Mad Money Machine

Lazy Portfolio Risk Analysis

You’ve used the IFA Benchmark Your Portfolio tool to review the performance of the Index Funds Advisors portfolios. They give you the return and the risk for each of their 20 IndexFolios over a timespan you select. I thought it would be cool to do the same thing for several of the Lazy Portfolios (click to see the make-up of each portfolio). Remember that nifty tool from a couple of shows ago? The StockMarketFunctions add-in for Excel can grab historical quotes from Yahoo!. Now I’ve developed a spreadsheet where I can plug in up to 10 ticker symbols and the percentage allocation to each stock or fund and then get out the total return for the portfolio and also the annualized risk. What is annualized risk? It is the standard deviation of monthly returns multiplied by the square root of 12. Not sure why it works and don’t really care. Anyway… I’ve plugged in some of the Lazy Portfolios to see their returns and risk for the past seven years, from 1/1/2000 until 10/1/2007. I’ve sorted by return and also sorted by risk.

Here’s the result, first sorted by annualized return over the nearly seven years:

Now, sorted by lowest risk:

You might enjoy seeing it as a scatter plot:

Now take a look at the same kind of chart only over a longer time span and INCLUDING THE DOW JONES 30 STOCKS!

Going farther to the right means you are taking on more risk. Basically, you want to find an investment at the upper left. The line that crosses from lower left to upper right is the “Efficient Frontier.” I think this is one of the most important concepts to understand in all of investing. That is why the icon for the Mad Money Machine incorporates it.

Note: I cannot guarantee the accuracy of these results. More likely, I might guarantee there is a mistake somewhere. But in general, the numbers give a good idea of the relative risk vs. reward results. No taxes or advisor fees were removed from the results.

MMM-083: Under the Micro Scope

Diving deep into Microcap stocks. Cramer’s Stocks of the Year. Barracuda. The NEXT Triple-Buy Stock. The best SOCKS (not stocks) to buy now. A Tool. A Guru.

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MMM-083: Under the Micro Scope [ 46:39 ] Hide Player | Play in Popup | Download

• Fox Business Channel’s Happy Hour
• Cramer’s Stocks of the Year
• Barracuda
• The NEXT Triple-Buy Stock
• The best SOCKS (not stocks) to buy now.
• Our Tool this week is just OK.
• Our Guru, however, is clever.
• XBOX, Soccer, etc.
• The best Microcap and Smallcap value funds to buy now. (see below)

Music from music.podshow.com:
ALTA PLAZA – XRAY DOGS
Ruby In the Dust – The Michael E. Thomas Band
Runaway Train – Under Feather

The Mad Money Machine is proud to be sponsored by Index Funds Advisors at ifa.com.
Email me: feedback at Mad Money Machine dot com, or comment, or Call me on the Mad Money Machine voicemail line at 206-734-4763

Thanks Rita

Rita sent me this link to Ben Stein’s article this past Sunday in the New York Times entitled “Sound Investing and Peaceful Sleep.” Ben has got the right idea. I loved watching him on the Fox Saturday morning business shows, especially when they would ask him for his stock prediction. He always chose a boring old fund. Ben and Rita are among my favorite people.

MMM-082: Listen to the Show

Investing in baseball cards? MLS’s David Beckham moment. The new iShares MSCI Emerging Markets Small Cap ETF. James B. Stewart says to “Buy and Hold“. The next winner of the Nobel Prize in Economics? Our Guru thinks that capitalism will fail. Our Tool is like wading through a flea market of investing data.

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MMM-082: Listen to the Show [ 26:00 ] Hide Player | Play in Popup | Download

• Lamenting the fact that your mother sold your baseball card collection? Try stocks instead!
• MLS may get its David Beckham moment after all.
• I’m going to keep a lookout the new iShares MSCI Emerging Markets Small Cap ETF.
• Crazy Logic mashup from Bootieusa.com
• The Automatic Portfolio Returns spreadsheet. Just change the dates and it will recalculate the performance of the three portfolios.
• James B. Stewart of Wall Street Journals Common Sense column says to “Buy and Hold“.
• Eugene Fama, the next winner of the Nobel Prize in Economics?
• Our Guru thinks that capitalism will fail. But not in the way you think. Listen to the Show.
• Our Tool is like wading through a flea market of investing data.
• Is there no end to the number of taxes we must be subject to? Will there ever be a tax that is repealed? Nah. Make mine Earl Grey.
• Mark Hebner talks about Step 10: Risk Capacity and describes CEO investing.

