100 Baggers

Recently I came across the book, 100 Baggers, by Chris Myers. The book presents a case study of 100-bagger stocks, i.e., stocks that turned $10,000 investment into a whopping Million Dollars. The book promotes a rather simple, yet fundamental concept of “buy and hold”, rain or shine. In addition, there are several key nuggets spread through the book that value investors such as myself will cherish. Below is a brief summary (in no particular order) of these nuggets of wisdom:

  • On book-value-per-share: When a company can build book value per share over time at a high clip, it has the power to invest at high rates of return.
  • On difference between Buffet-I and  Buffet-II:
    • In Buffet-I (looking for cigar-butt stocks), the prediction of future cash flow is not that a big deal because you are trying to buy something really cheap in relation to the current years balance sheet or income statement
    • In Buffet-II (look for good companies trading at fair value), Buffet has to have a sense of where earnings are going and therefore he will not invest in companies that he cannot understand
  • On Return-on-Equity:
    • A great place to start is to start looking for company that has a high ROE for 4 to 5 years in a row and earned it not with leverage but with high profit margin.
    • When you see ROE of 20 % year over year, some one is taking the profits at the end of the year and recycling back into the business so that ROE remains where it is
    • High quality stocks are those that do not fall 35 % in bad markers, rather they fall 3 % and then ROE kicks in
  • On Gross Margins:  Gross margins are surprisingly sticky and do not contribute meaningfully to fade rate (or mean reversion)
  • On Passive Investing using ETFs:
    • The people who like to make ETFs, like to put big liquid stocks in them. Companies that are controlled by insiders tend to be illiquid relative to their peers, thanks to the large stake of controlling owners. As a result these types of owner-operated businesses tend to get mis-priced
    • The presence of owner operated can by itself be a signal of value
    • As people pile onto ETFs, that ETF has to go out and replicate its set portfolio-regardless of what prices for the stocks are
  • On Boredom Arbitrage:
    • Quote from Pascal “all men’s miseries derive from not being able to sit in a quite room alone”
    • Market pays, what may be called a entertainment premium for stocks with exciting story. As a result, boring stocks sell at a discount.
  • On Best CEOs (borrowed from Book by Thorndike, The Outsiders):
    • Best CEOs are all great capital allocators
    • They have five basic options for capital allocation: invest in existing operations, acquire new businesses, pay dividends, pay down debt or buy back stocks.
    • Over a long term share holder return will depend on how effectively the CEOs use these available options
    • In general, great CEOs disdain dividends, make disciplined (and occasionally large) acquisitions, use leverage selectively, by back lots of stocks, minimize taxes, run decentralized organization and focus on cash flow
  • Investment quotes:
    • Investing is one sphere of life and activity where victory, security and success is always to the minority and never to the majority
    • In investing, never cry over spilled milk
    • In markets you make more money sitting on your ass
    • I invest knowing fully well that I may loose big on any position. Overall though, I know I will turn in an excellent result


Self Managed Retirement Portfolio

This is the final article in my series on Retirement Portfolio’s. In this article I will discuss my retirement portfolio, which is spread across 3 different brokerage firms. The goal for this article is to outline the various ETF and mutual-fund investment vehicles present in my retirement portfolio. In forthcoming articles, I will delve deeper into each of the asset class present in my retirement portfolio.

Feel free to share your thoughts on how you go about handling your own retirement account.

Retirement Accounts

My retirement account is comprised of

  1. An active 401-K account at Vanguard from my current employer
  2. Roll-over IRA account with Fidelity and
  3. Individual Roth-IRA account at Merrill Edge

Before digging into the composition of assets in each of my retirement-portfolio accounts, I want to share a few thoughts on the topic of consolidation.


Any one reading this may obviously be wondering, why have so many retirement accounts and why with different brokerage firms? Why not consolidate, may be into current active 401-K plan?

There is lot to be said about consolidation. For example, see Wall Street Journal article or the Times article on the topic. The thesis for consolidation primarily revolves around the idea of ease of portfolio management. However, for the following two reasons, I beg to differ.

(a) With a single consolidated account, one looses out on the diversity of available investing opportunities as well as many of the perks offered by one brokerage firm but not the other.

For example, Fidelity has excellent  tools to compare and evaluate ETF and mutual fund investments and I love what they have done with their mobile app. For Bank of America, Preferred Rewards Platinum Honors members, Merill Edge offers 100 free-trades per-month, which means virtually no-transaction cost for managing retirement-portfolio with Merill Edge.

(b) Nowadays it is quite easy to effectively manage various retirement accounts in one place using online personal finance websites such as PersonalCapital.com and Mint.com.

The way I see it, I can have my cake and eat it too.  In other words, diversify institutional risk, as well as benefit from unique offerings of different brokerage firms, while satisfying the desire for consolidation via readily available online personal finance tools.

Active 401-K plan

I currently have an active 401-K plan from my current employer, Amazon.com. Amazon 401-K offerings can be seen at  myplaiq.com. The plan offers 23 funds in total. Several of the funds are the so-called target-date funds.

