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Gains from Behavioral Finance

       October 12, 2017  Gains Behavioral Finance.pdf

Instead of merely trying to not fall victim to the human foibles revealed by behavioral finance, how can we go a step further and capitalize on all the stupid things investors do?

Drain the Traditional IRA Early?

       October 12, 2017  Drain the IRA.pdf

A common perception is that the longer funds remain untaxed, the greater the returns because of gains on untaxed money.  While counterintuitive, we show and illustrate that often for many investors it's better to pay the taxes now.

Approaches for Picking Individual Stocks, Screening for a Group of Stocks, or Selecting Factor-Based Indexs of Many Stocks

       May 25, 2017   Stock Selection - Rifle, Shotgun or Net.pdf

         June 13, 2017  Portfolio Status by Rifle, Net or Shotgun.pdf

The methods we use to select stocks need to take account of how many stocks we want to select and the variation in results we might expect.  Skillful allocation between index funds might beat the overall market for a given year, if that is your goal, but not satisfy if your goal is to beat the market by ten percent.  Selecting individual stocks using factor-based research is a misappropriation of the research and is not likely to work.    

Using Data to Capitalize on Behavioral Finance

         December 11, 2016  What Moves Stock Prices4.pdf

How do we explain that stock movements correlate so tightly with each other?  Are there ways to systematically take advantage of what we know about stock correlations?  Why are investors so phobic of volatility, when it is more predictable than price and is essential for gains?  Are there systematic ways to take advantage of irrational behavior revealed by behavioral finance?  Momentum shows us that stocks go up  ̶  until they don't. Is one ahead to buy stocks trending up, or to buy stocks that have dropped and expect a reversion to the mean?

These are some of the questions to which we sought answers by looking at monthly returns over twelve years and over a million rows of data. Variables include volatility, correlation, and price.  The resultant portfolios are working nicely.         

Playing Defense

       December 30, 2015.   Playing Defense.pdf

In this two-page summary I first review my effort to replicate and create a portfolio from the liquidity findings of the Ibbotson et.al. article below.  While my data were not useful for that purpose, they were very useful in the discovery of a portfolio with very low draw-downs and high annual returns (16.7%, including time in cash).  What is most dramatic is that the number of stocks selected by the screen correlate with returns over the next year (p of .00000435).  Since 2003, months with a screen selection count of 15-29 have not had a loss the consequent twelve months and had average returns of 24.7%.  Screen counts of 30 or more have not had a loss and had annual returns of 27.0%.  Study the table.  


    Liquidity as a Style

         December 4, 2015.  Ibbotson-Liquidity as an Investment Style.pdf

Roger Ibbotson et.al. present a compelling case and data as to why liquidity can produce excess returns even more so than the usual factors of value, size and momentum.

     Style Reversion to the Mean 

        December 4, 2015.   If Factor Returns Are Predictable_Why is There an Investor Return Gap.pdf

Styles or factors run in predictable cycles, with most investors exiting and changing managers, funds or investments when they should be buying.  The article was published by Research Affiliates and is written by Jason Hsu, Ph.D.  Below are reports on my endeavors to test and implement this very provocative article.  


       November 27, 2015. Momentum or Reversal.pdf

Every time I buy a portfolio of nicely trending stocks, they seem to reverse.  The paper describes a study of weekly percent change since 2009 for the largest 3,000 stocks.  I made several interesting discoveries in addition to clear evidence that for the last six years, stocks going down (and still around) give far better returns than stocks going up.  

    Cycles for Value and Growth

        December 13, 2015.    Factor-Value Growth.pdf

The divergence between value and growth since 2000 is shown on several charts in the search for investable patterns.  There are definitely periods—sometimes extended periods—when either value or growth has far superior returns.  And there is a reversion to the mean.  However, the length of the cycles is not consistent.  For example, value has been underperformed growth in a serious way for the past twenty months or so, but how long that will continue is hard to know.  

    Small Cap Advantage

         December 13, 2015.  Factor-Market Capitalization.pdf

Similar to with value and growth, charts and some methodological description are shown in the endeavor to find a pattern of superior performance between large and small cap stocks.  In looking at data other than are reported here, I generally find that small cap stocks outperform, but as a result of exceptional returns from a small number of stocks.  If I remove the outliers or cap their returns in the analysis, the large cap stocks outperform.  I see the same thing between value and growth, with value stocks being more similar in their returns.