Music from music.podshow.com:
ALTA PLAZA – XRAY DOGS
Ruby In the Dust – The Michael E. Thomas Band
Choices – Mostly Harmless
Tea For Others – The Loving Its
Runaway Train – Under Feather

The Mad Money Machine is proud to be sponsored by Index Funds Advisors at ifa.com.
Email me: feedback at Mad Money Machine dot com, or comment, or Call me on the Mad Money Machine voicemail line at 206-734-4763

yes, I’m going to do a show 82

Finding a hard time getting the house to myself. And since I’m only going to do 4 shows in October anyway, I guess I can spread ’em out a little. Keep checking back, got some good stuff in the next show.

MMM-081: Get Your History Right

My FAVORITE TOOL so far. A lavish wedding, or a lavish retirement? Learn personal finance thru Monopoly. Our Guru says help yourself first. Lost luggage.

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MMM-081: Get Your History Right [ 33:30 ] Hide Player | Play in Popup | Download

• A lavish wedding, or a lavish retirement?
• This week’s Tool helps you get your history right. This may be my favorite tool of all tools I’ve ever reviewed on the Mad Money Machine! HERE’S AN EXAMPLE SPREADSHEET calculating portfolio returns.
• I talk briefly about the Lazy Portfolios Q3 Update.
• Our Guru thinks that looking out for yourself is the best way to look out for others.
• I talk not about where to invest, but WHEN to invest. Take the RCS! Two times to make a trade: When you’ve got the money and when you need the money.
• Eight Personal Finance Lessons I Learned from Monopoly.
• RavJim wonders why there is a difference between my accounting and IFA’s accounting on the IndexFolio 100’s return.
• John Bogle was on the Bill Moyer’s Journal talking about the Battle for the Soul of Capitalism
• We go to the archives to play Step 10: Risk Capacity.

Music from music.podshow.com:
ALTA PLAZA – XRAY DOGS
Ruby In the Dust – The Michael E. Thomas Band
BIG DEAL- girls stuff
Robert Lund – 50 Ways To Lose Your Luggage – The FuMP

The Mad Money Machine is proud to be sponsored by Index Funds Advisors at ifa.com.
Email me: feedback at Mad Money Machine dot com, or comment, or Call me on the Mad Money Machine voicemail line at 206-734-4763

Lazy Portfolios Q3 Update

Here’s a summary of how the “Lazy Portfolios” (as seen in The Kirk Report at thekirkreport.com) have done through the 3rd Quarter of 2007. I will provide more detail of the makeup of each portfolio here and on the podcast. I also show each portfolio’s annualized performance for the previous 1.75 and 2.75 years.

NOTE THAT THESE ARE THE EQUITY ONLY PORTIONS OF EACH PORTFOLIO. I REMOVED THEIR BOND COMPONENT (IF ANY).

Sorted by long-term performance:

Now the short-term, YTD sort:

Here is the detailed holdings of each portfolio. The 3rd column is the original portfolio percentage including bonds. The last column shows the equity weightings without bonds.

Details of IFA IndexFolio 100 are here.

MMM-080: Fill In the Blank

The strength cannot be underestimated. It is not investing, it is speculating. Ruby In The Dust, full version.

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MMM-080: Fill In the Blank [ 36:56 ] Hide Player | Play in Popup | Download

• You listeners moved EconTalk up 6 notches in the iTunes charts!
• I got my XBOX back. It works great, knock wood. I got a copy of Halo 3.
• I play the COMPLETE version of “Ruby In The Dust”
• If an 8-year old can get an investment portfolio right, so can you!
• I am a closet market timer. I waited to re-invest my tax-loss harvest. Boooo!
• A caller to the voicemail line relates his story about a bad bad investment advisor exploiting him.
• I play the musical version of Step 9: History
• I’m reading Offside: Soccer and American Exceptionalism (see below)
• I just learned about Generation adidas.
• We study Cross Correlation this week and why it is important in your portfolio.

