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Jackass investing free lunch portfolio manager


jackass investing free lunch portfolio manager

based methodology that results in a "Free Lunch" portfolio - one that produces don t do it profit from it by michael. your investments top fund manager. by myth then replaces it with a return driver based methodology that results in a Free Lunch portfolio one that produces both greater returns and lower risk. Judd Kahn, PhD (New York, NY), is a member of Morningside Value Investors. Paul D. Sonkin (New York, NY) is the investment manager of the Hummingbird Value. BROWSER BASED ETHEREUM MINING MINER GATE

What I do out of the gate is say open up your box, not necessarily playing outside of the box, but just really expand it and incorporate a variety of new strategies and markets into your portfolio that really will provide you with true portfolio diversification. So the philosophy is the same.

Zack: So is it truthful to say that you are sort of taking aim at buy and hold in particular? Michael: Certainly. I break everything down into trading strategies. A trading strategy is comprised of a return driver, something that is going to make a power return and a market. A buy and hold strategy in U. You have very little diversification value in a buy and hold approach.

But it is not a terribly bad thing to have as one component in a portfolio. Zack: I really like how you defined the investment process. Could you talk about that going from return driver to trading strategy? You sort of just hit on that now. Just to block that out a little bit. Michael: Everything has to be broken down to what the ultimate underlying return driver is. That is what I do throughout the book, and once you have a return driver, you try to select which markets it is most applicable to.

In the long term, the return from stocks is driven by corporate earnings growth. If a company grows and their earnings grow, the stock will become more valuable and ultimately price higher. But in the short term, and by short term I mean less than 20 years when we do these studies, the dominant return driver for a stock position has to do with the enthusiasm or lack thereof of the investor crowd. So it is understanding what the return drivers are, what markets it is applicable to, and then you can put a portfolio together that is made up of disparate and uncorrelated return drivers.

There is an action section there that not only takes your myth busting that you get in the book but then provides you an actual strategy to capture that. So can you tell us a little bit about the strategy to address this myth number one that you talked about? In myth number one, there is not a problem with. I believe it is a valid return driver.

We capture that with exchange trade funds and mutual funds in this model portfolio that I put together. But overall, long stock positions make up maybe a quarter of the portfolio. We capture that in dividend ETFs that are looking for higher dividend models. So there is different mutual funds and ETFs that are out there that follow different strategies to capture that long stock component using slightly different return drivers. Then that is what we incorporate into this portfolio as a portion of it.

Zack: So does that require a lot more work on the individual investor? One that is essentially a passive portfolio. Zack: These are the free lunch portfolios that you describe in the book? Michael: That is correct. In myth number 20, there is no free lunch, I lay out in that myth the performance of what I call the free lunch portfolios, the ability of earning both higher returns and having lower risk than the conventional wisdom portfolio, which is essentially long stocks, bonds, maybe some real estate, and a little bit of cash.

The numbers are absolutely true. In the free lunch portfolios, I have two different options. One that is very passive. It just invests in long only and ETFs and mutual funds. I say long only because it is buying those, but those mutual funds and ETFs themselves are employing trading strategies that were described in the book.

So somebody else is doing the actual trading. That is the simplified free lunch portfolio. In the standard free lunch portfolio, there are some trading strategies individuals can employ on their own, trading stocks, trading ETFs, using strategies that have a sound logical basis for providing a positive, inherent return, but they do take a little more work on the part of the investor.

They could employ the simplified free lunch portfolio. Zack: I like your discussion about a diversified global ETF portfolio using some type of timing mechanism on top of it, sort of like tactical asset allocation. Can you talk a little bit about your philosophy there? In both of those, it shows that momentum investing is a viable practice.

So that behavior can be used for timing ETFs or mutual funds as well. You have to have a systematic process in place for doing that. But what it does is systematically move you in and out of the stronger performing in the U. Zack: One other strategy that you talk about is actually I devote a whole chapter in my book to it was the insider trading strategy.

What do you attribute that to? To answer that question, I think that some of it is they like to do what other people are doing. There are a lot of things that are out in the public domain as far as trading strategies that are valid trading strategies that are under exploited, which is great.

Zack: Leaves the opportunity for us. Michael: Exactly. You and I can exploit those and the people who read our books can exploit those. It is a great valid return driver. I think the hard part to get individual investors in general on board with all these things is getting them to stick to a quantitative model.

