12  
Bajaj Corp 30.59 35.24 CNX500 96.55 49.48    
Britannia Inds. 76.55 50.19 CNX500 176.34 84.49 51.05 30.87
Castrol India 47.97 95.53 CNX500 52.67 23.51 16.68 25.37
Coal India 19.83 91.26 CNX500 15.27 5.88    
Colgate-Palm. 56.71 72.56 CNX500 30.57 22.43 19.72 24.87
Credit Analysis 31.53 26.57 CNX500 23.71      
CRISIL 65.62 29.63 CNX500 8.55 28.63 28.04 34.06
Cummins India 45.91 27.22 CNX500 58.29 32.83 18.06 26.16
Dabur India 72.61 30.93 CNX500 46.65 34.7 24.21 28.18
Divi’s Lab. 29.9 25.93 CNX500 29.5 21.43 20.43 30.98
eClerx Services 23.85 33.37 CNX500 23.88 30.46 27.89  
Eicher Motors 78.98 45.31 CNX500 122.22 114.19 80.83 51.4
Emami 57.76 38.15 CNX500 132.57 56.76 34.41 47.37
Glaxosmit Pharma 72.8 25.43 CNX500 38.15 17.34 11.22 14.59
GlaxoSmith C H L 48.75 27.62 CNX500 27.39 32.55 28.21 30.81
HCL Technologies 19.36 36.68 CNX500 17.81 54.2 38.13 25.14
Hero Motocorp 20.53 35.84 CNX500 1.25 8.52 6.51 15.22
Hexaware Tech. 28.4 30.69 CNX500 95.15 33.3 46.4 18.39
Hind. Unilever 50.2 115.85 CNX500 30.83 24.57 28.5 18.35
Infosys 20.71 25.31 CNX500 28.7 26.37 8.91 14.36
ITC 29.11 31.21 CNX500 -14.86 6.03 14.41 18.4
Kaveri Seed Co. 16.59 40.54 CNX500 -4.18 67.64 65.21  
Lupin 35.44 26.42 CNX500 46.33 42.41 33.86 37.22
Mindtree 19.6 26.53 CNX500 20.52 59.68 36.66  
Monsanto India 65.94 28.4 CNX500 63.99 74.71 30.74 14.74
P & G Hygiene 61.63 30.11 CNX500 37.34 40.01 23.19 24.79
Page Industries 76.56 34.01 CNX500 69.8 66.24 66.56  
Sonata Software 14.79 32.39 CNX500 92.12 102.52 24.1 17.04
Strides Arcolab 62.21 167.01 CNX500 92.01 21 24.27 17.99
Swaraj Engines 22.73 31.92 CNX500 2.33 30.89 16.98 15.92
Tata Elxsi 43.22 36.32 CNX500 170.21 98.05 44.92 23.27
TCS 22.05 42.15 CNX500 -3.18 26.89 24.13 22.95
Titan Company 38.33 25.79 CNX500 1.21 14.18 19.2 30.07
VST Inds. 21.79 43.91 CNX500 11.72 1.33 27.78 17.7
Zydus Wellness 33.78 26.83 CNX500 49.58 27.65 12.35 20.37
CAGR 51.40 45.65 33.32 28.56

The trailing returns of these stocks are:

  • 1 year=51.4% ( CNX 500 return=12.5%)(Franklin Prima Plus=31.5%)
  • 3 year= 45.7%(CNX 500 return=20%)( Franklin Prima Plus=28.2%)
  • 5 year=33.3%( CNX 500 return=9.2%)( Franklin Prima Plus=16.7%)
  • 10 year=28.6%( CNX 500 return=13.1%)( Franklin Prima Plus=19.9%)

Here is the excel sheet for the above data: CNX 500 Simple Magic Formula Stocks

So these stocks have handily beaten the index and very good active mutual funds in the past. But this is not a right comparison as these stocks may not have been selected in the past and may not have been in the CNX 500 index. Yes, that is true. But when you look at the companies, a lot of them are well-known companies with strong brands and possibly pricing power. And if you invest in the whole basket, you are most likely to do well in the long run of 10-20 years. Likely, not definitely.

Therefore, you may want to consider a strategy like this, provided you are willing to stick with it for the long run. Like getting married to the strategy, no matter what. Otherwise, it may be better to stick with well diversified mutual funds using a systematic investment plan.

How To Create Portfolios That Adapt To Market Changes

This post contains the key ideas from the book, ‘ Survival of the fittest for investors’ by Dick Stoken.

