FYI:
Regards,
Ted
Copy & Paste Barron's 2/22/14: Beverly Goodman
Noted investment manager KKR caused a bit of a stir earlier this month when it announced it will close two of its entrants into the mutual fund arena.
It's not that the funds themselves were so notable. In fact, they're about to be shuttered because they failed to get any traction in the year they were open. But it speaks to the difficulty of the ongoing quest to incorporate alternative investment strategies into a mutual fund format—and who can offer the most elegant solution.
In the case of KKR's two funds, it seems clear that mutual fund companies had an advantage. KKR is a pre-eminent investment manager, with much more name recognition than the typical hedge fund firm, and yet its mutual funds couldn't compete. It wasn't a matter of performance: The KKR Alternative High Yield fund (ticker: KHYKX) returned more than 7% last year, beating the category average, but the firm acknowledged in a statement that the fund simply had too many established competitors (a "very crowded marketplace") with long track records. The KKR Alternative Corporate Opportunities fund (XKCPX) returned 14% in 2013, but was an overly complicated hybrid product that came with an onerous initial-investment process and "lacks the daily liquidity most mutual fund investors expect." Both funds in about a year took in just $33 million, on top of KKR's $125 million in seed money.
And yet investors appear to be clamoring for alternative-investment strategies in a mutual fund structure. Hedge funds saw $6.9 billion in outflows last year, while liquid alternative mutual funds took in $40 billion, according to Morningstar data. And that category doesn't include fixed income: Another $55 billion went into unconstrained or nontraditional bond funds, the mutual fund answer to fixed-income and credit hedge funds. With some $360 billion in assets, hedge funds still dwarf the $139 billion in alternative mutual funds—but may not for long.
Many alternative managers, however, are now realizing that their investment expertise isn't enough to make them successful among retail investors. "Mutual fund firms are just better at navigating the landscape and understanding the business," says Josh Charney, an alternative-investment analyst with Morningstar, adding, "They've been marketing products since the dawn of time. Hedge funds have only been allowed to market since the JOBS Act went into effect."
Indeed, the big winners have been offerings from mutual fund firms. Long/short equity funds took in $20.5 billion last year, though the lion's share, $13.4 billion, went into just one fund—the $21 billion MainStay Marketfield fund (MFLDX), which saw its assets triple. It returned 16.9% last year, versus 14.6% for the long/short category. Performance helped, certainly, but MainStay is a part of New York Life, which has a 150-person sales force. "We don't even think of Marketfield as an alternative fund," says Steve Fisher, president of MainStay Funds. "It's just a mutual fund with a very flexible approach. Our distribution model helps advisors understand how our funds fit into a portfolio."
Hedge funds face challenges in reaching mutual fund investors, and developing relationships with their advisors. Mutual fund firms, meanwhile, face challenges in terms of hiring the talent necessary to manage alternative portfolios. Alternative mutual funds often carry a management fee near the 2% charged by most hedge funds, but they're not allowed to pay managers a portion of the gains—making it a much less lucrative opportunity for the manager.
RATHER THAN A PITCHED BATTLE between alternative managers and fund companies, though, the approach we're likely to see more of going forward is one of collaboration. Mutual fund firms can use their name recognition and marketing and sales prowess, and rely on the investing expertise of hedge fund managers. Many alternative mutual funds use subadvisors to manage assets. One of the most successful examples is Blackstone's partnership with Fidelity—in terms of both the development and execution of the final product.
Last August, the two firms launched the Blackstone Alternative Multi-Manager fund (BXMMX); its $1.2 billion in assets is allocated across 12 hedge fund managers including Cerberus, Wellington Management, and Caspian Capital. It's only available to the high-net-worth clients of Fidelity's Portfolio Advisory Services group. It's an exclusive arrangement for one year, but John McCormick, director of Blackstone's alternative asset management group, says the fund's appeal for "mom and pop investors," could also lend itself to inclusion in a 401(k) plan, variable annuity, or other insurance product.
Blackstone initially approached Fidelity several years ago with an idea for "a very different sort of product," McCormick says. After extensive talks and reworking, the two firms arrived at a fund that could exploit Blackstone's heft in the hedge fund world and Fidelity's reach in the retail world. "We're the largest allocator to hedge funds in the world," McCormick says. "If we ask them to build something special, they do it."
.

