The United States Oil Fund (USO)

The United States Oil Fund (USO) is a domestic exchange traded security designed to track the movements of light, sweet crude oil (West Texas Intermediate). It was issued on April 10, 2006 by the United States Commodity Fund, designed to provide investment results corresponding to the daily changes of the spot price of WTI crude oil to be delivered to Cushing, Oklahoma. Although this fund invests its assets primarily in futures contracts (standardized contracts), it may invest in forward contracts (customized contracts) as well.

Investing in the USO is not the only you can join in the industry. A few alternatives to this are U.S. 12-Month Oil Fund (USL) or U.S. Natural Gas Fund (UNG). The USO is known to have higher fees than its alternatives, and so it is not a favorable choice for investors.

You might wonder how good USO is doing.

The graph shows USO performance comparing to the Crude Oil by their prices. The USO actually kept up for the first few years, but failed to appear as promising as the Crude Oil starting from 2009. Crude Oil price increased incredibly in 2009, and stayed high until 2014, but we cannot see the same thing from USO. The Price Correlation Coefficient of these two is only 0.627914464, and their Return Correlation Coefficient is 0.030781845, meaning there is not enough a significant relationship between them.  This leads to the conclusion that the USO is not tracking well with Crude Oil, especially during the time when the industry is most promising.

In conclusion, I reccomend not investing in the USO. The fund never seems to have beaten its own industry market, and statistical results show that it is still going downhill. You should look into other alternatives if you consider investing in the energy industry.

Link to the data can be found here.

Under Armour

Under Armour (UAA) is a rather new name in footwear, sports and casual apparel. Founded in 1996 by Kevin Plank, Under Armour quickly rose to become one of U.S biggest sport brands, along with Nike and Adidas.

However, at the end of January this year, UAA had a cliff-like drop of 50%, from $40 to $20 which frightened investors and put the company to doubt as whether it would recover or would go bankrupt in the near future. The biggest reason for this came from the news that UAA's CFO Chip Molloy left the company for "personal reasons", and the market clearly punished UAA price for the possibility of the company having fraud. However, there are more reasons that can explain the situation. The brand right now lacks some potential or famous sport athletes that boost up their sales. With the decrease in sales, renting costs have been overwhelmed and as the result the company showed bad financial results. These reasons are worth explaining the situation, yet in my opinion, they do not appear critical enough to drive a company to bankruptcy. The company can overcome the situation by successfully hiring a talented CFO and changing its marketing strategy to include more well known sport stars.

With this opinion in mind, I think about "Charlie and Jamie" kind of investment. From the list, the lowest strike price for a call option with the lowest cost per option is the $45 Call with the cost of $0.40. If UAA price recovers to $40 in 100 days, then we have the following calculations:

The option is likely to cost $9.68 by then, and at that time the rate of return will be 24.2 times! For example, if you invested 100,000 options for $40,000 you would receive $968,000. Easy way to make a million isn't it? And if the outcome is not as expected, you can just walk away from the deal, and lose the money you put in for the options, which in this case is $40,000. Even if you are not that adventurous, I still recommend you this investment, as the 24.2 times of return is always worth trying.

LSV Asset Management - LSVEX Fund

LSVEX vs. DFA

LSV Asset Management (LSVEX Fund) is a value equity management firm which was formed in 1994 by Lakonishok, Shleifer and Vishny – all of them are professor of Economics or Finance at distinguished universities in the U.S. Lakonishok is a well-known market behaviorist who believes that investors are irrational, being controlled by fear and greed: they usually hold onto losing stocks for too long, afraid to admit they have made bad decisions, but also quit too early on promising stocks, just to have their hands firmly grip onto their small rewards. By exploiting this, better-informed investors can make killings on consequent anomalies.