1. Over the long run, most investors( both individual and institutional) fail to beat the market. Investors, on the whole, have a terrible record at forecasting.

2. From 1926-2010:

  • 100% equities=9.87% annual return
  • 100% intermediate bonds=5.35% annual return
  • 100% long-term bonds=5.5% annual return
  • 60% stocks/40% bonds=8.6% annual return
  • 100% T-Bills=3.62% annual return

3. For the higher return offered by equities, you need to accept regular underperformance and at times excessive losses of more than 20% of our total capital. 60% stocks/40% bonds reduce the risk significantly and reduce the gain only slightly.

4. The stock-market is better understood as a complex adaptive system which are governed by trends rather than a purely logical Newtonian system.

5. Alternative investment portfolios:( 1972-2010)

  • 33% Gold/33% REIT/33% Long-term Government Bonds( rebalanced yearly): 11.30% annual return( -8.24% worst drawdown)= Alternate Investment Portfolio
  • 50% Gold/50% Long-term Government Bonds( rebalanced yearly):9.96% annual return(-15.36% worst drawdown)
  • S& P 500: 10.05% annual return(-37.61% worst drawdown)

6. Passive combined portfolio: (1972-2010)

  • 25% S&P 500/25% REIT/25%Gold/25% Long term government bonds( rebalanced yearly): 11.34% annual return ( -11.37% worst drawdown)
  • 50% S&P 500/50% Alternate Investment Portfolio( rebalanced yearly): 11.16% annual return(-19.92% worst drawdown)

7. You can modify this passive combined portfolio by going for global equities, global REITs and global long-term bonds( if they are available in an investable form)

8. There are trends in complex adaptive systems and trends changing. If we have a way of identifying trends and trend changes among various asset classes, it may be profitable.

9. The Buy and Sell Portfolio: 

  • Buy when DJIA/S&P 500 closes at a 6 month high. Sell DJIA/S&P 500 closes at a 1 year low. Put the proceeds into 5 year treasuries.
  • CAGR: 1926-2010= 12.77% ( worst drawdown=-20.30%)( worst drawdown for buy and hold=-64.21%)
  • CAGR: 1972-2010=13.84%( worst drawdown=6.09%)( worst drawdown for buy and hold=-37.61%)

10. The Buy and Replace Portfolio:

  • Buy Gold when it closes at a 1 year high. Sell gold when it closes at a 6 month low. Put the proceeds in long-term 20 year treasuries.
  • CAGR: 1972-2010=16.03%( worst drawdown=-12.7%)

11. The Buy and Sell REIT Portfolio:

  • Buy REITs when they close at a 6 month high. Sell REITs when they close at a 12 month low. Put the proceeds into 5 year treasuries.
  • CAGR: 1972-2010=14.92%( worst drawdown=-16.56%)
  • CAGR for Buy and Hold REITs: 1972-2010=12.01%( worst drawdown=-47.50%)

12. The Active Combined Asset Portfolio:( rebalanced yearly)

  • 33% Buy and Sell portfolio
  • 33% Buy and Replace portfolio
  • 33% Buy and Sell REIT portfolio
  • CAGR: 1972-2010=15.58%
  • Worst drawdown=-0.68%

13. Leveraged portfolios will further increase the return, except in S&P 500.

Leverage at 2:1( annualised return 1972-2010)

  • S&P 500=8.2% ( worst drawdown=-84.20%)
  • Active combined asset portfolio=23.06%( worst drawdown=-7.64%)
  • Passive combined asset portfolio=14.46%( worst drawdown=-31.41%)
  • Alternative investment portfolio=14.27%( worst drawdown=-32.88%)

Leverage at 1.5:1( annualised return 1972-2010)

  • S&P 500=8.09%( worst drawdown=-60.42%)
  • Active combined asset portfolio=19.42%( worst drawdown=-5.62%)
  • Passive combined asset portfolio=12.98%( worst drawdown=-19.51%)
  • Alternative investment portfolio=12.93%( worst drawdown=-20.55%)

14. You need to have a crisis plan. If you lose 20% of your money, you should put your money into defensive assets. If you lose 50% of your money, you should become more defensive. Defensive assets include:

  • T-Bills
  • TIPS
  • 5 year treasuries
  • 5 year or less CDs at good banks
  • Fixed annuities underwritten by a strong institution, if you are over age 60

15. Things to remember when making rational decisions in games of uncertainty.

  • Our knowledge is limited. Know what you don’t know.
  • Process is more important than outcome.
  • Detach yourself from meaningless noise and engage on your own terms.
  • Remember you are error-prone. When an error happens, correct it immediately. Remember your errors and don’t repeat it. Use your errors as a learning experience. Don’t view proper decision making as an all or nothing proposition. You just have to make less faulty decisions than others. Build imperfection into your strategy, leaving ample margin of safety.