FYI:
Regards,
Ted
http://news.morningstar.com/articlenet/article.aspx?id=636180

Class P shares are specifically designed to be offered through fund supermarkets:

Class P shares are only available to investors purchasing shares through a no-load transaction fee network or platform that has entered into an agreement with NYLIFE Distributors LLC, the Fund's principal underwriter and distributor or its affiliates to offer Class P shares through a no-load transaction fee network or platform. Class P shares have no initial or subsequent investment minimums.

From prospectus.
Class P shares have a lower ER (no 12b-1 fee) than Class A or Inv shares (A/Inv shares are virtually identical except that A shares typically require a $25K min) both of which come with a load. You can see this difference in the reported one year performance: 16.87% (Class P), vs. 16.62% (Classes A and Inv), reflecting the 0.25%/year 12b-1 fee in the latter. (Figures from NYLife website.)
For some reason, Mainstay also claims (in the prospecutuses) that the cost the fund incurs for shorting stocks is nearly a full percent lower for P shares than for A shares (1.18% vs. 2.14%). (This difference makes no sense however, and I would suggest further study.)
Regardless, the absence of a 12b-1 fee, and the absence of a load, makes purchasing P shares through a supermarket cheaper than purchasing load shares (unless you're purchasing over $1M worth, in which case the load is waived).

At Fidelity, you can establish an initial position for $49.95, and then DCA automatically at $5/transaction. You don't escape the commission, but you can keep it pretty low. Other brokerages may offer DCA for even less (or zero).

Reply to @AndyJ:
Hi AndyJ,
Thank you for reading and replying to my post.
I do believe that most MFO participants are somewhat immune to the attraction of the Star ratings. But not all are, and most of the general pubic blindly fall under its spell. Most investing folks find it hard to resist. As unlikely as it seems, a measurable segment of our population still believes in Astrology.
I had the good fortune to become familiar with Morningstar in its formative years. I enjoyed frequent exchanges with John Rekenthaler during this period. The Morningstar team were true believers that they had invented a winning formula, and they touted it with high confidence. For the uniformed investor, for the novice investor, for the lazy investor , and especially for the investor susceptible to advertisement, the Morningstar star system became the de facto bible.
All behavioral research concludes that folks have a propensity to make decisions with the reactive (system 1) portion of their brain rather than the reflective (system 2) segment. We’re lazy and often default to an easily recalled Star rating when making a mutual fund decision.
The tsunami of Star advertising, mostly funded by the mutual funds themselves, sealed the deal by constantly proclaiming the wonders of their 5-star and 4-star funds. They failed to mention the highly ephemeral nature of these ratings.
The tidal wave of misleading advertisements that extolled the virtues of the Star system motivated the 1990s research that challenged its usefulness as a predictive tool. Yes, Morningstar did admit the limitations of its service, and did modify it. My reference to Russ Kinnel documents that conversion and acknowledgement. But the general investor population still trusts the Star ratings, often to the exclusion of other more dominant factors (like costs).
Please see MFOer BobC’s professional comments on this topic. It dovetails precisely with my amateur’s observations. A lot of investors still slavishly subscribe to the Star ratings. The loyalty persists and can do significant harm to portfolio maintenance like encouraging more frequent fund tradeoffs.
BobC sees it in his daily interactions with clients. I see it through the continuing attention given to it in research projects. That’s why I referenced the 2010 Vanguard study. Professor Bill Sharpe challenged the utility of the Star program in the late 1990s; Vanguard considered it a topic worthy of research dollars in 2010, a decade later. The issue perseveres.
Uninformed, or rookie, or lazy, or advertisement susceptible investors still make investment decisions using primarily, and perhaps singularly, Star ratings. That’s troublesome. It inspired my posting. The Star trap is hard to escape.
I know you haven’t fallen victim to it. I trust that most MFO members avoid it, but some do not. My submittal is merely a cautionary reminder. Take care.
Best Wishes.

I wonder how many billions will escape PIMCO this year? It doesn't look as though the public is buying the new normal that Gross and El-Erian are peddling.
Dan Ivascyn hopefully is re-negotiating his contract.