Music from music.podshow.com:
ALTA PLAZA – XRAY DOGS
Ruby In the Dust – The Michael E. Thomas Band

The Mad Money Machine is proud to be sponsored by Index Funds Advisors at ifa.com.
Email me: feedback at Mad Money Machine dot com, or comment, or Call me on the Mad Money Machine voicemail line at 206-734-4763

please stand by for show 80…

I did some recording for show 80 (No, not another interview) the past couple of days and when I had put some of it together, it did not come up to my quality standards content-wise. So instead of releasing rubbish, I’m going to take another crack at it today and for however long it takes to get it right. Stay subscribed.

MMM-079: Meta EconTalk with Russ Roberts

An interview with the host of my favorite podcast: Russ Roberts of EconTalk available in iTunes and at EconTalk.org. Why economics is not boring. Background about his show. Hayek, Wikipedia, and Libertarianism.

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MMM-079: Meta EconTalk with Russ Roberts [ 55:49 ] Hide Player | Play in Popup | Download

Of the 125,000 podcasts that Apple says are available in iTunes, EconTalk hosted by Russ Roberts is my favorite. I had the privilege of interviewing him today to find out more about his podcast, how and why he got into economics, what a listener might want to know before listening to EconTalk, and then how to solve some of the world’s problems through better economics.

Russ is interested in making economics understandable to the non-economist. Economics is more than just the stock market, interest rates, and inflation. It is about scarcity and making choices.

He blogs at CafeHayek.com. He writes novels. He does the EconTalk podcast.

He was good in Economics in high school. Started doing more unusual things like writing novels to communicate the ideas in economics. He believes we live in an incredible time due to the wide availability of information on the Internet.

We discuss the economics of EconTalk itself. He does a mix of interviews, some face-to-face, some over the phone. He interviews some colleagues and other notables in economics. The podcast is part of a project at Econlib.org. Also the Online Library of Liberty. Classic works are online such as Adam Smith. They have a concise encyclopedia of economics which Russ says is an incredible resource.

His book The Choice is a primer on trade written in the form of a novel. A dialog between a fictional television factory manager in the 60’s who is worried about competition from Japan. Be sure and read the newest, 3rd edition which is updated for contemporary issues (and is actually cheaper). His thesis is that trade is overwhelmingly beneficial for those who participate.

His new book might be called The Price of Everything. It is about how the modern economy allows us to plan and dream and fulfill our desires of a wide variety both material and non-material that don’t require a central planner. Our various dreams weave together smoothly. He points out why we have the most successful economy in history. Why do we take it for granted? A train is the wrong metaphor. Instead, it is a tremendous, organic thing that is hard to harm. It will come out next year by Princeton University Press.

He says many books have come out recently about economics for people with no economic background. Recommends books like those from Steve Lansberg, Tim Harford’s The Undercover Economist, Robert Frank’s The Economic Naturalist, Tyler Cowan’s Discover Your Inner Economist. Freakonomics, Freedomnomics. Thomas Sowell’s Basic Economics.

How do we deal with the incredible flood of media and information that is available to us today? Russ says we will always look for filters to help us choose the things to see, hear, and read. The non-centralized, self-organizing techniques that are emerging to help make recommendations of what information and entertainment to consume. He says we are still at the beginning and things are continuing to get better and better.

We briefly discuss how to better raise children. We don’t need to teach them PowerPoint and keyboarding. Instead, play with them athletically and through great boardgames like Settlers of Catan and Puerto Rico. And read, read, read.

I ask him how he responds to the dreaded question at parties: “So what do you do?” He used to say he writes novels about economics.

I ask about three things that seem to recur on EconTalk: Hayek, Wikipedia, and libertarianism. Russ says his shows may vary on their level of discourse from highly sophisticated to those more for beginners. Hayek’s central idea is that of self-organizing system or the way that markets coordinate knowledge via prices. He discusses an example from The Invisible Heart that talks about why the Bagel store never runs out of bagels even though people didn’t place their orders ahead of time. And you can even buy croissants on the number one pizza day of the year: Super Bowl Sunday. These self-organizing systems without a coordinator look organized.

Wikipedia works amazingly well even with its distributed editing. Libertarianism allows freedom to work.

If Hayek were a financial planner, he would recommend index funds. Russ says he himself invests in index funds. It is difficult to find a market opportunity before everyone else and anything else means it is too late.