Joel Greenblatt said this in his book, when he published the magic formula. That is the data from the [inaudible ] studies, which is in my book as well in myth number three. It really shows that people cannot make those decisions on a day-to-day basis properly. They lose money by doing that but they will still keep trying to do it.

There is another section I have on expert opinion, essentially showing that you cannot rely on experts, just reiterates that whole concept that people who are committed to a certain philosophy and start preaching it to the public as an expert become even more locked into it and become even more wrong than the experts who are less followed. Zack: That is a great point. So as you are saying that I am thinking in some way in my own investment and what I preach to my clients is I do a lot of that leg work for them.

When people start managing their own money as you describe, they lack stick-to-it-ness, particularly in what is happening in the ETF space. We are seeing a lot of new strategies coming on board, and my first inclination was, and you mentioned one of them, which is the Guggenheim Sabrient Insider Index. Now, Wall Street is packaging them and there goes that opportunity. It is a lot easier for me to outsource that to them even if I could probably do better on my own theoretically.

At least someone else is managing the money and enforcing that stick-to-it-ness in some way. Michael: Right. What made my book and actually the action section that is over on the JackassInvesting. Otherwise they would have had to essentially make it their profession and develop strategies and follow those strategies on a daily basis. Now they can put a passive investment in place in an ETF that is making those active trading decisions on their behalf.

Zack: What is jackass about this process? To me jackass investing is the fact that conventional investment wisdom teaches people to take unnecessary risks with their money. Any time you take an unnecessary risk, that is behaving like a jackass. It is avoidable, but people are taught over and over buy and hold, concentrate your portfolio on stocks and bonds. Okay, diversify it, but you are still long only, which is driven within a 20 year period primarily by the enthusiasm of other investors.

Your investment decisions are really being relegated to the population, and if they like stocks, the stocks you held long are going to go up. Because of this, measures such as priceto-book-value ratio help to identify which stocks may be truly undervalued. Valuation levels of stocks vary over time, often dramatically from bear market bottoms to bull market tops.

During the depths of a bear market, many firms can be found selling for a price-to-book ratio less than one. In the latter stages of a bull market, few companies other than troubled firms sell for less than book value per share. Piotroski found that most stocks trading with an extremely low price-to-book-value were either neglected or financially troubled firms.

Small, thinly traded stocks are rarely followed by analysts. The flow of information is limited for these stocks and can lead to mispriced stocks. Analysts typically ignore these stocks and tend to focus on stocks with general interest. Most of the stocks selected by the initial price-to-book 12 Jackass Investing — Action for Myth 1 value screen are low capitalization stocks. This does not pose a problem for most individuals, but may limit investment by the larger mutual funds and hedge funds, as they may not be able to invest large amounts in many of the selected stocks.

As described in Myth 15 — The Largest Investors Hold All the Cards, this ability to buy and sell small capitalization stocks is an investment advantage held by smaller individuals over large institutional investors. Profitability, financial leverage, liquidity, and operating efficiency are examined using popular ratios and basic financial elements that are easy to use and interpret. Stocks that pass all nine screens are included in the portfolio.

Minimum Profitability Piotroski awarded up to four points for profitability: one for positive return on assets, one for an improvement in return on assets over the last year, one for positive cash flow from operations, and one if cash flow from operations exceeds net income.

These are simple test that are easy to measure. Because the requirements are minimal, there is no need to worry about industry, market, or time specific comparisons. Return on Assets. Piotroski defined return on assets ROA as net income before extraordinary items for the fiscal year preceding the analysis divided by total assets at the beginning of the fiscal year.

ROA examines the return generated by the assets of the firm. Piotroski did not look for high levels of ROA, only a positive figure. Positive income is a significant event for these firms. Improving Profitability. The next variable Piotroski considered looked for improving profitability. Operating Cash Flow. Piotroski awarded one point if a firm had positive operating cash flow.

Operating cash flow is reported on the statement of cash flows and is designed to measure a company's ability to generate cash from day-to-day operations as it provides goods and services to its customers. It considers factors such as cash from the collection of accounts receivable, the cash incurred to produce any goods or services, payments made to suppliers, labor costs, taxes, and interest payments.