16. In investment markets, there are trends, narratives ( the stories we tell about what will most likely happen), the error-prone agents( ourselves), misperception of risk and fluctuations. Dealing with these successfully is the key to success.

17. A real bubble is when a market index after reaching a new 20 year( or more) high, then triples from that level within the following 5 year period.

18. If many people follow these strategies, they will cease to work.

19. Things to take away:

  • Markets are complex adaptive systems and alternates between order and chaos.
  • True bubbles are rare, but when they happen, they can destroy a lot of wealth.
  • Trends are important.
  • Evolution and the stock market are smarter than you and me.
  • Varied asset classes and selection of some of them depending on certain criteria( commodities, currencies and TIPs may be some to think about in the future)
  • There are unknowns in every system and each system is born, grows and dies. We do not know where our current system is in its life-cycle.
  • Markets can be beaten, but only for a minority and if everyone follows these strategies, then these strategies will fail to work.

Investment strategies 12: Simple momentum strategy using 4 highly liquid asset classes

This strategy is very simple.

We use four asset classes which has highly liquid and have minimal bid-ask spreads. They are: S&P 500, EAFE, Emerging markets and Gold.

We invest in the top two classes each year.

The data can be seen in this spreadsheet.

  • Average annualised 10 year returns for this strategy from 1972-2013= 17.65%
  • Average annualised 10 year returns for equal weighted(EAFE, US, Emerging)=14.08%. This strategy has better 10 year returns than the momentum strategy only 3 times and the difference was not very great.
  • Average annualised 10 year returns for equal weighted(EAFE, US, Emerging and Gold)=12.48%. This strategy did not beat the momentum strategy even once.

Hence this is a very good strategy for getting above average returns and is highly liquid and has minimal bid-ask spreads.

Investment strategy 11: Simple ETF Momentum Strategy Using Stocks and Gold

The principles behind this strategy are as follows:

  1. Stocks give higher returns than bonds or other asset classes over the very long run.
  2. If we invest in stocks all over the world and not in one region alone, we are likely to have better returns.
  3. Although gold is thought to have long-term returns of close to zero, one should remember this includes the era when we used a gold standard. If you look at gold returns from 1972 to 2012, they have given an annual compounded return of 8%, which is a very good return. Gold acts as a hedge against inflation and has real value in today’s world of excess money printing.
  4. Momentum works.

The strategy is as follows:

1. The asset classes we are going to use are:

2. We can invest in each of these asset classes in an easy way using ETFs as shown above.
3. Calculate the last one year’s return for each of these ETFs. This can be done using data from morningstar.com( performance).
4. Choose the top 2  or  3  ETFs with the highest return over the past year.
5. Buy equal amounts of them.
6. Hold them for 1 year.
7. Repeat steps 2-6 again.

The historical returns using such a strategy from 1973-2012 are as follows:

  • Top 1-15.38%
  • Top 2- 17.61%
  • Top 3-17.89%
  • Top 4-15.42%
  • Top 5-13.81%
  • Equal weighted-12.67%

The average annualised 10 year returns over the same period are as follows:

  • Top 1: 17.26%
  • Top 2:19.50%
  • Top 3: 18.82%
  • Top 4: 16.17%
  • Top 5: 14.55%
  • Equal weighted: 13.33%

If we use the data from the indices on which the above ETFs are based, from 2004-2012( because we have data for some of the indices only from 2003), the annualised return for the top 3 ETFs is 12%. The annualised return using the original data for the same period is 12.15%.

We can see that this strategy outperforms the equal weighted strategy. The returns of the equal weighted strategy are not too bad either compared to traditional asset allocation strategies. Either of these strategies is better than simply investing in US stocks, But we should be ready for short-term volatility and underperformance but the long-term results are very good( almost Warren Buffetesque like).

If you want to invest using this strategy today, the 1 year returns are as follows:( taken from morningstar.com)

  • US large cap:35.88%
  • US small cap:46.20%
  • EAFE:  31.51%
  • Emerging: 6.04%
  • Ex-US small cap: 23.91%
  • Gold :  -23.43%

So the Top 3 asset classes are: US small cap, US large cap, EAFE. You might feel concerned in investing in stuff, that has gone up in price, but if you can stick it out for the long-term, i.e 10 years or more, you are likely to outperform.