At the very least, here at MFO; one has an ongoing knowledge base from which to continue to learn and grow from to support investment decisions. MFO is just not about technical aspects and digging into various funds. I believe one of the greatest values here is to better understand the most critical aspect of investing; and that is behavorial understandings.
The thousands of words written here, will many times contain sprinkles of behavorial thinking mixed among the discussions.
Any words that may cause one to think differently about a specific topic or to discover a new topic related to investing helps fuel the continued growth needed for introspection to remain a successful investor over the many long years.
One may travel to other sites and the numerous links posted here; but should always return to MFO for a more full view of the investing landscape.
My inflation adjusted 2 cents worth.
Regards,
Catch

Building starts all around. IPO resurgence. Hey, even home improvement loans coming back.
If...
Companies start increasing CAPEX, like oil houses have done recently, to help create real growth (versus EPS engineering via buy backs),
Credit remains low, available, accommodating,
Washington does not jump off tracks,
Our workforce remains robust and capable,
World remains at (relative) peace,
Then...
Our reluctant bull continues.

Hi Guys,
Earlier this week the WSJ published its quarterly mutual funds and ETFs review that incorporated 2013 data.
Overall, it’s a comprehensive summary in a concise, useful format. But I do take issue with part of their winners and losers page. I like the 5-year and 10-year listings since these provide some performance persistence insights. I believe their last quarter and 1-year winners and losers listings are a disservice to many individual investors. It invites
hot-hand thinking. It energizes herding instincts.
These short-term listings that emphasize ephemeral success stories encourage putting outcomes over process.
Consider a two-by-two matrix with good (GP) and bad (BP) processes in the horizontal direction, and good (GO) and bad (BO) outcomes in the vertical direction.
The upper left GP-GO box reflects just rewards. The mixed BP-GO illustrates a lucky happening. The mixed GP-BO demonstrates an unlucky event. The BP-BO box might well be interpreted as poetic justice.
As investors we can only control process. Outcomes are always uncertain, and we are subject to the whims of the financial Gods. So we should focus our resources at developing and persistently deploying a carefully constructed investment process.
For a passive investor that’s simply assembling a low-cost composite total market Index fund array.
For the active mutual fund proponent, it means cobbling together a portfolio with the following characteristics: low cost, low turnover, long tenured management arguably with financial degrees from Ivy league schools, and with investment philosophies and preferences similar to the clients.
The active route is more challenging with a likelihood of Index out-performance that is in the 10 % to 30 % range depending on time horizon and number of active funds within the portfolio.
Annual returns behave in a helter-skelter manner. If there is some order to annual rewards, it surely has escaped me. Patience is a prized virtue for successful investing.
Asset Allocation quilts offer a great way to illustrate the year-by-year chaos of investment category return disorder. I particularly like the report issued by the RBC Wealth Management outfit in Texas. Here is a Link to their “Market Cycle Quilts”.
https://www.rbcwmfa.com/File/Featured Reports/marketcycles.pdf
The Market Cycle Quilts document the separate and rapid elevator rides that various classes experienced since 1999 for the following clusters of investments: Asset Classes, Indices, US Economic Sectors, Developed Countries, US Stocks, US Bonds, Income Focused, and Alternate Investment groupings.
This is a huge body of data displayed in an attractive format. It is the most complete set of charts I’ve ever seen within the Quilt or Periodic Tables presentations. All these tables vividly demonstrate the volatility in annual returns; the first shall be last in short order.
One of the main themes that the marketplace constantly exhibits is a reversion-to-the-mean. The S&P Persistency and the SPIVA Scorecard reports demonstrate the fragility of superior above average performance among the professional class of investment wizards. The DALBAR studies show that individual investors do even poorer when contrasted against market averages.
I hope the Market Cycle Quilts will provide some guidance to MFOers when developing their investment philosophy and processes. Outcomes are forever uncertain. Good luck and good judgment to all you folks.
Best Regards.