Completely passive strategy for me would involve indexing with the Vanguard-2040, target date fund, in line with the time-period when I expect to retire from work. This fund has significant cost advantage in terms of the net expense ratio, which stands at 0.06 %. However, given the duration for retirement, the fund is heavily biased towards equity assets, in particular US equities.

Given that I am some what vary of current-valuation for US equity assets and have a desire for  exposure to non-US equity assets, I decided to construct my own portfolio out of available fund choices.

Motivated by the simplicity of equal distribution portfolio’s such as the Permanent Portfolio and the 7-Eleven Portfolio,  I chose the portfolio strategy of equal weighted  capital spread across 4 distinct asset classes,  S&P index fund, US small-cap stock fund,  Fixed Income fund and International stock fund using the available 401-K offerings.

Table 1, below offers a comparison of fund allocation between the completely passive 2040-target date fund vs. my choice for portfolio construction

 Vanguard -2040 Target FundMy Portfolio
US EquityVTSMX (52.1 %)VIIIX (23 %)
VEXRX (11 %)
International EquityVTPSX (34.6 %)OANIX (33 %)
US BondVTBNX (9.3 %)PTTRX (33 %)
International BondVTIFX (4 %)

The downside for my portfolio strategy is the cost, which in aggregate stands at about 0.4075 %, about 6-times greater than the alternative of investing in appropriate target-date fund. In other words, for a $10000 portfolio, I am paying about  $41 in management fees as opposed to paying $6 for a 2040-target date fund.

For now, I am willing to pay this fees to have the ability to diversify out of US equity markets into broader ex-US markets. I will revisit my portfolio in a years time and see whether returns on my portfolio are worth the cost of high management fees.

Rollover IRA

I am managing my rollover IRA money at Fidelity.com. The money is pooled from 401-K and 403-B accounts with two of my previous employers, Qualcomm.com and Univ. of Florida, respectively.

For my Rollover account, I chose to design my portfolio using the 7Twelve portfolio strategy using ETF offering by Fidelity that have zero-transaction cost. I was able to identify commission-free ETF for each of the 7 asset classes, except for the commodity asset class. Table 2, provides details on my Rollover-IRA portfolio with Fidelity.  The net expense ratio for my portfolio stands at 0.1525 %

Fund TypeTickerExpense-Ratio %Total AssetInception Date
Large-Cap USIVV0..0491.2 B5/15/2000
Mid-Cap USIJH0.074.8 B5/22/2000
Small-Cap USIJR0.071.6 B5/22/2000
Developed World EquityIEFA0.0823.7 B10/18/2012
Emerging Market EquityIEMG0.1420.8 B10/18/2012
Real Estate FREL0.0811.9 B2/2/2015
Natural ResourceFMAT0.0817.8 B10/21/2013
CommodityCOMT0.4824.6 B10/15/2014
US BondAGG0.0550.36 B9/22/2003
Treasury Inflation BondTIP0.223.36 B12/4/2003
International BondEMB0.3911.87 B12/17/2007
Cash EquivalentSHY0.1511.19 B7/22/2002

Roth IRA

I am managing a self-managed Roth-IRA account with Merill-Edge. For my Roth-account, I decided to again go with the 7Twelve portfolio strategy. Given that for my account with Merill Edge, I do not have to worry about transaction cost, I chose to construct my portfolio using ETF assets distinct from those held within my Fidelity account.  The idea is to further diversity equity assets across the various 7Twelve portfolio asset classes.

Table 3, provides details on my Roth-IRA portfolio with Merrill Edge. The net expense ratio for this portfolio is 0.17 %, slightly higher than the one with Fidelity, primarily due to the high expense-ratio for commodity-ETF.

Fund TypeTickerExpense Ratio %Total AssetInception Date
US Large CapVTV0.0683.9 B1/26/2004
US Mid CapVO0.0613.2 B1/26/2004
US Small CapVB0.063.6 B1/26/2004
Developed World EquityVEU0.1127.9 B3/2/2007
Emerging Market EquityVWO0.1416.9 B3/4/2005
Real EstateVNQ0.1210.1 B9/23/2004
Natural ResourceVAW0.1015.2 B1/26/2004
CommodityDBC0.851.95 B2/3/2006
US BondBIV0.0714.58 B4/3/2007
Treasury Inflation Protected BondSCHP0.052.5 B8/5/2010
International BomdEMB0.3911.87 B5/31/2013
Cash EquivalentSST0.1141.68 M11/30/2011


In summary, my retirement money is distributed across 28 different funds, covering  a wide spectrum of asset classes. It may be argued that I have a case of over-diversification, the downside of which may be below average market returns. On the other hand, I feel quite comfortable knowing that the likelihood of my portfolio being decimated in a black-swan type event is rather low.


Retirement Portfolio- 7Twelve

This is continuation of part II on my series on Retirement Portfolio’s.  In this article, we will look at the 7Twelve Portfolio.

In my last blog article (see here), we looked at the Permanent Portfolio (PP). While PP provides broader diversification into asset types that are uncorrelated at the macro-level, the diversification is not quite as broad. For example, both the stock and the bond portion of the portfolio is solely made up of US assets with minimal diversification into the broader ex-US world.

