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The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets Paperback – April 5, 2011
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"The most useful recent book could be The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets, by money managers Mebane Faber and Eric Richardson, who work at Cambria Investment Management. They analyze how the endowments of Harvard and Yale posted such world-beating performance. Then they offer a simplified model that regular people can adopt."—BusinessWeek (April 9, 2009)
"Markets left investors almost no place to hide last year, with nearly every asset class heading south. Money manager Mebane Faber of Cambria Investment Management outperformed by a mile, however.....Faber is co-author of the The Ivy Portfolio, which details his approach. Following the investment tenets of the Harvard and Yale endowments (which until last year both had sterling performance) but without using their riskier alternative assets, he demonstrates how to outperform with lower volatility."—Barron’s (April 27, 2009)
"Does the Ivy Portfolio deserve a spot on Dad's bookshelf? With its graphics, tables and step-by-step guidance, the book is often more straightforward than a college financial aid form."—Wall Street Journal (June 16, 2009) --This text refers to the Hardcover edition.
From the Inside Flap
Over the past twenty years, the Yale University and Harvard University endowments have achieved unprecedented investment success. Since 1985, the Yale University endowment returned 16.62% per year, easily surpassing the S&P 500 Index's 11.98% return. The Harvard University endowment returned over 15% a year—and both endowments achieved these results with significantly less volatility than the S&P 500.
Despite the general success of the top endowments, 2008 proved difficult for many buy-and-hold investors as well as the endowments. Many asset classes finished the year with declines of 30% or more.
The Ivy Portfolio shows how individual investors can mimic the stellar long-term investment track records of these top endowments while avoiding bear markets like 2008.
The Ivy Portfolio begins by examining the theory, process, and discipline behind the success of the Yale University and Harvard University endowments. It demystifies the techniques that the ivory-tower academic practitioners use to manage their portfolios and shows step by step how an individual investor can hope to duplicate their returns using an innovative ETF-based investment strategy.
The Ivy Portfolio then demonstrates a simple tactical asset approach to dampen the impact of bear markets on long-term investment results. The model would have protected an investor from the carnage of 2008, all while eliminating the uncertainty and emotions of investing.
The Ivy Portfolio also showcases a method to piggyback the stock-picking abilities of top hedge funds, allowing investors to achieve greater success by following the valuation insights of the smart money.
The Ivy Portfolio will show investors exactly how all this can be accomplished—and allow them to achieve an unparalleled level of investment success in the process.--This text refers to the Hardcover edition.
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Rather than simply read the book and write a review, I decided to back-test the Ivy Portfolio and report my findings. I was so pleased with the results of my back-tests, that I adopted the strategy for use with my own savings funds.
What is momentum investing? "Buy high, sell higher." Momentum investing flies in the face of the old Wall Street adage, "Buy low, sell high." Momentum trading works because inefficiencies persist in the market and can be exploited.
What does the Ivy Portfolio consist of? At a minimum, the Ivy Portfolio invests in five asset classes: domestic stocks, foreign stocks, bonds, real estate, and commodities. It is possible to create the Ivy Portfolio with Exchange Traded Funds (ETFs), using but one ETF per asset class: Vanguard Total Stock Market ETF (VTI), Vanguard FTSE All-World ex-US ETF (VEU), Vanguard Total Bond Market ETF (BND), Vanguard REIT Index ETF (VNQ), and PowerShares DB Commodity Index Tracking (DBC).
Incidentally, in addition to the five asset classes mentioned above, the big endowments invest in two relatively illiquid asset classes that small-time traders like me cannot touch: private equity (venture capital and buyouts) and hedge funds. Not to worry. Small-time traders like me have access to great performing funds that big endowments can't touch. I'm reminded of Warren Buffett's lament, something to the effect, that he could make more money percentage-wise with $100,000 than he could with $1 million or $1 billion.