Hi Guys,
Let me start with a disclaimer. I breezed through the referenced article since most of it is “old” stuff and commonly accepted market wisdom. So I do not claim that my posting is a definitive or complete review of the paper.
Of course, the idea to replace the conventional portion of what the author elected to call the “Price Return” with investor equity percentage growth commitment and cash-bond supply growth components is dramatic and inventive. I like that. Only time will test the validity and usefulness of the proposed concept. But many kudos for trying. I’ll mostly focus my comments on this aspect of the paper.
Take note that even the basic partitioning of the initial total equity returns equation is a departure from the standard sectioning. In John Bogle’s classic “Common Sense on Mutual Funds” book, he divides the total returns into investment and speculative subcategories. Bogle assigns earnings growth rate and dividend yield to the investment category, and reserves P/E ratio changes to the speculative category. This researcher doesn’t accept that interpretation.
I suppose it somewhat depends on your investment philosophy. Bogle is certainly conservative and long-term oriented. The current writer’s proclivities are unknown since he chooses to be anonymous.
This fact itself is a little troublesome. If this thesis were generated at the University of Chicago or MIT, it would be critically peer reviewed. Not so in this instance. If in time this provisional model proves to be a flawed concept, the unknown author will simply fade away and not pay any reputation price for his faulty analyses.
On the positive side, the proposed model does take advantage of two commonly acknowledged heuristics: the wisdom of the crowds and a regression-to-the-mean. Both are used in an inverted sense. The wisdom of the crowd is reflected as the independent variable in the proposed model. It is the worldwide sum of all equity investors. However, they are typically on the wrong side of the wager. When they are heavily invested, the equity marketplace is likely overbought and a reversion-to-the-mean is the order of the day.
The reported work sets a low hurdle for itself. It uses the current value of investor enthusiasm, as measured by their equity percentage holdings, to project a 10-year rolling return. The author sort of endows the investor with a prescience that is hard to justify. Why not a 1 year forecast, or a 3-year, or a 5-year, or a 20-year timeframe? Data mining is a possibility in this instance.
Another consideration is that a meaningful test of the validity of the asserted model must wait and wait and wait and wait before seeing if the model bears fruit. Immediate feedback is impossible. Therefore, the learning process is delayed.
I was disappointed that the author elected not to challenge his model with out-of-sample data. For example, he could have used data sets before World War II. High quality data of the form needed might not have been available, so, as an alternative approach, this researcher could have segregated his post WW II data into subsets and tested the accuracy of the resultant forecasts for each subset.
Out-of-sample testing is always needed. Researchers always reserve data for that purpose. We’re all familiar with the failures of the long skirt, the super-bowl, and the Bangladesh butter production correlations to forecast equity returns when challenged with evolving data. More seriously formulated correlations like the Shiller CAPE model worked for a while and then failed. The investment roadway is littered with such failed correlations. Caution is warranted.
Forecasters fail to forecast; there is little reason to believe that equity investors possess that skill. Black swans and exogenous events happen to destroy any hopes for accurate long range forecasts. The author takes some pride that the proposed forecasting tool does not incorporate fundamental market parameters. I tend to distrust such a correlation as a weakness.
The author elects not to emphasize the data scatter about his correlation until the very end of the article. That scatter (standard deviation) is always an important consideration in any investment decision. Currently, based on the proposed correlation, the equity markets offer a 10-year rolling average return of 6 % with data showing scatter between a 5 % and 9 % level. That’s not a particularly shocking projection.
As the forecast time horizon expands, the projections should reflect the historical averages. Essentially, that’s what I meant when I said that the author set himself a low hurdle. As a zeroth order prediction I could simply quote the historical averages and its standard deviation. As a first order correction to that initial estimate, I could correct either upward or downward using CAPE as a guide. This procedure is just a reversion-to-the-mean generic philosophy and might well be as reliable as the referenced research.
Only time will tell. Unfortunately, given the time horizon for the referenced work, that wait will be painfully long. I have no horses in this race. I really do wish the author well. I like attempts to improve our market understanding. Most models fail; especially since investor sentiment is fragile and ever changing, it is a tough modeling nut.
I hope you guys find this a little helpful. Please remember that I have not done a meticulous scrutiny of the referenced article. Daniel Kahneman would not be a happy warrior with my submittal given that it is almost solely based on my reflexive thinking on the matter.
Best Regards.

Xeriscape, bow before Dr. Carrier's picture occasionally, flush less (shower with friends??), buy land in southern Oregon (coastal, not inland; it's already dry) for your heirs. It's global warming, baby (I'm channeling Dick Vitale).
I know my aging memory is faulty, but I swear we had more snow days off school in Indiana than they do now. I think there is a change.
Heck, you were already off topic.