A positive cash flow from operations implies that a firm was able to generate enough cash from continuing operations without the need for additional funds. A negative cash flow from operations indicates that additional cash inflows were required for day-today operations of the firm. Accrual Accounting Check. This examines the relationship between the earnings and cash flow. A point is awarded if cash from operations exceeded net income before extraordinary items. The measure tries to avoid firms making account adjustment to earnings in the short run that may weaken long-term profitability.

Piotroski feels that this element may be especially important for value firms, which may have a strong incentive to manage earnings to avoid triggering problems such as violations to debt covenants. Financial Leverage. The higher the figure the greater the financial risk.

Judicious use of debt allows a company to expand operations and leverage the investment of shareholders provided that the firm can earn a higher return than the cost of debt. Normally, the more stable the cash flow of a firm, the greater financial risk a company can assume. However, a company must meet the rules covenants along with the interest payments of its debt or risk bankruptcy and complete loss of control of the firm.

By raising additional external capital, a financially distressed firm is signaling that it is unable to generate sufficient internal cash flow. An increase in long-term debt will place additional constraints on the financial flexibility of a firm, and will likely come at great cost. To judge liquidity, a company earns one point if its current ratio at the end of its most recent fiscal year increased compared to the prior fiscal year.

Liquidity ratios examine how easily the firm could meet its short-term obligations, while financial risk ratios examine a company's ability to meet all liability obligations and the impact of these liabilities on the balance sheet structure. The current ratio compares the level of the most liquid assets current assets against that of the shortest Action — Myth 1 15 maturity liabilities current liabilities.

It is computed by dividing current assets by current liabilities. A high current ratio indicates high level of liquidity and less risk of financial trouble. Too high a ratio may point to unnecessary investment in current assets or failure to collect receivables or a bloated inventory, all negatively affecting earnings. Too low a ratio implies illiquidity and the potential for being unable to meet current liabilities and random shocks that may temporarily reduce the inflow of cash.

Piotroski assumed that an improvement in the current ratio is good signal regarding a company's ability to service its current debt obligations. He also indicated in a footnote that the decline in current ratio was only significant if the current ratio is near one. The final capital structure element awards one point if the firm did not issue common stock over the last year.

Similar in concept to an increase in long-term debt, financially distressed companies that raise external capital could be indicating that they are unable to generate sufficient internal cash flow to meet their obligations. Additionally, issuing stock while its stock price is depressed low price-to-book highlights the weak financial condition of the company. We screen for stocks that have maintained or reduced the number of outstanding shares during their last fiscal year.

Gross Profit Margin. Companies gain one point for showing an increase in their gross margin. Long-term investors buy shares of a company with the expectation that the company will produce a growing future stream of cash. Profits point to the company's long-term growth 16 Jackass Investing — Action for Myth 1 and staying power. Gross profit margin reflects the firm's basic pricing decisions and its material costs. Computed by dividing gross income sales minus cost of goods sold by sales for the same time period.

The greater the margin and the more stable the margin over time, the greater the company's expected profitability. Trends should be closely followed because they generally signal changes in market competition. Piotroski zeroed in on improving gross profit margin because it serves as an immediate signal of an improvement in production costs, inventory costs, or increase in the sale's price of the company's product or service.

Asset Turnover. The final element in Piotroski's financial scoring system adds a point if asset turnover for the latest fiscal year is greater than the prior year's turnover. Asset turnover total sales divided by beginning period total assets measures how well the company's assets have generated sales.

Industries differ dramatically in asset turnover, so comparison to firms in similar industries is crucial. Too high a ratio relative to other firms may indicate insufficient assets for future growth and sales generation, while too low an asset turnover figure points to redundant or low productivity assets. An increase in the asset turnover signifies greater productivity from the asset base and possibly greater sales levels. The stocks that make it through all of the screens constitute the Piotroski portfolio for that month.

This is the approach my firm, Brandywine Asset Management, first developed almost 30 years ago and continues to employ today. The majority of people do not employ a systematic process when they invest their money. As a result, they react emotionally to every market move or geopolitical event. This provides us with a great opportunity to outperform those same funds. Because the majority of people are so consistent at mis-timing the market, we can use them as our George Costanza indicator and do the opposite.

There are numerous measures of market sentiment.