Ivy Portfolio, the book, is the outgrowth of a paper ("A Quantitative Approach to Tactical Asset Allocation") published by Faber in 2007 in The Journal of Wealth Management. The book, like the paper, promotes Faber's favorite momentum strategy, namely, trend following. A second momentum strategy -- risk adjusted relative strength -- is briefly introduced but not developed in the book. This is my favorite momentum strategy. It is given expanded treatment in a subsequent research paper entitled "Relative Strength Strategies for Investing" (April 2010) by Mebane T. Faber.
How well does the Ivy Portfolio match the performance of the big endowments? This question is complicated by the fact that Faber's book was published in 2009 with historical data extending only through 2008. On the other hand, the historical databases for VTI, VEU, BND, VNQ, and DBC go back just through 2007. Therefore, I can merely compare the performance of the Harvard and Yale endowments with the Ivy Portfolio for the years 2007 and 2008. To our benefit, 2007 was a Bull Market year while 2008 was a Bear Market year. The 2007 annual returns for Harvard, Yale, and Ivy were 23.0%, 28.0%, and 29.5% respectively. The 2008 annual returns were 8.6%, 4.5%, and 36.3%. The Ivy Portfolio was the winner in both years, outstandingly so in the 2008 Bear Market year. Ivy also boasted higher Sharpe ratios and lower drawdowns than the big endowments, making for an outstanding risk to reward ratio. Note: I did the Ivy Portfolio back-tests with the relative strength, risk adjusted, momentum based application made available by ETF Replay. I rotated 100% of my funds into the top-1 asset class at the end of each month. Besides outperforming the big endowments, my Ivy Portfolio also outperformed Faber's trend following strategy that potentially bought and held all five asset classes at once, allocating 20% of the funds in the portfolio to each asset class.
About The Ivy Portfolio Authors: Mebane T. Faber is a popular speaker and writer who has worked as an equity analyst, a quantitative research analyst, and more recently as the Portfolio Manager at Cambria Investment Management. He operates several popular websites, one of which is directly involved with keeping the contents of this book up-to-date. Eric W. Richardson is the founder and CEO of Cambria Investment Management.
And with this authority, I can say with complete confidence that the Ivy Portfolio is about as bad as it gets. The wide variety of inane strategies suggested are inappropriate for every investor: be it Yale or the little guy.
If you are interested in learning about the successes of Yale and how to tweak those successful strategies for yourself - then go to the source: Yale's Chief Investment Officer, David F. Swensen, has written two books on the subject. One of them, Unconventional Success: A Fundamental Approach to Personal Investment, is even geared for the individual investor.
While a decent read for an investment book, if you were to actually follow the advice in this book and invest according to the suggested funds, you would be seriously disappointed. I backtested each portfolio, and they all stink. For example, I backtested the IVY 20 portfolio from 5/22/2008 (the earliest you can backtest because not all the securities were available prior) to 4/17/2015. It suffered its largest peak to trough decline in the debacle of 2008 with a 44% decline, in contrast to S&P 500 loss of 52%. But during the entire test period it significantly underperformed the S&P, by 34%. During the test peiord it had a total return of 15% and annualized return of 2%. The source of the backtest is ezbacktest.com
Here are lists of minor complaints:
* It assumes that investors have a good knowledge about various ETF's, which may not be the case. It does not shows the holdings in VEU (FTSE All Word ex US ETF), which contain Nestle, BP PLC, Total SA, HSBC and Novartis etc. It does not show the composition of DBC (PowerShares DB Commodity Track) which contains 34% WTI crude oil, 17% gold, 17% heating oil, 14% wheat, 13% corn and 11% aluminium.
* Some of the recommended ETF's are very thinly traded. There are better alternative vehicles. For example, it recommends EWX (SPDR S&P Emerging Markets Small Cap) for emerging market small cap. EWX is trading about 7,000 shares a day and only has $7 million of assets. A better alternative is DGS (WisdomTree Emerging Markets Small Cap Div) which is trading around 22,000 shares a day and has $52 million in assets.
* 10 month moving average is not easy for average investor to obtain. A readily available alternative is 200 day moving average. 200 trading days equate to 9 months and 1 week. The information is available on Yahoo Finance Chart.
Wish I could return the book and thus salvage something from the fiasco!