Good story on the Yacktman Fund Family from a year ago if you missed it...
http://finance.fortune.cnn.com/2012/12/13/yacktman-don-funds/

What's also exceptional is Yacktman's dedication to his family. Six of his seven children have followed him from Chicago, where he lived for 38 years, to Austin, where he moved in 2005. He's been transferring control of the funds to his second-oldest son, Steve, 42. And for the past seven years he has dedicated his life to helping his adult daughter recover from a devastating stroke that left her in a locked-in state.
Meeting Yacktman is a lesson in humility -- he acts more like a church bishop (which he was, incidentally, at his Mormon congregation) than a multibillion-dollar investing star. His voice rarely rises above a quiet conversational level. He answers his phone himself. He doesn't employ anyone to handle public relations. His daughter Melissa, 35, recalls working for him during summer breaks, when lunchtime included inviting the passing homeless man to eat. "It'd be me, my dad, and a homeless guy at Wendy's," she says.
Yacktman's Mormon beliefs, which he's followed since converting to the church when he was 15 years old -- seeking stability after his parents divorced and each remarried several times -- lead him to eschew alcohol and gambling. He avoids promoting his own record or ideas, which is almost never the case when a fund grows as fast as Yacktman's has. "I never want to come across as arrogant," he says from his modest third-floor office in the west hills of Austin, where landscape reprints hang on the walls.
Each of his children can tell a story about his frugality. His son Brian, 33, remembers Don hiring him out of business school for $35,000 less than the going rate for MBAs. Another time at family dinner, the twice-a-month gathering of his children in Austin, his son Rob's wife threw away a recycling bag filled with empty soda cans. Don marched out to the garage to save it. His explanation: "No reason to waste a good bag."

also allstarinvestor read
http://www.allstarinvestor.com/ - could not find the linkage
Editor's Corner
2013 Is History, 2014 Awaits
Ron Rowland
Just a few hours remain in 2013, and financial trading has come to a close. You may remember that early in the year many analysts were calling a top nearly every time the market declined. Stocks had the last laugh though, marching upward throughout the year and rendering those gloomy predictions useless to most investors and damaging to those who heeded the advice to sell.
It was a good year for most equity markets and a not-so-good year for other asset classes. Domestic small cap stocks were the big winners, gaining more than 38% by most measures. Slicing the small cap designation a little thinner, stocks in the Russell Micro-Cap Index boasted returns in excess of 45%. International stocks were mixed, with developed foreign markets gaining about 21% while emerging market stocks lost ground. The benchmark iShares MSCI Emerging Markets ETF (EEM) declined about 4% for the year.
Bonds had a tough year, and nearly every segment posted losses. The U.S. aggregate bond market shed about 2% for the year. Losses were steeper among Treasury securities, as the iShares 7-10 Year Treasury Bond ETF (IEF) dropped more than 5%, even after adding in its monthly dividend. Longer maturities meant larger losses as the Vanguard Extended Duration Treasury ETF (EDV) plunged 20%. Hopefully, bond investors have gotten the message that Treasury bonds are not automatically safe. There was no hiding in international bonds either, with developed country government issues declining 3% and emerging market bonds dropping about 10%. One segment that managed to post gains for the year was corporate high yield (“junk”) bonds, with most funds targeting this segment advancing 5% or more.
Commodities also failed to produce profits in 2013. The largest multi-commodity ETF, PowerShares DB Commodity Index (DBC), dropped more than 7%. Gold was a big story in 2013, partly because the yellow metal plunged more than 28%. Energy was the only major commodity group posting profits for the year with United States Natural Gas Fund (UNG) gaining about 10% and the United States Oil Fund (USO) advancing around 6%.
It will be another year before anyone knows the 2014 results, but that hasn’t stopped many people from making predictions. The first trades of the year will begin in less than 48 hours. We wish you a happy and prosperous New Year.
Investor Heat Map - 12/31/13
Sectors
Industrials maintained its first-place ranking, and Technology stayed close behind in second. Materials continued its recent climb, improving from fourth to third this week. Having Industrials and Materials together near the top is reminiscent of a strong global economy, and there is probably at least one economist willing to claim that is exactly what we have. Consumer Discretionary improved its absolute strength while simultaneously slipping a notch in relative strength. Health Care and Financials held their ground in the middle of the pack. Telecom and Energy swapped places with Telecom coming out on top today. The bottom of the rankings stayed much the same with the defensive groups of Consumer Staples and Utilities barely clinging to positive trends while Real Estate trails behind.
Styles
A couple subtle changes in the Style rankings produced a more definitive pattern. Small Cap Growth and Small Cap Blend swapped places, although they were in a virtual tie a week ago. Small Cap Value and Large Cape Growth also swapped places, and they too had identical momentum readings last week. However, these seemingly insignificant changes now put the four smallest capitalization segments at the top in order from Growth to Value. Micro Cap claims the overall leadership position while the three Small Cap categories take second through fourth. The lower half remains a somewhat disorganized mixture of Mid Caps, Large Caps, and Mega Cap. Mid Cap Value resides at the bottom, although with a momentum reading indicating an upward trend of 23% per year it really can’t be called weak.
Global
Europe was challenging the U.S. for the top spot a week ago, and today it has a firm grasp on the position. The U.S. dropped to second and is again facing competition, this time from the U.K. Recent strength in the British Pound has been a positive influence and could be the deciding factor over the next few weeks. World Equity and EAFE round out the top five, after which there is a large drop-off in momentum readings. Japan and Canada are next in line, just as they were a week ago. China and Emerging Markets managed to shake off their negative readings, but their new positive scores are far from being solid. Pacific ex-Japan and Latin America gained strength yet remain in negative trends.

