{"id":25874,"date":"2011-12-08T07:00:44","date_gmt":"2011-12-08T12:00:44","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/12\/08\/risk-on-risk-off-and-the-economics-of-moneyball\/"},"modified":"2011-12-08T07:00:44","modified_gmt":"2011-12-08T12:00:44","slug":"risk-on-risk-off-and-the-economics-of-moneyball","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/12\/08\/risk-on-risk-off-and-the-economics-of-moneyball\/","title":{"rendered":"Risk On \/ Risk Off and the Economics of Moneyball"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

Risk on, risk off.\u00a0 No four words could better describe the frustrating year that was 2011.\u00a0 Yes, I realize that the year isn\u2019t quite over yet.\u00a0 We still have a few more weeks. \u00a0But I, for one, am ready for a fresh start in the New Year.\u00a0 We\u2019ve made money in 2011.\u00a0 But it has been a lurching, nauseating roller coaster ride to get here, and we would have suffered a lot less heartburn had we simply taken the year off.<\/p>\n

For those of us who consider ourselves value investors, the risk on \/ risk off trade is particularly frustrating because the market has made little distinction in 2011 between the wheat and the chaff.\u00a0 When the market is in \u201crisk on\u201d mode, everything rises in lockstep with little regard for price or quality.\u00a0 And investors differentiate even less in \u201crisk off\u201d mode, throwing out the baby with the bathwater.<\/p>\n

If you\u2019ve gotten whipsawed a few times in 2011, don\u2019t feel bad.\u00a0 Even some of the all-time investing greats have suffered an annus horribilis.<\/em>\u00a0 George Soros, the godfather of hedge fund managers, struggled to turn a profit this year and closed his funds to outside investors.\u00a0 And Pimco\u2019s Bill Gross\u2014the Bond King himself\u2014has had one of the worst years of his career, finding himself at the bottom of his peer group (see \u201cThe Bond King Does an About Face<\/a>\u201d).<\/p>\n

Still, not everything has performed poorly.\u00a0 Boring, consistent dividend-paying stocks have held up comparatively well, and \u201cvice\u201d stocks\u2014particularly tobacco and some alcoholic beverage stocks\u2014have had a phenomenal year.\u00a0\u00a0 As a proxy, take a look at Figure 1<\/strong>, which compares the performance of the Vice Fund (VICEX)<\/a><\/strong> to the S&P 500.<\/p>\n

\"\"<\/a><\/p>\n

Figure 1: VICEX vs. S&P 500<\/p>\n<\/div>\n

Vice has a 10 percentage point lead, and this is in spite of the fund\u2019s high allocation to gaming and defense stocks, which have not fared as well.<\/p>\n

As investors, we\u2019re not particularly interested in what performed well yesterday.\u00a0 We\u2019re far more concerned with what will perform well tomorrow.\u00a0 <\/strong><\/p>\n

And therein lies the rub.\u00a0 So long as we remain in this high-correlation risk on \/ risk off market, our investment performance will be intimately tied to shifting political winds in Europe.<\/p>\n

If Europe\u2019s leaders manage to reestablish confidence in their respective sovereign bond markets, then it\u2019s \u201crisk on\u201d and commodities and lower-quality, more speculative stocks should do phenomenally well.\u00a0 But if we have another setback\u2014say, if a major piece of reform legislation gets torpedoed by squabbling among Euro states or a botched referendum\u2014then it\u2019s \u201crisk off\u201d and you better be in cash.<\/p>\n

\"\"<\/a>\"\"
\nIn honor of the movie release of Michael Lewis\u2019 Moneyball<\/em><\/a><\/strong>, I\u2019ll use a baseball analogy.\u00a0 You run the risk of swinging big and missing if you bet on \u201crisk on\u201d and we end up with \u201crisk off.\u201d\u00a0 But, if you bet on \u201crisk off\u201d and we end up with \u201crisk on\u201d you run the risk of getting a called strike as a potential home run pitch whizzes right by you.<\/p>\n

In this environment of uncertainty, I recommend investing the way that Billy Beane\u2019s early 2000s Oakland Athletics played baseball.\u00a0 Go for steady, consistent wins.\u00a0 You don\u2019t have to hit home runs.\u00a0 Just get on base and avoid striking out.<\/strong><\/p>\n

In my view, this means implementing a dividend-focused strategy.<\/strong>\u00a0 Buy companies that survived the 2008 meltdown intact and actually raised <\/em>their dividends that year.\u00a0 At current prices, your risk of long-term or permanent loss is slim.\u00a0 And if Europe \u201cblows up,\u201d you can be reasonably certain that your dividend checks won\u2019t bounce.<\/p>\n

For a good list of potential candidates, investors might want to take a look at the holdings of the Vanguard Dividend Appreciation ETF (NYSE: $<\/span>VIG<\/a>).<\/strong>\u00a0 Every stock in the portfolio has raised its dividend for a minimum of 10 consecutive years\u2014including the Armageddon years of 2008 and 2009.<\/p>\n

If you liked this article by Sizemore Insights<\/i>, you\u2019d probably enjoy The Sizemore Investment Letter<\/i>, our premium members-only newsletter. Click here<\/a> for more information.<\/p>\n","protected":false},"excerpt":{"rendered":"

By The Sizemore Letter Risk on, risk off.\u00a0 No four words could better describe the frustrating year that was 2011.\u00a0 Yes, I realize that the year isn\u2019t quite over yet.\u00a0 We still have a few more weeks. \u00a0But I, for one, am ready for a fresh start in the New Year.\u00a0 We\u2019ve made money in … <\/p>\n

Continue reading “Risk On \/ Risk Off and the Economics of Moneyball”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-25874","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/25874","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=25874"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/25874\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=25874"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=25874"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=25874"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}