As such, I was not quite satisfied with PP and I kept looking for portfolio ideas that are as appealing as PP but also more broadly diversified. And then,  I happenstanced onto the 7Twelve Portfolio. I was hooked.

7Twelve Portfolio was first proposed by Dr Craig Israelsen, Ph.D. in 2008 with a follow up  book on the topic titled, 7Twelve:A Diversified Portfolio with a Plan in 2010.

In his book, Dr Israelsen uses the analogy of “great salsa recipe” to explain his approach to designing 7Twelve portfolio as a well-diversified multi-asset portfolio. The book offers a comprehensive review of the 7Twelve portfolio and also offers a detailed recipe for construction the portfolio.

In addition to having written a book on the topic, Israelsen also maintains a website, http://7twelveportfolio.com/ ,  a rich resource for everything 7Twelve.

For the uninitiated, I will offer a brief summary of the portfolio and in the spirit of this blog, offer my analysis of portfolio returns.

For an in-depth look at this portfolio, check out Dr Israrelsen’s book. I would also like to recommend the blog article by WhiteCoatInvestor on this topic, which I found to be quite useful as I was preparing to write on this topic.

7Twelve Portfolio

7Twelve portfolio is comprised of 12 fund types covering 7 different asset classes.  The chart below (from 7twelveportfolio.com) shows the break down of various asset classes in the portfolio.

In the spirit of “keep it simple”, each fund gets equal allocation of 1/12th of the portfolio money and is re-balanced annually. To quote Dr Israelsen, “If I were trying to juice the returns, I wouldn’t equally weight”,  and I like it.

Given the above distribution of investments across the portfolio assets, 66.6 % of portfolio dollars are assigned to equity and alternative investment funds and the remainder to 33.3% are assigned to bond funds. This asset-distribution strategy mimics vanilla version of balanced portfolio with 60/40 split between stocks and bonds, but with more diversification.

There is a healthy mix of ex-US funds in both the equity and the bond component of the portfolio, something that was amiss with both the Buffet Portfolio and the Permanent Portfolio that we discussed in this series. Furthermore, 8.33 % of assets are also invested into real-estate fund, again something that is not name of the game in designing traditional retirement-portfolio’s.

Portfolio Construction

Chapter 14 of Dr Israelsen’s book presents a detailed list of funds options (from both mutual fund category and ETFs) to fill in each of the 12 slots within the 7Twelve Portfolio. However, the book was written in 2011 and since then the fund options to choose from has increased quite a bit.

A distilled version of Dr Israelsen’s list as well as additional funds now available, comprising of all ETF options for 7Twelve Portfolio is summarized in Table below:

Fund TypeSourceTickerExpense RatioInception Year
Large Cap USFrom Book IVV, SPY, IWB0.04, 0.09, 0.152000, 1993, 2000
Additional ITOT, VOO 0.03, 0.042004, 2010
Mid Cap USFrom BookVO, IJH, IWR, MDY0.06, 0.07, 0.2, 0.252004, 2000, 2001, 1995
Small Cap USFrom BookVBR, IJS, JKL, IWN0.15, 0.25, 0.3, 0.332004, 2000, 2004, 2000
AdditionalSLYV, SLY, VIOV0.15, 0.15, 0.22000, 2005, 2010
Developed non-US StocksFrom BookVEU, EFA0.25, 0.352007, 2001
Emerging non-US StocksFrom BookVWO, GMM, EEM0.27, 0.59, 0.722005, 2007, 2003
AdditionalIEMG, SCHE0.14, 0.132012, 2010
Real Estate FundFrom BookVNQ, RWR, ICF0.15, 0.25, 0.352004, 2001, 2001
AdditionalUSRT, MORT0.08, 0.412007, 2011
Natural ResourcesFrom BookXLB, VAW, IGE0.14, 0.1, 0.481998, 2004, 2001
Commodity From BookGSG, DBC0.75, 0.832006, 2006
US Bond From Book BIV, BND, AGG0.07, 0.05, 0.052007, 2007, 2003
Treasury Inflation Protected From BookIPE, TIP,0.15, 0.22007, 2003
International BondFrom BookIGOV, BWX, 0.35, 0.52009, 2007
AdditionalBNDX, RIGS0.12, 0.172013, 2013
Cash FundFrom BookNo ETF suggestion
AdditionalICSH, ULST, SHV, NEAR0.08, 0.2, 0.15, 0.252013, 2013, 2007, 2013

Given the sheer number of available options within each fund-category, the table can seem some-what overwhelming.

Below are some macro level observations that I want to share about the table:

  •  Several of the low cost ETF options to construct 7Twelve Portfolio are available from Vanguard.
  • Within the last 4-5 years, in general, there is a significant increase in number of fund options with low expense ratio.
  • The most expensive fund category to maintain within the 7Tweleve portfolio is the commodities fund category.

As it turns out, over the last several years, the commodities sector has fared significantly worse and is one fund category that has pulled down the performance of 7Tweleve portfolio down. This has raised the question in my mind, what would the 7Twelve Portfolio look like without the commodities fund present.

I would still have quite a diversified portfolio across all 7 asset classes, however, the name 7Twelve would no longer be quite suitable and we would be forced to rename the fund 7Eleven… Alas, the name 7Eleven is already taken..