When deciding which stock to be put on LSVEX portfolio, Lakonishok also used common value indicators: cash flow to price, book to price, sales to price, dividend to price etc... However, he screens out cheap stocks of those near bankruptcy or takeover, plus the stocks that just went public, while his not-so-secret key factor in his model is diversification. Regarding small-cap stocks, no stock in LSVEX is too big to fall, and no single industry is too important as weighted in percentage. For large-cap stocks, Lakonishok fancies some undervalued companies that he thinks they “aren't as bad as the market thinks they are”. That makes up a portfolio that consistently beating the market, both in bulls and bears, in large-cap and small-cap.

When comparing to LSVEX, people often think of Dimensional Fund Advisors (DFA), one founded and directed by Fama – another famous professor of Finance in the same Illinois area as Lakonishok. Fama believes in efficient-market, that the stock price is correctly adjusted at anytime because they reflect information known to investors, so picking stock to “beat the market” is just some illusion. With that approach, Fama includes in DFA portfolio almost everything, except for those also near takeover. DFA is passively managed, thus its fees and cost are undoubtedly low when compare to other funds.

As a result, for different reasons, DFA’s and LSVEX’s portfolios both have the advantage of diversification while they also let out dying stocks. In the end, the two firms pick the same stocks or group of stocks even though their theories contradict one another.

LSVEX vs. SPY

For the analysis of LSVEX and SPY, monthly data from Yahoo! Finance was used for the period from 2009 to 2017.

LSVEX slightly outperforms SPY, so I recommend buying LSVEX.

The Reminiscences of a Stock Operator

Reminiscences of a Stock Operator - as simple as the title sounds, without using any metaphor or symbol for indirect meaning, the book by Edwin Lefèvre in 1923 is about a famous stock operator named Larry Livingston. Many people believe Jesse Livermore to be the real life Larry Livingston, for the rise and fall as a legend stock operator in his life. Despite those corresponding events, this book is “a fictionalized memoir only of Livermore’s early and ascendant years” only (foreword), and I should not wonder myself which part of it is true or nonexistent. The book has become the guideline of investors for its useful lessons while the interesting, humorous (and even sarcastic) voice of Larry Livingston keeps you hook until the end.

Larry Livingston starts off as a quotation-board boy in a stock-brokerage office. His talent in arithmetic and his great ability in memorizing numbers have led him to start predicting the market, and he began to make his fortune at some “bucket shops”, those that let you bet on stocks for even a tiny sum of money. Soon he became too good at this game, made more money than any kid at his age, and was kicked out from any shop in Boston. With some money on hand, he decided to come to New York at the age of twenty-one.

Despite high hopes for his future, he failed and lost all of his money, not only once, but thrice, before he began to understand the system, understand the differences between the game in bucket shops versus the trading on Stock Exchange. He said that “A man must believe in himself and his judgment if he expects to make a living at this game. That is why I don’t believe in tips.” He was a loner most of his life, but he enjoyed the game and the money it brought him. He gained more valuable lessons, be more cautious when trading, and eventually became a millionaire. He was famous, and people tried to approach him. He started to spend more money, had more vacations, but then strayed away from his principles of trading, and got into some bad investments. Inevitably, he went bankrupt. That hit him hard than any failure he had experienced, but that was also a good chance to freshen up his mind. He stood up again, slowly but surely this time, and made a good fortune when the market sharply rose before World War I. He paid off his debts, and concluded his story with some more valuable lessons of the stock market and its players.