Hi Mark,
Thank you so very much for posting the Morningstar Article by Samuel Lee.
The article clearly demonstrates the market wisdom that when prices are extremely low, the likelihood of oversized returns is very high.
The article is basically an uncluttered, focused review of an impressive body of statistical market data sets. That’s great. However, the author’s interpretation of the data is surprisingly and disappointingly incomplete.
Whenever presenting statistical data, it is always a good policy to include some measure of the dispersion in the data to supplement the commonly cited Mean and/or Median statistic. The data’s standard deviation is the usual dispersion measurement. Quoting some average value is simply not enough.
A quick scanning of the 3 graphs displayed in the referenced article plainly shows that the data scatter is rather large for a major portion of the collected data range. Lee failed to even mention this significant observation. Perhaps it works to weaken his main theme.
To illustrate, just concentrate on Figure 1 which presents the correlation of forward 5-year real returns as a function of Shiller’s inverted Cyclically Adjusted Price to Earnings ratio (CAPE). The data set is fundamentally a wide cloud up to an inverted CAPE value of approximately 12 (P/E ratio of about the 8.3 level).
It is not an exactly new concept that if the P/E ratio is so low that a highly profitable opportunity exists to buy into equities with a high likelihood of huge future rewards.
Similar dispersed cloud formations exist within the other two figures. The dispersion aspects within each of these data sets should have been highlighted in the text. It is always a meaningful part when interpreting any statistical data.
The author also tends to overstate the rigidity implied by the Buy-and-Hold market strategy employed by many market participants. Buy-and-Holders never believe that it is a forever pledge. If it were, profits would never be realized.
Most Buy-and-Holders, myself included, just avoid the daily noise created by frantic media coverage and an overly aggressive trading cohort who actively seek quick rewards without hard work. That cohort are the natural experimental subjects for the Behavioral researchers. Overconfidence is a representative characteristic of this group who do a great service in making the marketplace more efficient.
Buy-and-Holders have divergent financial goals that not only depend on their ages and purposes, but also on market dynamics. It is a cardinal sin to characterize that cohort as a single, inflexible mass with a uniform timeframe. Things are never that simple.
Mark, regardless of my reservations, I really enjoyed the referenced piece. I learned from it. I love these big picture, meta-analysis. I truly appreciate your effort in bringing it to my attention. Thank you once again.
Best Wishes and Happy New Year.

Reply to @MarkM: I'm waiting for Ted to say it's time to close this thread. In the meantime, back in the 90s you could trade in and out of mutual funds on a daily basis (if needed) at fund families such as Strong and INVESCO. I took full advantage of the liberal fund policies back in the days. You could also "dateline" mutual funds back in the days with impunity and with no redemption fees etc. As those who were around then and actively participated, datelining was the closest thing ever to a free luch on Wall Street. Much different landscape today. I always felt it best to be a hybrid trader/investor. An investor when the position is moving in your direction, a trader when it stalls or reverses.
Edit: I believe I mentioned this before and *not* meant in a "pejorative" manner, this is a very, very, conservative group of investors here. I just never had the luxury of being conservative because I got such a late start trying to build my limited capital back in the days. I was forced to think outside of the box.

