Can Warren Buffet and John Hussman Ratios be Used to Trigger ETF Asset Movement
12/04/2010 0 comments
In a previous article we looked at how the CAPE can be used as a signal to drive selection of assets. We created five regions based on the ratio f the current CAPE10 to the long term average CAPE10:
- Significantly Overvalued (SO): when the ratio >= 150%
- Modestly Overvalued (MO): when 117% <= ratio < 150%
- Fairly Valued (FV):when 83% <= ratio < 117%
- Modestly Undervalued (MU): when 67% <= ratio < 83%
- Significantly Undervalued (SU): when the ratio < 67%
We then had two alternative strategies that either blended stock and cash or swapped between stock and cash. Stock market exposure is through Wilshire 5000 total return index (^DWC). This could easily be replaced with and ETF such as VTI -- we use DWC to give a long history.
We summarized the results:
| Portfolio Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|
| Shiller Stock OR Cash | 12% | 65% | 18% | 101% | 12% | 77% |
| Shiller Stock and Cash | 5% | 87% | 2% | 12% | 2% | 9% |
We noted
- The results show the more aggressive approach (all stock or all cash) delivers higher returns but is more volatile.
- Probably the ideal is somewhere between these two approaches.
We will now apply the same approach to Warren Buffet's Stock Market Valuation to GNP ratio John Hussman's peak PE to long term PE ratio.
We will take the Stock or Cash strategy -- i.e. the portfolio either includes all stock or all cash. Remember that we are looking at how effective the trigger point is rather than optimizing a portfolio.
The ratio trigger points are:
Buffet -- go to cash when the ratio is above 115%
Hussman -- go to cash when the ratio is above 150%
Portfolio Performance Comparison
| Portfolio Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|
| P Warren Buffett Total Stock Market Valuation to GNP Ratio SO SU Weekly Strategy | 13% | 71% | 23% | 136% | 15% | 102% |
| P Hussman Peak PE SO SU Market Timing Strategy Weekly | 13% | 71% | 18% | 82% | 12% | 62% |
Clearly as both portfolios have the same funds, once the triggers switched over, performance was identical. However, the delay in switching over to stocks by the Buffet trigger gives better returns.
Finally, we can add the Shiller strategy and make a final comparison.
| Portfolio Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|
| P Shiller Cyclically Adjusted PE 10 SO SU Stock Market Timing Strategy Weekly | 13% | 71% | 19% | 104% | 12% | 79% |
| P Warren Buffett Total Stock Market Valuation to GNP Ratio SO SU Weekly Strategy | 13% | 71% | 23% | 136% | 15% | 102% |
| P Hussman Peak PE SO SU Market Timing Strategy Weekly | 13% | 71% | 18% | 82% | 12% | 62% |
This shows how important it is to get the signals right! Remember that this is an all or nothing approach and if we used all of the five regions, the results would be different. It is certainly an area for further analysis.
We have demonstrated that each of these ratios can be used as trigger points to shift a portfolio. This can be very useful in building an ETF portfolio that has some dynamic properties.
In the next article, we will construct an ETF portfolio that uses an index to build a tactical portfolio.
labels:investment,
Symbols:SPY,QQQQ,IWM,MDY,EFA,VEU,EEM,VWO,IYR,ICF,VNQ,GSG,DBC,DBA,USO,LQD,CSJ,CIU,HYG,JNK,PHB,TLT,IEF,SHY,SHV,BND,AGG,MUB,MBB,
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