Of many valuable lessons from his books, there are some I find greatly helpful and interesting. After he failed the third time in New York, he realized what was going wrong with his method. “There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win.” In order to become better, avoid things that will get you worse. In fact, believing in yourself is hard, especially after continuous failures, but that should not get in the way of your learning. “My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat. But if I cannot advance I do not move at all. I do not mean by this that a man should not limit his losses when he is wrong. He should. But that should not breed indecision. All my life I have made mistakes, but in losing money I have gained experience and accumulated a lot of valuable don’ts.” Be cautious, but do not be indecisive, that is another guideline for anyone feeling stuck and afraid of losing more, for anyone will surely encounter mistakes in their lives: “If a man is both wise and lucky, he will not make the same mistake twice.  But he will make any one of ten thousand brothers or cousins of the original.  The Mistake family is so large that there is always one of them around when you want to see what you can do in the fool-play line.” While you can improve yourself by avoid making the same mistakes, you should accept that there are far too many mistakes in life and try not be frightened by them. People were wiped out of the stock market not because they were ineligible, but because the fear was too much for them to handle and they ended up disbelieve in themselves. “The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. The market does not beat them.  They beat themselves, because though they have brains they cannot sit tight.” The last sentence really struck my mind, even though it is not some totally new wisdom, as people keep saying that your greatest enemy is no one but yourself. Overcoming bad habits, fear, indecisiveness, and forgiving yourself will open your mind for learning new things, and help you advancing in life.

In conclusion, within the range of a few words, I cannot describe the true value this great book contains. Although it was published almost a hundred years ago, and the system has changed a lot, it still holds many lessons that are applicable in investing world. If you are interested in the stock market, and see yourself as an investor, my recommendation is to start with this book as your guideline. Even if you do not have too much interest in the stock market, there are many psychological perspective and lessons in life you can take from the book. The Reminiscences of a Stock Operator by Edwin Lefèvre is a classic, marvel, one of the most widely read and highly recommended investment book ever that will enrich yourself with lots of wisdoms.

GS vs. BX - The two famous money managers and how to evaluate them

Goldman Sachs Group (NYSE: GS) and Blackstone Group (NYSE: BX) are two of the most prominent, leading money managers in the U.S. Considering any of these two stocks as your investment should be a safe choice with promising return, but which one is better?
Goldman Sachs was founded by Marcus Goldman in 1869 with its headquater placed in New York City, and later on Samuel Sachs joined the firm. Its function and services include global investment banking, investment management, securities, and other financial services, mostly with institutional clients. As of 2013, report said there are 31,700 people employed by Goldman Sachs worldwide.
Blackstone was founded in 1985 in New York City, 116 years later than Goldman Sachs was. The founders were Peter George Peterson and Stephen A. Schwarzman. The group functions as a multinational private equity, alternative asset management and financial services. Their specialties are in private equity, credit and hedge fund investment strategies. Blackstone grew rapidly and became the largest alternative investment firm in the world in 2013.
While accessing monthly data of Goldman Sachs and Blackstone for the period from 1/2012 to 1/2017, I ran some analysis and found these results:

Both of the two stocks produce higher return than SPY. BX being on the upper hand, also carries more risk (higher standard deviation). If we do a regression to know which one is "better" or "worse" according to CAPM theories, we have the two betas representing systematic risks.

Now this looks interesting. Both of them behave better than the market (> 1). However, it indicates here that GS has higher systematic risk, so it should be "rewarded" with higher returns. However, we clearly see that BX has better average return! In order to find out if any of these stocks really "beat the market", I ran another regression and made some calculations.

Comparing these two, BX has more abnormal return (alpha), and all of its measurements: Sharpe Ratio, Treynor's Measure and Information Ratio are also better. GS on the other hand carries negative abnormal return and thus does not beat the market. With this, the myth is no longer. Blackstone is a better choice for your investment, and this is my recommendation of this week.

Is Berkshire Hathaway Inc. Class A the best choice in the world?