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As you might have guessed, this is not your typical investment book. Jackass Investing presents an entirely new, and eminently logical, process for investing - all of it supported by numerous relevant facts and studies. But Jackass Investing is not a dense financial tome. It is extremely readable and includes entertaining and relevant references to popular culture - such as Criss Angel's magic, George Costanza on Seinfeld, the rock band Rush and heavyweight boxing contender "Fast" Eddie Chambers - to help describe investment concepts in a truly approachable way.

Perhaps most importantly, the book is also highly practical, as this website includes specific actions you can take to turn your "Poor-folio" into a truly diversified portfolio that can make you money in even the harshest environments. The WisdomTree Managed Futures Fund that I have included seeks a positive return in any environment; it has allocations to energy, livestock, grains, metals, various currencies, treasuries, and derivatives.

The CANSLIM is a strategy that has been discussed in a previous article of mine that selects small-cap growth stocks that have enjoyed favourable growth in recent periods and are viewed as undervalued. The SunAmerica fund offers exposure to a vast number of fixed income and managed future funds and seeks an absolute gain by utilizing and actively managed quantitative investment process.

This is the riskiest portion of the portfolio, but it has great upside potential. The iShares Diversified Alternatives Trust holds a variety of long and short positions in currency forwards and exchange-traded futures. The fund seeks to earn absolute returns with a low historic correlation to traditional asset classes Lastly, the iShares Dow Jones Select Dividend Fund will provide some steady income in the form of dividends.

For further information on dividend investing, please refer to one of our previous article, Playing Dividends. Although the difference in total returns is minimal my portfolio is 2. A longer time frame analysis would have been beneficial, but this was not possible as some of the funds in the portfolio were created less than two years ago. I hope you have enjoyed this insight into portfolio diversification.

Please keep some of these concepts in mind before creating your next portfolio strategy! Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Additional disclosure: This series has been written on a contracted basis with the book's author. The opinions expressed in the article are those of Efficient Alpha and not necessarily those of the book's author.

Efficient Alpha has been contracted to describe strategies and concepts used within the book but not to promote or recommend any strategies, the author, or the author's services. This article was written by 1. Our core products include: financial newsletters, blogging, presentation preparation, investment research and ghost writing. Our normal clientele are small to medium-sized firms with research, analysis, or marketing needs but whom may have insufficient staff or topic expertise.

Joseph Hogue, founder and analyst, has more than ten years in the investment industry and holds the Chartered Financial Analyst designation. Hogue is also the administrator for the FinQuiz Blog, an online source for CFA exam preparation advice and preparation. Working from Medellin, Colombia, he has worked for clients ranging from individual investors to large multinational firms.

Prior to his work as a financial writer, Mr. Hogue worked as an economist for the State of Iowa, as a consultant on trade issues and analyzed real estate development deals in Colombia.

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I want to mention right from the start that this book review of Jackass Investing is my opinion only.

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Jackass investing free lunch portfolio manager If You are Risk Averse, You Should Not be Investing in Stocks — Period Investing in stocks is the same as investing in businesses source the expectation that the business will create value for the shareholders. Too high a ratio may point to unnecessary investment in current assets or failure to collect receivables or a bloated inventory, all negatively affecting earnings. He also indicated in a footnote that the decline in current ratio was only significant if the current ratio is near one. A buy and hold strategy in U. In plain English and with easy-to-understand examples, Mike Dever explains how 'drawdown' is every investor's true measure of risk not volatility and how 'correlation kills' an investor's opportunity for real returns. Dever devotes his time to running Brandywine Asset Management, which follows Mr.
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Bank of america stops crypto In both of those, it shows that momentum investing is a viable practice. To help ensure minimum liquidity Action — Myth 1 11 and financial reporting standards over-the-counter bulletin board stocks and ADRs were excluded. Some are quite direct. I think by now any regular reader of my site knows that I like an investing book that offers me strategies and concepts that have actual ongoing real examples which I can tweak and play with to determine how suitable they are for my trading style. It is more of a professional focused organization that provides the Compustat type data and the software to go with that. Dever points to how the Securities and Exchange Commission completely missed Bernard Madoff's multi-billion investment scam even though they had multiple chances for catching and preventing it. This gives us four full years of performance data, including the financial crisis.

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jackass investing free lunch portfolio manager

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