Twofer Wednesday

First up is an interview with Jason Zweig at Advisor Perspectives. I tend to read a good bit of his stuff as there is usually an interesting nugget or two but I tend to disagree with his conclusions. Candidly I do not know much about his background other than he's been a prominent writer for quite a while. I have no idea if he has ever been a decision maker in any sort of investment capacity.

In the interview he has some interesting things to say to advisors about making sure they try to understand how risk and volatility work (I have no idea how good his understanding is).

He goes on to say a couple of other things that I think are overly simplistic. He says "The financial advisory community has fallen hook, line, and sinker for the Wall Street propaganda that every investor should have at least 10 percent of their assets in commodities" which he says is unfortunate. He notes that commodities have generally gone down in price over long periods of time so owning them, in that light, is not ideal.

Well I've never been in the 10% camp so I do not quibble with that. The interview does not cite the period of time he is talking about. He made a comment about how long it took to break even in gold for anyone who bought at the high. If part of the reason to own commodities is that they usually have a low correlation to equities and equities had a massive super cycle to the upside from 1982 to 2000 then a poor result in commodities is far from a black swan. Without knowing the time period he had in mind, from a performance standpoint commodities were not important for most of the 1980s or the 1990s.

However during this past decade they were very important as US equities dropped 24% pricewise. Ten years ago gold was around $300 versus a little over $1000 now, Copper was a little less than a dollar versus about $3 now and soy beans more than doubled.

In thinking about commodities for the next decade will they matter or not? To figure that out do you want to rely on what happened in the 1980s or do a forward looking analysis on supply and demand trends around the world? Asset allocation and portfolio construction is not as simple as people like Zweig make it out to be (in his articles anyway, I've never read one of his books).

The other item came from a reader who asked if I've compared returns of stocks I've picked versus ETFs. It is not that simple. Not every stock lends itself to an easy comparison to an ETF. Yesterday I mentioned my Brazil stock, which is Vale (VALE), had lagged EWZ last year but has beaten it in other years. Over five years (I've held it a little longer than that) VALE is about 50% ahead of EWZ. Additionally I sold some in the mid to low $30s in early 2008 so how would I compare the two? I own a Brazilian stock because I do not want to own Brazilian financials and EWZ is heavy in financials.

I've disclosed owning Caterpillar (CAT) which has generally outperformed the Industrial Sector SPDR (XLI) but it doesn't always. However I traded it a couple of times along the way so comparisons are difficult. One name that has not worked out so well is China Mobile (CHL). I bought way below its high but it is down from where I bought it. I'm not sure there is an ETF that makes for an easy comparison. Part of the reason I chose it is that I want to avoid financial companies from China. In the time I've owned it it has done about the same as FXI but even if it had lagged badly I am unwilling to risk client money in Chinese financials.

Up to this point the conversation has ignored the concept of risk adjusted return. In a properly diversified portfolio some stocks could be thought of a volatility dampeners so with those beating something is not necessarily the goal. I recently disclosed swapping Monsanto for MOO. These two probably are more of a direct comparison in the context that the reading is asking. As I disclosed however, MON started out better than MOO and then lagged. MOO went down much more during the worst of the bear and so bounced back a lot more and so while these two might be comparable I am not sure the action taken allows for a comparison.

To repeat it just isn't that simple.