I ask if all good economists end up as libertarians. Russ says no, there are those who disagree with him and want more government regulation.

Would an economist buy a battery tester from Radio Shack? That is, do we trust that their tester doesn’t lead one to believe that batteries wear out faster than actual in order to sell more batteries. Russ gives the example of toothpaste tubes where you can’t get the last drop out. Conspiracy? Russ thinks not. Competition is an extraordinary way to protect consumers from other money-making incentives.

I ask whether he believes that one should be free to do as one wishes as long as he doesn’t disturb his neighbor. Leonard Read wrote Anything that’s Peaceful with the them that as long as you don’t interfere with others, its OK. But the interesting case is our paternalistic urge to protect others. But this doesn’t justify intervening in their lives. The other issue is not just that of physical harm to others but this notion of psychological harm to others. What if a neighbor is offended by some magazine we subscribe to? Even if they don’t see it. Russ thinks it is a road to tyranny, government control, and dangerous things like the reduction of freedom. We are starting to get intolerant to what people eat: smoking, meat, fat, candy, calories. But the logic of saying that if ANYTHING you do impacts me in some negative way is wrong. We should just focus on physical harm, not the psychological

I ask if he is optimistic that people will understand more about economics and thus make the world a better place. He sees in the longer view a march toward human freedom. 2100 will be better than 2000 even though we will see ups and downs. Material progress has been a tremendous change, the number of people in desperate poverty has gone down.

Having said that, the political system we operate under has some inherent institutional barriers to freedom. The two parties reduce competition. But he is optimistic. He recommends his collegue Bryan Kaplan’s book The Myth of the Rational Voter on how the political process works and how economics is misunderstood.

I ask about obesity and economics and he did talk with someone about this on EconTalk. The basic idea is that food is cheap and continues to get cheaper. Should we tax bad food? No. That’s not the way to fix things. We must restrain from restraining others. People need to be more disciplined. We check our email too much, for example. Basically, we need more discipline. While he advocates watching less TV, and has gotten rid of cable TV at his house, he is not in favor of the government regulating TV watching. That is treating us like children instead of adults. Instead we need to figure out as adults how to eat less and exercise. “Most powerful governments do evil. There are very few powerful governments that were benign and benevolent.”

I ask Russ where he thinks the stock market is headed.

The Mad Money Machine is proud to be sponsored by Index Funds Advisors at ifa.com.
Email me: feedback at Mad Money Machine dot com, or comment, or Call me on the Mad Money Machine voicemail line at 206-734-4763

MMM-078: It’s a Sucker’s Game

Jim Cramer says active trading is “a sucker’s game.” More about the Tax-Loss Tango. Soccerhead and American soccer mania. The mathematical formula for happiness = S + C + V. Mark Hebner explains Step 9.

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But, if you just can’t possibly deal with that then go ahead and
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MMM-078: It's a Sucker's Game [ 31:30 ] Hide Player | Play in Popup | Download

• Cramer says active trading is “a sucker’s game.”
• More discussion about the “Tax-Loss Tango”
• Fantastic book: Soccerhead by Jim Haner, explains why I never heard much about soccer when growing up. Do you realize that today more kids play soccer than baseball?
• Go Women’s National Team!
• I found the mathematical formula for happiness and it is this H = S + C + V. Happiness equals your happiness Setpoint plus your Conditions plus your Voluntary actions.
• We need a compendium (say, a Wikipedia article) of all songs that have whistling in them!
• Our Guru explains how investing is like amateur tennis and golf. Just avoid mistakes. He says day trading is a “sucker’s game.”
• Mark Hebner explains Step 9: History and why we need to understand how markets have performed over the long term.
• Be sure and get back here quickly next Tuesday for show 79! A very special interview with my FAVORITE podcaster.

Music from music.podshow.com:
ALTA PLAZA – XRAY DOGS
Loser – Daiki
Happiness Is Like A Kiss – Mike McGill
Brand New Sucker – Jonathan Coulton
Loser – Comeg

The Mad Money Machine is proud to be sponsored by Index Funds Advisors at ifa.com.
Email me: feedback at Mad Money Machine dot com, or comment, or Call me on the Mad Money Machine voicemail line at 206-734-4763