Portfolio Performance

Dr Israelsen has found that for the decade spanning the period from 2000-2009, 7Twelve portfolio produced an average annualized return of 7.81 % with volatality of 15.11. Compare above numbers to S&P 500 returns for the same duration, -0.6 % with volatality of 19.57 (Source: macrotrends.net). The lost-decade, atleast from the perspective of 7Twelve portfolio was not lost indeed.

More recent performance numbers for 7Tweleve portfolio are available from the 7Tweleveportfolio.com website, reporting an annualized average returns of 7.71 % (portfolio made up of 12 actively managed funds) and 7.51 % (portfolio made up of 12 passively managed funds) for the 15 year period from 2002 through 2016

The exact composition of funds in the 7Twelve portfolio producing the above reported numbers is not freely available either on the website or in the book.

I therefore decided to construct a specific version of low-cost 7Twelve portfolio and track the portfolio’s performance relative to those of the Buffet Portfolio and the Permanent Portfolio for the most recent 5-year period.

For kicks, I also analyzed returns for a modified 7Twelve Portfolio without the commodity fund, which I call TTweleve-Minus One portfolio.

The four portfolio’s are summarized in Table below

Portfolio-NameNumber of FundsPortfolio-CompositionAverage Expense-Ratio
Buffet Portfolio2ITOT, SHY0.09
Permanent Portfolio4ITOT, TLT, SHY, IAU0.145
7Twelve-MinusOne Portfolio11ITOT, SCHM, VBR, VEU, SCHE, VNQ, VAW, AGG, SCHP, IGOV, SHV0.11
7Tweleve Portfolio12ITOT, SCHM, VBR, VEU, SCHE, VNQ, VAW, DBC, AGG, SCHP, IGOV, SHV0.17

The chart below shows the portfolio performance over the last 5-years. Each portfolio was re-balanced annually.

Quite unsurprisingly, for the time frame considered, cumulative returns on the Buffet-Portfolio has left all others in the dust. For each of the 5-years analyzed, annualized returns for BP was higher than any of the other portfolios. A clear demonstration of how well the US-stock markets fared during this period of bull-markets, that has continued on since March of 2009.

Both the 7Twelve and the 7Twelve-MinusOne portfolios fared quite a bit better than the Permanent Portfolio.  The impact of commodities decline is also quite obvious in the better returns of 7Twelve-MinusOne portfolio relative to that of the 7Twelve portfolio.

To put the returns in perspective, let us look at the risk-return profile for each portfolio..

Quite interesting indeed.. the significantly larger gains in Buffet portfolio has come at the cost of significantly larger volatality.. It seems like for every percent gain in average annual returns, volatality increases by 5 points.

In bull markets, volatality typically occurs on the upside and is investors best friend. However, in bear markets, volatality is on the downside and can be quite fatal to one’s portfolio.

The average annual mortgage rates for 30-year fixed mortgage for the last 5 years has been around 3.86 % (source: FreddieMac). 7Tweleve portfolio’s average annual return for the same period according to my analysis above, has been 3.92 %. Not bad indeed for the degree of portfolio-volatility.

In summary, 7Twelve portfolio (may be 7Tweleve-MinusOne) is quite a strong contender for a retirement-portfolio, and quite worth of a second look as a serious contender as a retirement-portfolio strategy for DIY-investors to build a long-term sustainable nest egg.


  1. ipython notebook (to reproduce charts presented in this blog article)
  2. Book:  7Twelve:A Diversified Portfolio with a Plan
  3. Blog: Whitecoatinvestor.com
  4. Website: 7Twelveportfolio.com

Retirement Portfolio- Permanent Flavor

The second topic in the series on Retirement Portfolio will focus on portfolio diversification.

I will share my thoughts on 2 specific retirement-portfolio ideas, (a) the Permanent Portfolio and (b) the 7Twelve Portfolio.

Each satisfies the following two basic requirements, that I feel are essential for self-directed individual investor:

  1. offer broader diversification (as compared to those offered by the Buffet Portfolio)
  2. is easy to construct (and maintain) using ETFs that are available from at least major one brokerage firm at zero transaction fees

In this post, we will exclusively look at the Permanent Portfolio.

The Permanent Portfolio

My interest in Permanent Portfolio stemmed from my desire to answer the following question:

Is it possible to construct a virtually risk-free retirement portfolio?

Let me first clarify the term “virtually risk free” in the context of the problem of home-purchase and down-payment.

Many of us have at some-point in our lives worked diligently towards building up enough cash reserves for a down-payment on the house.

The median home price in Seattle is now $722,000, which means, a 20 % down-payment requires cash saving of $144,000. Quite a chunk of change!

The fear of loosing out on this principal forces us (and rightly so) to park this sum of money in a regular bank savings account  (should you choose to hold savings account in BoA, the rate of return is meager 0.01 %).

Virtually risk free in this context means, high probability of investment not decreasing below principle (even in the scenario of black swan events such as the financial crisis of 2008) with a non-zero probability of earning more than 0.01% on the investment.