Reply to @AndyJ:
Agree with you there, AndyJ. I don't think all that much in general of our new Nobel Prizewinner, but CAPE was never sold as anything but a long term indicator (meaning at least 10 years). It's nothing that Benjamin Graham didn't do, but over 7 years instead of 10. The idea was to get completely through the business cycle and thus avoid the distortions in P/E that come from measuring it during boom years vs. bust years. I think that the general idea is sound, and the 'discovery' that valuations haven't mattered recently when you're well into a bull market run seems to be the most easily forgotten discovery in human history.
They used to say that you could only have one bubble per generation because investors, having been caught up in one, would never forget it, but it seems that P. T. Barnum ("There's a sucker born every minute") and H. L. Mencken ("Nobody ever went broke betting on the stupidity of the American Public") may have had a point.

FYI:
Regards,
Ted
http://news.morningstar.com/articlenet/article.aspx?id=623140

Hi Vert,
Nice post. I particularly liked your closing statement: “The inherent uncertainty of the future cannot be escaped.” I completely agree; I hope my postings give proper recognition of that inescapable conclusion. Monte Carlo analyses shine under those cloudy circumstances.
Monte Carlo methods allow a rapid assessment of risks under numerous potential scenarios. By examining a plethora of possible happenings, the odds of likely outcomes can be estimated. Hundreds, even thousands, of randomly selected cases are calculated for each input run. The value of Monte Carlo simulation rests in its exploration of these uncertain outcomes.
Of course, the more realism, in terms of modeling influential parameters and real world data, that can be introduced into the simulation inputs, the more reliable will be the odds estimates. In World War II, convoy routes and screening strategies, and attack submarine groupings and tactics were evaluated using rudimentary Monte Carlo modeling tools.
Along with your cautionary comments, I would emphasize that the simulation outputs are merely approximate probabilities. They should be interpreted just like horse racing odds – no guarantees whatsoever. The resultant odds change with any modifications to the input parameters.
The power of the Monte Carlo codes is that they permit sensitivity, “what-if”, studies. Input values can be conveniently adjusted to search for exploitable trends that move the odds towards more likely and more attractive outcomes. These outcomes are forever tied to the inputs. I hope that I clearly made that point. Garbage in, garbage out always applies.
The inputs could reflect past performance data or any perturbations that the code user elects to test. His choices and any special input preferences will be reflected in the output probabilities. Only the user can judge the merits and shortcomings of his analysis.
I understand that neophyte users might be tempted to overly trust any output that has seemingly very precise number values. That’s a cardinal sin; it is only an artifact of the computer’s number crunching and display power. The overarching uncertainties of future returns remains a mystery. The Monte Carlo analyses merely identifies the level of that risk, and perhaps an asset allocation mix that minimizes that risk. By all means, buyer beware.
I’m sure you realize that portfolio standard deviation estimates are part of the investor Monte Carlo inputs. The portfolio standard deviation is calculated by holding weight factors and the correlation coefficient estimates for all the various portfolio positions. These too can be parametrically examined in the overall simulation process.
Thank you so very much for your informed and discerning contribution to this exchange.

MJG, by your own statement, "These tools certainly can not predict future investment returns; nothing and nobody can. But they do provide guidance and awareness of the risks..."
Well, it seems to me that since they certainly can not predict future returns, the guidance they can provide as to future risk only will extend through the range of vague to misleading, nothing more. Sticking to the 'vague' portion of that spectrum, that's nice and no doubt better than nothing, but I can give plenty of other ways to provide vague guidance towards risk:
1. Check the investment's standard deviation. The higher the deviation, the greater the risk.
2. Check the investment's correlation to something else you own. Negative correlation (if continued into the future, and that's the 'if' that makes this vague) will reduce the risk of adding it to your portfolio.
3. Higher valuations (by whatever ratio) of whatever investment increases the risks of losing money on that investment.
And so on and so forth. I'd guess that the most dangerous things about Monte Carlo simulations are the spurious probability numbers that they spit out. The unsuspecting investor is likely to treat these as possessing an exactitude which they simply do not possess.
For my tastes, historical drawdown ratios are a far more concrete way to get guidance as to the risks involved with investments. These are vague, too, since history at best rhymes (rather than repeats itself), but, as I say, the best way is probably more a matter of taste than anything else, which follows from the inherent vagueness of every method. The inherent uncertainty of the future cannot be escaped.