     Quality as Measured by the Piotroski F-Score

         December 3, 2015   Quality and Piotroski F-Screen.pdf

The Stock Investor Pro Piotroski F-Score is a measure of a firm's healthy financials and fundamentals.  Is it a useful measure of quality?  I discovered some surprises in this examination.    

Presentation Slides for Twin Cities AAII Chapter Program

       December 3, 2015   AAII Dec 2015.pptx

This are the PowerPoints I used in my presentation to the local AAII chapter titled "Dangerous Maxims."  I also review other research, some of it described below.

Reactions to and Suggestions for the National AAII Conference

        November 10, 2015.  AAII 2015 Conf Reactions.pdf

I had the privilege of attending the National AAII Conference in Las Vegas November 8 and 9.  The attached write-up is about some of the issues I saw presented, and some that I saw missing.

Planning Spreadsheet (Monte Carlo)     

                Intro Page.pdf    

                Sample Printout.pdf    



                Many Boomers will not be able to continue their present lifestyle into a non-working retirement even with the most aggressive and successful investment program.  Many other families approaching retirement or already retired have assets far in excess of what is required to assure their current and chosen lifestyle.  For them these assets and the fruits of these assets will eventually go to heirs, charity or the government.  They need to be prudently managed for that purpose, rather than to miss returns that could greatly benefit chosen heirs or causes.  In between these extremes are people who need to plan and invest with exceptional care and attention so as to enable their future security.  Personally, I happen to be in this last group, as are many of my clients.

It is easy to read that historical equity returns average 9.8% and then make future projections based on that rate each year.  Doing so creates a very misleading picture, as historical returns vary considerably.  In fact, annual returns vary more than the normal statistical distribution assumed by many financial planning tools providing Monte Carlo simulations.  I developed a spreadsheet for inputting projected income and expenses in years going forward, along with other relevant data such as allocation between equities, Treasury Bills, bonds and real estate.  Multiple scenarios are then calculated using randomly selected years since 1928 (or a more recent year of your choosing).  A comparison is also shown for calculations using a fixed rate of return.  The two principal advantages to the spreadsheet are: 1). Returns are calculated based upon historical precedent, rather than assumptions about normal statistical distributions. 2). It is not a black box.  If you are familiar with Excel, you can review all calculations and make adaptations to fit your unique situation.    

You are welcome to download the spreadsheet and do what you will with it.  The equity returns are based on the S&P500.  You may want to substitute another index.  Contact me if you have questions or want help in getting it adapted to your situation. 

Do Index Funds and ETFs Undermine the Efficient Allocation of Capital?

       October 19, 2013.  Tor Dahl e-mail.pdf 

Index products buy all the stocks in the index, whether they have merit or not.  These capital flows do not distinguish the efficient and productive companies from all the rest.  Will this undermine capitalism?  Could we just as well have the State allocating capital to specific companies?  A noted economist answered my e-mail. 

Why is it harder to beat the market?

     July 10, 2013.   Why it's harder to get market-beating returns.pdf

Not only Wenzel Analytics, but active managers in general are having more trouble beating the market. This analysis presents data on changes in correlations and the number of stocks significantly exceeding market returns.  While indexed products are a common response, are they also the cause of the changed market dynamics?  The last page addresses what an investor might do.

Analysis of AAII Shadow Stock Screen

       December 10, 2012.  Shadow Stock Analysis.pdf

AAII Shadow Stock screen frequently publishes updates on its Shadow Stock Screen (SSS), a small cap screen available through their Stock Investor Pro stock data and software.  Should you invest using the screen?  Perhaps more useful than the detailed assessment of the screen is the methodology for how to evaluate or improve upon a screen.     

Using Screen Counts to Forecast Market Trends  

       November 12, 2012    Counts Forecast Returns.pdf

Serendipitously I discovered that the number of stocks conforming to criteria for a specific screen corresponded to the returns from that screen over the next year.  For high counts occurring 29% of the time the relationship held true without exception.  Since almost every screen or set of criteria that one might construct will also correlate with market returns, this has some interesting implications.  Detailed data is provided in tables and charts.  

When Should One Buy Quality Stocks? 

      November 7, 2012    Risk-On Risk-Off.pdf

It is easy to naively assume that one should always buy quality stocks, but some markets reward quality stocks and sometimes risk-on markets reward low-quality stocks.  Identifying quality is the easy part.  The more complicated part involves indicators for risk-on and risk-off markets, and knowing how to hedge the risks for each type of market.


