The Investment Scientist

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Oil and Gas Investment Scam

In the last month alone, I’ve gotten calls from two clients asking me if they should invest in tax advantaged oil and gas investments being pitched to them?  Both of these clients are physicians.

The pitch is that oil and gas investments are like IRA accounts, but without the contribution limit. Whatever amount you invest can be written off right away.

The pitch is quite alluring to high-income professionals like physicians who are facing higher taxation. But it sounds too good to be true, so I did a study.

It turns out what is being pitched as “tax advantaged” is in fact the riskiest part of an oil and gas investment.

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Like Odysseus, automatic investments help investors avoid the Siren call of market timing

We call it stupid if someone takes a $55k job, even if he is offered the same job at $100k.

We call it market-timing when the same thing happens in the stock market. The long-term average annual market return is 10%, but the long-term average annual investor return is only about 5.5%. This is documented both by Dalbar’s study titled “Quantitative Analysis of Investor Behavior” and Morningstar’s research on fund returns and investor returns.

How could this possibly happen?

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Hedge fund managers take their cut

There is a new book about the hedge fund “industry” by former insider Simon Lack. Its title says it all – The Hedge Fund Mirage – The Lesson of Big Money and Why It’s Too Good To Be True.

Not everybody has time to read books like this, but if you are ever approached by a hedge fund peddler – I get calls every week about an amazing alternative investment opportunity – at least look at the table below before you part with your money.

Between 1998 and 2010, hedge fund fees totaled $440 billion versus $9 billion total profits for investors.

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New York Stock Exchange

Value investing as an investment discipline was pioneered by Ben Graham and is practiced by Warren Buffett.  It has a long history of data collection and many rigorous studies done in the most prestigious research universities.

The idea of value investing is that undervalued stocks will ultimately outperform overvalued stocks in aggregate.

There are four simple measures one can use to determine if a stock is relatively undervalued or overvalued….

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Asset Class Rebalance

Asset Class Rebalance

In one of my previous posts, I showed how diversification across asset classes is superior to momentum and contrarian strategies. Today, I am going to show how disciplined rebalancing adds to returns. I will first demonstrate this using a stylized example and then through historical returns.

An example of two asset classes

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MZ Capital 40/60 Portfolio Model

This report shows the construct and performance of a 40/60 model portfolio.

Asset Classes and Fund Selection

There are six asset classes in this portfolio model. The asset allocation is implemented using DFA funds, as shown in the table 1. I explained why DFA funds are better than Vanguard funds here. 

Table 1: Asset Class Funds
Asset Class Percentage Funds
US Equity 10% DFFVX – US Targeted Value Fund
International Equity 10% DISVX – International Small Cap Value Fund
Emerging Markets 10% DFEVX – Emerging Market Value Fund
REIT 10% DFREX – Real Estate Securities Fund
TIPS 20% DIPSX – Inflation-Protected Securities Fund
Treasuries 20% DFIHX – Short-Term Treasuries Fund
Muni Bonds 20% DFSMX – Short-Term Muni-Bond Fund

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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