Continuing from last week, our topic today is about Berkshire Hathaway Inc. that is run by the legend Warren Buffett. “Berkshire Hathaway Inc. is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States. The company wholly owns GEICO, BNSF Railway, Lubrizol, Dairy Queen, Fruit of the Loom, Helzberg Diamonds, FlightSafety International, Pampered Chef, and NetJets, and also owns 43.63% of the Kraft Heinz Company, an undisclosed percentage of Mars, Incorporated, and significant minority holdings in American Express, The Coca-Cola Company, Wells Fargo, IBM and Restaurant Brands International.”(Wikipedia) The list goes on and on, just to show how powerful Berkshire Hathaway Inc. is. Needless to say, Warren Buffett is not only a famous investor but also a self-made billionaire who leads Berkshire Hathaway to its glory. We can talk about him or the Berkshire Hathaway Inc. all day long, however, for now we should not indulge ourselves in amazing Mr. Buffett too much, but to keep a cool head and think whether his Class A stock (BRK-A) is really worth it. Let’s see how good BRK-A is in comparison to our last week SPY, and whether to invest in BRK-A or not.

I collected historical monthly data of BRK-A and SPY from Yahoo! Finance, for the period from 01/01/2000 to 01/01/2017. Here is the result after some simple analyzing.

As we can see, when putting together, BRK - A outperforms SPY in return, however it also has higher risk (higher standard deviation). So are you thinking you clearly have an upper hand with BRK - A? Please hold on, because I have an option that is even better than BRK - A!!!

How can I come up with a good option like that? I mix the 2 stocks - BRK-A and SPY - together, by making 100 portfolios that have different allocation of these 2 stocks. Let's see the results in a scatter plot graph:

The X-axis represents risk, or standard deviation, while the Y-axis shows the return. What is the best portfolio among these? I pick the one that has highest risk with lowest return, or in other words, the one that has highest Sharpe Ratio. Here is a part of that mixing result in number:

The one highlighted produces the best outcome (also known as the Optimal Risky Portfolio) and has 87% of BRK - A and 13% of SPY. This is also my recommendation. If you want to invest in BRK-A, please consider buying 87% of BRK - A and 13% of SPY for your portfolio to archieve a better result.

Back to the question from beginning, now we can answer for sure that BRK - A is still not the best investment in the world. By mixing stocks together and create more diversified portfolios, we can always archieve better results than investing in individual stocks.

Data set and calculations can be found here.

SPDR S&P 500 - Analyst Report

The SPDR S&P 500 (NYSE: SPY) is an exchange-traded fund (ETF), designed for tracking the S&P 500 stock market index. SPDR S&P 500 is an acronym for the Standard & Poor's Depositary Receipts – Standard & Poor's 500 Index, which consists of 500 stocks selected by economists and considered as leading measure of U.S equities. The S&P 500 is a preferred index for U.S stocks, because of its market cap methodology that weighs larger companies as more important, rather than the traditional price weighting methodology that weighs more expensive stocks as more important. In other words, your portfolio will consists of 500 leading companies stocks with as tiny the amount of investment as you want it to be. Should it looks interesting to you to acquire SPY stocks, the process is as easy as logging in your online brokerage account and search for it, or calling your broker and ask for it.

How good can this SPY stock be? Historical data from Yahoo! Finance shows that from January 29, 1993 to December 31, 2016 SPY has an average monthly return of 0.814% and standard deviation of 4.16%. It implies that in the long run you should make profit of 0.814% a month with this stock, however the chance of running into a loss is also likely to happen. 95% of SPY’s expected monthly return ranges from -7.34% to 8.97%, so you have a fairly higher chance of making money rather than losing money. For better understanding, I shall construct a Monte Carlo simulation in SPY.

Assuming $500 is invested in SPY every month for 30 years. The total amount invested is $180,000. The return rate is randomly chosen from the range, and then an ending balance is calculated. Repeating the process for 100 times, and here is the result: on average the ending balance is $1,160,121.25 with a 95% chance it ranges from $(216,845.09) to $2,537,087.59. That means you are likely to get a return worth 6 times your investment, and you are likely to be a millionaire after 30 years just by investing in SPY. My reccomendation is to buy SPY, keep it and invest more in it as much as you can. Not only this is a safe choice with low risk, it also promises high return that not many investments can compare to.