Making Money through Paradigm Violations

           February 5, 2011   Paradigm Violations.pdf

This two-page discussion paper outlines eight paradigms for all economic transactions, and presents a framework for understanding innovations by applying a paradigm to a set of services usually provided through another paradigm.  Several examples illustrate the concepts.


Yes, But is it Health Insurance?

          January 3, 2011      Yes But is it health insurance MISF.pdf

Many economists, politicians and commentators mention that going forward, the costs of Medicare and other medical services are the biggest threat to our economy.  Well, I wrote a paper about how to think out the solution, and here it is!  If you like thinking from new perspectives and alternative paradigms, this is for you.  I sent it to former Senator David Durenberger, now chair of the National Institute of Health Policy at the University of St. Thomas, and he replied, "I took a great deal from your article 'yes, but is it health insurance.'  I am going to use it in my health policy class.  And probably on other occasions. It is ahead of its time, certainly way ahead of the current reforms which are important, but costly."


Investing for Non-Profit Donations

            December 2, 2010    Investing for Non-Profit Donations.pdf

By gifting appreciated assets to selected non-profits, one can often make sizeable gifts at no cost to the donor, or at a cost basis which is a small fraction of the gift's value.  If one can deduct the full value of a stock that has gone up three-fold, and one is at marginal tax brackets of 25% federal and 8% state, the original cost to the donor is entirely matched by the tax benefit.  However, the strategy for part of ones portfolio requires choosing highly volatile stocks, which will make many donors uncomfortable.  To gift stocks which happen to have appreciated is to miss most of the opportunities currently offered by the tax code.  For this to work, one has to deliberately have a portfolio dedicated to this purpose.  The article goes into details of how to select such portfolios, and what return distributions might look like.  Lists are given of prerequisites and cautions.       

A Replacement for Health Insurance

         August 27, 2009   Replacement for Health Insurance.pdf

Because our nation is now involved in an intense debate about reforming how we pay for health and medical services, I reviewed and edited a paper I did on the subject in 1995 when I was studying the matter as part of a Ph.D. program.  The paper describes why insurance is inappropriate for most healthcare services and then suggests one of many possible alternative ways to structure paying for services.  Since the paper is lengthy, I have also included a brief Health Finance Advocacy Statement as well as a biographical statement of my background in healthcare procurement. (Health Finance Bio.pdf.)


Stock Screen Rotation 

            June, 2009  Stock Screen Rotation.pdf

Whether looking at AAII stock screens or those I have developed, I find it hard to find stock screens that produce a consistent count month after month, year after year, with consistent high performance and consistent performance from all the stocks selected.  Would we get better returns using the current best performing screens?  The answer is no.  But we get exceptional returns when using specific ranks other than the best.  Here is an overview report.


Getting There

How can you be comfortable in the face of investment uncertainties?  What framework does it take for you to know that you are doing what you can to have enough, and even beyond that, maximizing your resources for the benefit of people and causes important to you?

Investing Process

Do you wonder how Wenzel Analytics has achieved its performance record?  Is there a reason for exceptional performance to continue?  This detailed description of the investment process provides a way for you to do due diligence on Wenzel Analytics before handing over authority to manage investments.  You might get some ideas for how to do your own investing, or you may want to imitate the steps in setting up a similar money management practice.  

Allocation and Use of Pivot Tables

The complexity of investment diversification will be overwhelming, result in procrastination and be expensive if you don't have a good framework and tools for seeing high-level balance and then being able to drill down to the details.  To effectively make allocation decisions, you need to be able to see what you want to see, how you want to see it, when you want to see it, and not see a lot of other stuff that is confusing.  This paper provides models you can create on paper, as well as samples of how an Excel pivot table can be an indispensable aid.  Download the sample pivot table and explore.  To put your own data in a pivot table, you may download this example, edit a row in the Master worksheet maintaining the formulas, and then delete the remained illustrative rows.

Cyclicals as Stand-in for Commodities                

Commodities should be part of everyone's asset allocation for the next few years.  Cyclical stocks track the commodities, and are more practical to buy for the average investor.  The paper ends with our choice of nine stocks from the index. 

How Do You Make Investment Decisions?

There are eight radically different ways that we go about making investment decisions.  Which do you use?  Which do you want to use?

Data Mining

Interested in know more about how data mining works?  Want to see an example of a decision tree?  This summary gives more detail than was given in Investing Process


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