Turtle Investing

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Turtle Investing

• The Practical Turtles Guide to Sticking Your
  Neck Out

Leigh Anderson lthia_at_tayara.comgt Presentation at
www.tayara.com/hia
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Conventional Wisdom

• Risk is proportional to reward
• You cant successfully time the market
• Therefore
• Choose an asset allocation (proportion of bonds
  vs. stock) consistent with your risk tolerance
• Buy, hold, rebalance
• Over a long (30 year?) time horizon, this is good
  advice

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Buy Hold Portfolios
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Market-Cycle Investing

• Risk varies over a market cycle (10 years or so)
• Sometimes risk is rewarded, other times not
• Suggests scaling risk exposure in response to
  market conditions
• Forecast returns to equities
• Increase/decrease proportion of equities in
  response to expected returns

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Forecasting Returns

• Roger Hussman method
• Forecast earnings
• Forecast P/E ratio
• Return Earnings growth annualized change in
  P/E ratio Dividend Yield
• Easy to do over 10-year period using historical
  trends
• See The Likely Range of Market Returns in the
  Coming Decade
• http//www.hussmanfunds.com/wmc/wmc050222.htm

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Peak Earnings Predictability
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Peak Earnings
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Historical P/PeakE Ratio
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P/PeakE vs Ten-Year Returns
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P/PeakE Ratio Summary

• P/PeakE ranges 7 20, with 11-14 normal
• 7 Major secular lows (e.g. 1982)
• 11 Median P/PeakE
• 14Average P/PeakE
• 20 Extreme highs (e.g. 1929)

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The Turtle Strategy

• Assume low P/PeakE means low risk/high return,
  and high P/PeakE means high risk/low return
• Form portfolio of bonds stocks
• Increase/decrease stock percentage as P/PeakE
  varies
• 7 or less 90
• 11 70
• 14 40
• 20 or more 10
• (Average exposure is 56)

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Stress Test 1968-2008

• Starts on a peak (a bubble)
• Two tech bubbles busts
• Real Estate bubble bust
• Stagflation
• High/low interest rates
• Twin Towers Bombing
• Three wars
• Two oil shocks
• 3 recessions

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Turtle vs Fixed Proportion
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Turtle Percentage of Equity
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1968 - 1980
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1980 - 1987
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1987 - 2000
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2000 - 2008
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Thoughts of Chairman Hussman

• In overvalued markets, risk-management is
  generous in the sense that avoiding risk costs
  very little (or nothing) in terms of foregone
  long-term returns.
• In undervalued markets, favorable valuation is
  generous in that it forgives even the most
  abominable timing of purchases, regardless of
  what happens over the short-term.
• November 24, 2008 The Cornerstone of Capitalism,
  John P. Hussman, Ph.D.http//hussmanfunds.com/wmc
  /wmc081124.htm

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Thoughts of Chairman Hussman

• Risk avoidance is generally uncomfortable when
  the markets are hitting speculative highs, and
  value-conscious investing is equally
  uncomfortable when the market is declining.
• but long-term investors who entirely ignore
  valuation are simply not investors at all.
• Value-conscious investing is both rewarding and
  forgiving over time. What the markets don't
  forgive is accepting risk in extremely overvalued
  markets and abandoning risk in undervalued ones.
  To do that more than once or twice in one's
  lifetime is to destroy any prospect of financial
  security.

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Thoughts of Chairman Hussman

• Investment returns aren't free money. Over the
  long-term, they are compensation for providing
  scarce, useful resources liquidity,
  information, and risk-bearing to other market
  participants. No useful services are provided to
  the market by a speculator who follows the crowd
  and chases glamour stocks higher late in an
  extended bull market run.
• People who take enormous risks in overvalued
  securities and compete with other speculators to
  accumulate scarce stock at high prices do three
  things they accept risk when the expected
  long-term return for risk taking is extremely
  low, they absorb liquidity when liquidity is
  scarce, and they distort the information content
  of market prices by pushing overvalued stocks to
  even more extreme levels.
• These speculators lose because they deserve to
  lose they have bargained to lose, because they
  have spent their wealth in a way that makes the
  market less efficient. This is why the Nasdaq has
  lost 80 from its speculative peak 8 years ago.
  Valuations have plunged from ridiculous
  elevations in 2000 to similarly extreme lows at
  present.

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Thoughts of Chairman Hussman

• In contrast, the market compensates investors
  not over the short-term, but predictably over the
  long-term for the willingness to bear risk when
  other investors are unwilling for the
  willingness to provide liquidity by holding out
  bids (gradually and at depressed prices) to
  panicked holders stampeding to get out and for
  improving the information content of market
  prices by reducing the pressure for undervalued
  stocks to become even more distorted in relation
  to their probable cash slows. Long-term returns
  in a market economy are always compensation for
  providing scarce, useful resources to other
  participants in that market. If the activity is
  not scarce, and is not useful to others, there is
  no reason to expect it to to be profitable.
• It is certainly not comfortable to scale into any
  investment exposure at all during a market
  plunge, but we are doing so very gradually. My
  guess is that when we look back on this period
  using monthly or quarterly charts, today will
  look like a very favorable point to have
  invested. On a weekly or daily chart, it may look
  premature or unfortunate but that's why you
  move gradually in response to improving
  valuations. Warren Buffett, who noted a good
  month ago that if prices keep looking
  attractive, my non-Berkshire net worth will soon
  be 100 percent in United States equities.
  Regardless of short-term prospects, I doubt he
  will have any regrets.

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Thoughts of J. Paul Getty
For as long as I can remember, veteran
businessmen and investors I among them have
been warning about the dangers of irrational
stock speculation and hammering away at the theme
that stock certificates are deeds of ownership
and not betting slips. The professional investor
has no choice but to sit by quietly while the mob
has its day, until the enthusiasm or panic of the
speculators and non-professionals has been spent.
He is not impatient, nor is he even in a very
great hurry, for he is an investor, not a gambler
or a speculator. There are no safeguards that can
protect the emotional investor from himself. -
J. Paul Getty
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Data Sources

• SP price earnings
• http//www2.standardandpoors.com/spf/xls/index/SP5
  00EPSEST.XLS
• Robert Shillers data
• http//www.econ.yale.edu/shiller/data/ie_data.xls
  

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How to Compute P/PeakE

• Download and open SP500EPSEST.xls
• Look at the 12 MONTH VALUES tab worksheet
• Scan down the 12 MONTH AS REPORTED EARNINGS PER
  SHR and find the largest number (no matter how
  far back). Thats the PeakE, in this case 84.94
• Look up SP500 index value in newspaper or
  Yahoo. Today it is 847
• P/PeakE 847/84.94 9.97