Virtually risk free can be converted to absolutely risk-free by making the simple choice of parking money in a FDIC insured online savings bank that offers on the order of 1 % rate of return in current market conditions. I think this is the especially the right choice if the time frame for purchase is less than a year.

Not withstanding the above scenario, Permanent Portfolio is an investment vehicle that has the potential to offer virtually risk-free returns on investment that are significantly above the nominal savings rate offered even by online banks.

Permanent Portfolio (also called the Simple Portfolio) was described at length by by Harry Browne in his book on personal investing titled: Fail-Safe Investing: Lifelong Financial Security in 30 Minutes.

The idea is to design a portfolio (or an investment vehicle) that is immune all macro-economic environments, i.e., inflation, deflation or recession.  In his book, Harry Browne suggests the following break down for constructing a Permanent Portfolio (PP)

  • 25 % in US stocks – which, usually provide great returns in times of prosperity
  • 25 % in physical gold bullion – which, is traditionally considered to be a good hedge against inflation
  • 25 % in US treasury bills- which, prosper in a deflationary market
  • 25 % in money markets- which is invaluable when money supply is tight as in times of recession.

Rebalancing is done annually.

It is not hard to imagine that one of the above four market environments, namely: prosperity (US markets since Mar 2009 ), recession (Financial crises of 2007-2008), depression (stock market crash of 1929) or inflation (double digit price inflation of 1970s), usually prevails at any given moment in time.

Barring some strange circumstances, almost always one or two of the above four asset types will save the day financially in any market scenario. This increases the likelihood that not only the principal  remains intact but at the same time by having a presence in the markets, there is an increased likelihood of getting decent investment returns over a sustained time period.

Let us find out if there is empirical evidence to support the idea that PP is a “virtually risk-free” vehicle for parking our hard-earned money.

Let us begin by constructing a PP, using ETFs. Since, my objective was to choose a time-period that covers at least one-black swan event, i.e., 2008 financial crash, I chose to construct PP out of ETFs that  were created before the 2008 and have lowest expense-ratio.

Table below provides a summary of the ETFs that I chose to construct the PP.

PPTickerExpense Ratio %Tracking ErrorTotal Assets $Inception DateCommission Free
25 % StocksITOT0.030.0451.3 B5/24/2001Fidelity
25 % TreasuryTLT0.150.227.2 B7/22/2002Fidelity
25 % Money MarketSHY0.150.0311 B7/22/2002Fidelity, TD Ameritrade
25 % GoldIAU0.250.738.9 B1/21/2005None

Let us now look at how the PP performed over the years.

The chart below summarizes, the annual returns for the PP  over 1 year (HP1) and 2 year (HP2) holding periods respectively, starting from 2005 through present day. 

Note: Annual dividend are not taken into consideration in the analysis presented below.

For year 2005, HP1 implies, the PP was created on 1st day stocks for all ETFs were available and the portfolio was liquidated on the last day of the same year, while for HP2, the portfolio was liquidated on the last day of the following year, in this case 2006.

I want to highlight couple of observations

  1. There are 3 one-year holding periods, when an investment in PP actually decreased the principal holding. One of those holding periods include the period of 2008 financial crash.
  2. For two-year holding periods, the results are quite encouraging, with virtually  no loss in principal over any of the 2 year holding periods with an average rate-of-return of 4.93 %

The analysis above is certainly not a thorough investigation of the premise that PP can offer virtually risk-free investing opportunity.

However, it is not far-fetched to conclude that if the time horizon for the requirement for capital preservation for a major purchase such as a house is longer than a year, PP should be given a serious consideration as the  investment vehicle of choice to allow for participation in the market upside.

The second chart shows the annualized returns for PP and the Buffet-Portfolio. For the purpose of this analysis we consider, each portfolio as created in 2005 and held through today with annual rebalancing (resulting in a holding period of >12 years)

Two comments on the chart:

  1. The big dip in annualized returns for the Buffet-Portfolio in 2008, and significant gains in annualized returns for Buffet-Portfolio in 2009 and 2013
  2. PP managed to pull through the 2008 financial melt down quite well with annualized returns dipping to -1.6 % in 2008. On the other-hand, PP missed on the gains in the US-equity markets in 2013, primarily due to fall in gold prices.

The average annual returns for Buffet-Portfolio during the last 12 years was about 6.34 %, whereas the average returns for PP was about 5.25 %.

The volatality in returns for the two-portfolio put things in perspective.. Volatility (as measured by standard-deviation) in Buffet-Portfolio was 14. 7 % vs.  5.25 % for PP.

Does a volatality of 3X merit gains of 1 % on average? I think Not!

In summary, while PP may not be the panacea for virtually risk-free investments, PP certainly merits a second look as a sound strategy for retirement portfolio that has the potential to build sustainable wealth over a long-time horizon.


  1. Additional resource for Permanent-Portfolio
    1. Book: Fail-Safe Investing: Lifelong Financial Security in 30 Minutes
    2. Book: The Permanent-Portfolio, Harry Browne’s Long-Term Investment Strategy
    3. Web-Article: Worlds best-investment strategy that nobody seems to like
    4. Web-Article: The Permanent Portfolio
  2. ipython Notebook (to reproduce all the figures presented in this blog)

Retirement Portfolio-Part I

In this 3 part series, I will present my thoughts on the topic Retirement Portfolio. 