Another Step Back 3:25 PM Seeking Alpha
GDX
Gold miner ETF sinks to five-year low, gold closes at lowest since July
The Market Vectors Gold Miners ETF (GDX -5.5%) plunges to a fresh five-year low thanks to the newest PMI manufacturing data, which climbed to the highest reading since 2011; BTIG analyst Dan Greenhaus calls the data "stunning,” and bad for precious metals.Comex gold dropped $28.50, or 2.3%, to settle at $1,221.90 for its lowest close since July; the SPDR Gold Trust (GLD) is down 2.5% to kick off December’s trading.Silver slumped 3.7% to $19.29, also the lowest since July.ABX -5.3%, NEM -3.8%, GG -4.6%, KGC -3.4%, GFI -3.5%, NGD -8.2%, EGO -7.5%, AEM -7%, AUY -5.5%, AGI -8.9%, SLW -5.7%.Other ETFs: GDXJ, NUGT, IAU, PHYS, DUST, SGOL, UGL, DGP, GLL, GLDX, DZZ, UGLD, DGL, DGZ, AGOL, GLDI, DGLD, GGGG, RING, PSAU, TBAR, JNUG, UBG, JDST, SLV, AGQ, SIVR, ZSL, USLV, DBS, DSLV, SLVO, USV.
Not a precious metal miner,but a continuing trend:via S A
RIO
Rio Tinto plans to cut capital spending 20% each year through 2015
Rio Tinto (RIO) is the latest miner to guide capital spending lower, announcing a 20% capex cut in each of the next three years to ~$8B in 2015; iron ore output will reach ~350M metric tons/year.In an investor presentation to be delivered tomorrow, RIO says its YTD spending is ~50% lower than in 2012 and has already exceeded its target of $750M in full-year spending on exploration and evaluation.
Casey Research
Rock & Stock Stats
Last
One Month Ago
One Year Ago
Gold 1,252.10 1,345.50 1,729.50
Silver 20.03 22.49 34.35
Copper 3.19 3.28 3.59
Oil 92.72 98.20 88.07
Gold Producers (GDX) 22.28 25.78 48.04
Gold Junior Stocks (GDXJ) 32.50 39.26 87.60
Silver Stocks (SIL) 11.65 13.32 23.03
TSX (Toronto Stock Exchange) 13.395.40 13,440.61 12,202.85
TSX Venture 934.89 968.44 1,218.38

From Seeking Alpha
Gundlach: Time to buy interest rate risk
"People are absolutely freaking out about interest-rate risk," says Jeff Gundlach, sitting down with Robert Shiller to size up the investment landscape. Ever the contrarian, Gundlach suggests last year's 1.4% low in the 10-year Treasury yield could still get taken out. The catalyst? "You never know until after the fact; otherwise, it would be priced in the market. But there is no inflation." To see "freaking out" in a picture, check out the price charts of the mortgage REITs, particularly the two proxies for riding the long end of the curve - Annaly (NLY) and American Capital Agency (AGNC). Gundlach: "You can take advantage of pockets of opportunity in what people don't want ... If you're willing to take the interest-rate [risk], you can get yields of 11% in the agency mortgage market."Constructive on housing (but not homebuilders), Gundlach is also bullish on non-agency mortgage paper, calling it the cheapest sector in fixed income on a risk-adjusted basis. Fans of also beaten-up non-agency mREITs like American Capital Mortgage (MTGE), MFA Financial, Dynex (DX), and Two Harbors (TWO) may want to take notice.Mortgage REIT ETFs: REM, MORT, MORLLong-duration Treasury ETFs: TBT, TLT, TMV, TBF, EDV, TTT, TMF, TLH, ZROZ, SBND, DLBS, VGLT, UBT, TLO, LBND, TENZ, TYBS, DLBL
Also A Good Read
Thirdly, monetary policy is being enlisted to try to generate the economic growth that politicians need to meet spending and entitlement pledges made to voters.
"Long term, it's not so much a financial crisis that we face. It's more a political and social crisis because these promises that we have made for ourselves will be broken," King told the BreakingViews conference.
Seen in that light, if the West is in the grip of ‘secular stagnation', as Summers suggested, the welfare state will have to shrink or taxes will have to rise to pay for it.
http://www.reuters.com/article/2013/11/29/us-economy-global-stagnation-insight-idUSBRE9AS03O20131129