The series will cover the following topics:

  1. In the first part, I will explore in some details what Warren Buffet has to say on the topic of retirement portfolio.
  2. The second part of the series will explore strategies for portfolio diversification beyond the so-called Buffet Portfolio.
  3. In the third part of the series, I will outline my retirement portfolio. I will also discuss some tools that I have put together to manage my retirement portfolio.

Buffet Advice

Let us begin with the following quotes from Warren Buffet on the topic of retirement planning:

“Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund”

“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.  I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions, or individuals — who employ high-fee managers.”

No fuss here. A very simple advise to construct a portfolio comprised of just 2 funds, with bulk of assets invested into a diversified S&P500 index fund.

Constructing Buffet Portfolio

How would one go about constructing the Buffet Portfolio?

For an individual investor, two choices exist:

  1. the open-ended investment company, also known as mutual fund or
  2. Exchange traded funds (ETFs)

There are several articles to be found online on the pros and cons of each investment vehicle for passive investments, see for example: investopedia, the balance, morningstar.

One key difference that I have noticed between these two investment vehicles and the one that is not often discussed is related to the ease of portfolio re-balancing.

Most traditional brokerage firms offer automated portfolio balancing service for portfolio’s comprised of mutual funds, which is not the case with portfolio comprised of ETF’s.

For me, the convenience of being able to trade in and out “at will” and low-cost relative to the open-ended fund counterpart trumps the inconvenience of manual rebalancing. My choice for portfolio construction is therefore heavily biased towards the use of ETFs.

Below is the summary of ETFs that track the S&P500 index

 SPDR S&P 500 ETFIShares Core S&P 500 ETFVanguard S&P 500 ETF
Ticket SymbolSPYIVVVOO
Net Expense Ratio0.0945 %0.04 %0.04 %
Tracking Error0.030.040.03
Total Asset$237,640,705$120,526,072$70,308,744
Inception Date01/22/199305/15/200009/07/2010
Commission Free TradeTD Ameritrade, FidelityVanguard

SPY is the oldest of the S&P 500 ETFs with highest amount of dollar-funds under management. Vanguard’s offering is the newest on the block, with extremely low expense ratio and tracking error.

A dollar invested in any one of the 3 ETFs listed above on the first day of the offering of Vanguard fund would have more than doubled in the last seven years, as can be seen from the chart below. Also, since each of the 3 ETFs track the same underlying index fund, they are pretty indistinguishable in terms of their long-term performance.

The choice of which ETF to pick in this category to include in the construction of Buffet-Portfolio therefore boils down to the brokerage firm used for holding the portfolio so as to minimize the transaction cost.

As to the suggestion for short-term govt bond, Buffet’s advise lacks some precision. For example, it is not clear from Buffet’s statement, whether short-term refers to 1-3 months or 1-3 years. Clearly, depending on the duration, the investment vehicle will change and so will the risk profile and the interest rates on the underlying bond-asset.

I would venture to interpret Buffet’s suggestion for short-term to mean 1-3 year US-Treasury bond, based on the idea that very short-term, i.e., 1-3 month bonds are almost equivalent to cash holdings in the portfolio, offering almost zero return-on-investments.

Below are ETFs vehicles for investing in the short-term 1-3 year US-Govt Bonds.

 iShares 1-3 Yr Treasury Bond ETFSchwab Short-Term Treasury ETFVanguard Short-Term Gov. Bond ETFPIMCO 1-3 Year US Treasury Index Fund
Index TrackedICE US Treasury 1-3 Year IndexBloomberg Barclays US 1-3 Year Treasure Bond IndexBloomberg Barclays US 1-3 Year Float Adjusted IndexBofA Merrill Lynch 1-3 Yr Treasury Index
Net Expense Ratio0.15 %0.06 %0.07 %0.15 %
Tracking Error0.
Total Asset$10.99 B$1.87 B$1.82 B$119.38 M
Inception Date07/22/200208/05/201011/19/200906/01/2009
Commission Free TradeFidelity, TD AmeritradeVanguard

SHY is the oldest of the bunch with highest assets under management. SCHO being the newest of the bunch but is quickly becoming quite a prominent fund in this category due to its low expense-ratio and low tracking error.

Also looking at the chart below, one cannot help but notice a high degree of variability in returns of the 1-3 Yr Treasure Bond funds. If I have to venture a guess, the cause may be related to the lack of a universal benchmark index that each of theses ETFs follow.

Based on the choices available and taking into account the transaction costs, one possible choice for a low-cost passive strategy of retirement investment with Buffet Portfolio would be:

90 % IVV, 10 % SCHO portfolio created either at Fidelity or TD-Ameritrade.

Buffet Portfolio-Performance

In 2004 annual Berkshire meeting, Buffet said:

“Among the various propositions offered to you, if you invested in a very low-cost index fund — where you don’t put the money in at one time, but average in over 10 years — you’ll do better than 90% of people who start investing at the same time.”

Buffet Portfolio constructed with an initial investment of $10000 and annual rebalanced, would have grown to $20644 today, producing a healthy  annual rate of return of about 5.7 %, especially considering the fact that time period includes the financial turmoil of 2007-2008.

The charts below track the evolution of Buffet-Portfolio over this time-period. Column 1 show the growth of total assets in the portfolio. Columns 2 and 3 track the change in number of each equity asset in the portfolio, resulting from annual portfolio re-balancing.

Is Buffet Portfolio Diversified Enough

It is quite evident that Buffet Portfolio is primarily a bet on America and is in line with Buffet’s thinking on the topic, see for example Buffet quote circa 2015:

“America’s economic magic remains alive and well”

Bloomberg has an entire article devoted Buffet quotes over the years on the American Dream.

Since the financial melt-down, adhering to this philosophy has been quite beneficial to every investor who has fully participated in the American markets.  It is therefore quite tempting to adhere to Buffet advise and simply index all of our equity diversification to S&P 500. 

However, given the premise of this blog and I believe, the desire of all retirement investors for captical compounding for the long haul, we should be vary of the possibility for a correction in US equity markets. And if the correction indeed happens, we could be in for a ride with Buffet Portfolio.

Let us look into some data that may offer some insights into where we are in the market-cycle in relation to US equity markets.

Buffet Indicator

In a 2001 Fortune magazine interview, Buffet opined on the macro state of the economy by stating that Buffet ratio, which he defined as the market value of all publicly traded securities as a percent of country’s GDP  “is probably the best single measure of where valuations stand at any given moment“.

In chart below (from Advisor Perspectives), we show where the Buffet indicator as it stands today.

The all time high for Buffet-indicator was reached at the peak of dot-com bubble.

Shiller PE Ratio for S&P 500 Index

The chart below, shows Shiller’s PE ratio for S&P 500 index (from multpl.com)

Shiller PE ratio is the ratio of price to average inflation adjusted earnings over last 10 years for all S&P 500 listed stocks.

It is interesting to note that Shiller PE is quite close to what it was at the peak of the most devastating stock market crash of 1929. The only other time when Shiller PE has grown beyond 30 is during the dot-com bubble.

Historical average for Shiller PE is 15.66. We are today at PE of almost twice that of historical averages.

Sound Bytes

Grantham, Mayo, Van Otterloo & Co. LLC  a global investment firm has recently put out a white paper titled: The S&P 500: Just Say No.

The primary thesis of the article is that the expected growth in earning and dividends for US equities do not justify the current hefty valuation of S&P 500 index and that better opportunities currently lie in the emerging markets.

Howard Marks, the legendary fund manager and Co. Chairman of Oaktree Capital put out a memo recently, titled There They Go Again… Again.

While summarizing all the things that Howard Marks has discussed in the article, is worthy of a blog in itself, one particular quote from the memo quite succinctly summarizes (to my  mind) the euphoria surrounding the present bull-markets:

“Where are we today? As I said earlier, risk is high and prospective return is low, and the low
prospective returns on safe investments are pushing people into taking risk – which they’re
willing to do – at a time when the reward for doing so is low.”


While I am not 100% certain that following Buffet’s advise to stay diversified only in the US markets is a great advise for one’s retirement portfolio, I want to leave you with the following tips from Buffet that are quite useful towards the goal of growing and preserving wealth over a long haul:

  1. Keep it simple
  2. Start early
  3. Don’t try to time the markets
  4. Don’t be afraid to buy the dips


  1. Github resource to download investmenttools package: investmenttools
  2. IPython notebook example to reproduce the Buffet-Portfolio plots: Buffet_Portfolio.html

Value Investing

In this article, I will cover my thoughts on the following topics:

  1. What is value investing?
  2. What is intrinsic value?
  3. What are some common accounting metrics to identify value stocks?
  4. What is some of the criticism of value investment strategy?
  5. Buffet-notion of value investing
  6. My take on value investing as an applied value investor.

Value Investing

Let us begin with a quote from Benjamin Graham, considered by many to be the father of value investing.

“We know from experience that eventually the market catches up with value. It realises it in one way or another”, –Benjamin Graham, 1955

This quote captures the essence of value investing.  Essentially, value investing is a framework for investing in equity assets that are trading at a significant discount to their intrinsic (or inherent) value. The idea is that the purchase of stock-asset below intrinsic value offers a margin-of-safety that can help absorb undesirable developments resulting from market overreactions on the downside.

It is clear from above definition that intrinsic value is at the heart of value investing strategy.  So what is “intrinsic” value of a stock?

Intrinsic Value

Philosophically speaking, value is something that exists in the mind. To define value is therefore as difficult as defining life itself. Even Benjamin Graham eschewed from precisely defining value for a given stock. However he did offer some guiding principles to assign a value, which he refered to as intrinsic value, to stocks.

Intrinsic value can be thought of as the dollar amount per-share that one can assign to a stock based on future earnings and dividends, discounted to today.

While theoretically sound, in practice the above definition leaves quite a room for guess work. For no one knows the future, let alone determining whether the company will survive. Intrinsic value is therefore at best an estimate for value, in terms of dollars, of the firm and can never be measured precisely.

One can though under assumptions, mathematically formulate the notion of future earnings discounted to today and obtain an estimate for intrinsic value of stock.

There are basically three approaches, commonly found in literature, on estimating intrinsic value for a stock:

  1. Discounted Cash Flow (DCF) Model:  Use firms discounted future cash flow to compute intrinsic value
  2. Dividend Discount (DDM) Model: Use firms discounted dividend cash flow to determine intrinsic value
  3.  Price-Earnings (PE) multiple: Use discounted future earnings per share to determine the intrinsic value

Detailed discussion on these methods is a topic for the future. For now, it suffices to know that whatever method is used to estimate intrinsic value, it involves knowing the future and since future is unknow, it involves making a guess.

To further hammer upon the above point, in the table below , I list the intrinsic value for Apple, pulled together from several sources:

SourceIntrinsic Value
GuruFocus (PE)251
Gurufocus (DCF)274

Unsurprisingly enough, there is a quite a wide-range in the estimates for intrinsic value.

Accounting metrics for Value Investor

For a value investor, pulling the trigger on purchase of an equity asset is much easier if the following two conditions are met:

  1. His/her estimate for intrinsic value for stock asset is above the current market price for the stock and
  2. There is a significant margin of safety underlying the price paid for aquiring the asset.

While there are several financial metrics that can be useful in stock valulation, see here for example,  below, I list 3 financial metrics that I have found useful in in assessing the margin-of-safety aspect of an investible asset:

  1. Earnings Yield (EY): EY as a accounting metric for margin-of-safety was proposed by Benjamin Graham in his book, The Intelligent Investor. EY is calculated as inverse of Price-Earnings (PE) ratio, by dividing the earnings per share (EPS) to the current market price for the share. The higher the difference between EY for a stock and the 10-year treasury yield, higher is the potential margin-of-safety for the stock.
  2. Price to Sales Ratio (PSR): PSR as a metric to value stock was first proposed by Ken Fisher. As opposed to PE ratio, PSR uses corporate sales to value a company. It is calculated by dividing company’s market cap by the total revenue in the most recent year.  PSR can be a good metric for identifying growth stocks that have taken a hit in earnings due to a short-term hiccup. In general, lower the PSR, higher the margin-of-safety.
  3. Payout-Ratio (PR): For firms that pay dividend, PR can be a critical measure to define margin-of-safety. PR is calculated as the ratio of firms dividend per share (DPS) to earnings per share (EPS). PY>100% indicates that the firm is paying its share-holders more money than it can earn… Clearly such a trend cannot last forever. Lower the PY, higher the margin-of-safety that the dividend income stream will remain intact even in downturn markets.

Critique of Value Investing

Academic Finance is dominated by the Efficient-Market Hypothesis (EMH), first proposed by Eugene Fama. The basis idea is that market price of stock is the best price for stock, reflecting all the available information about the stock at any given moment in time.

Proponents of EMH claim that it is difficult to identify good stock trading at a bargain. Value investors seeking bargains will therefore end up with collection of “low” quality stocks with low market-to-book ratio relative to their growth peers.

Over long term, value investors tend to make money simply because they are willing to take higher risk on such low quality stocks and are rewarded in proportion to the risk they entail.

These ideas were formally captured by Eugene Fama and Kenneth French in one of their highly cited works titled, Common risk factors in returns of stocks and bonds.  This work led to the idea of value premium, defined as the risk adjusted returns of value stocks over growth stocks.

Buffet notion of Value Investing

It can be argued that the fundamental approach to value investing as proposed by Benjamin Graham, is to hunt for value premium, i.e., seek out bargain low market-to-book stocks.

Warren Buffet and Charlie Munger’s modified the basic value investing approach by their willingness to seek out high quality stocks not necessarily trading at bargain price, but available at fair price.

A recent article by David Harper on Investopedia titled, Warren Buffett’s Investing Style Reviewed, aptly summarizes Buffets approach to value investing and is worth a read for folks who want to understand why and how Buffet differs from the traditional Graham notion of value investing.

My take as an Applied Value Investor

I have adopted value investing principles to suit my needs for sustained wealth creation as an individual investor under the following constraints:

  1. limited supply of time and resources
  2. limited supply of capital and
  3. average investor intelligence.

Fundamentally, I believe that markets from the perspective of an individual investor are extremely efficient and it is prudent to participate in the markets passively, by owning a basket of well-diversified index-funds that track the overall markets across all asset types.

At the same time riches cannot be had by simply following the markets, but rather seeking out opportunities to invest in high quality stocks, with high margin of safety, that may be trading at fair value and at times even at a siginificant discount to intrinsic value.

Accordingly, my approach is to allocate ~20 % of my investible assets for active value investing in the hopes of seeking alpha, while the bulk of my investible assets, are invested in a diversified portfolio of index funds.

As this blog evolves, I will dig deeper into specifics of my approach to value investing and portfolio diversification. I will use this forum to track my performance, my mistakes and lessons learned.

I am hopeful that this blog is useful to the commuity of individual investors, who like myself ,are on a self directed journey towards financial independence and share my passion for disseminating the education and experience gained over time for greater good.