Risks and Rewards

In investments, it’s often thought that risks and returns are often interlinked and highly correlated, i.e. low-risk investments have low returns and vice versa.  However, nothing is further from the truth.  The reason is not all risks are rewarded and not all low-risks instruments have low rewards.  Some investments have tremendous amount of volatility but are poorly compensated.  These are poor investments most of the time unless you’ve reasons to include them in your portfolio.

A more educated view is that the intelligent investor should take calculated risks which are well worth exposing your portfolio to.  In academia speaks, we should invest in securities with high risk-adjusted returns.  Risk-adjusted returns are measured by calculating the Sharpe ratio of that particular security or portfolio.  The formula for Sharpe ratio is the excess returns of the security above the risk-free rate divide by the volatility of the same instrument.  The risk-free rate is usually the interest rate of the short term government bond.  The volatility is measured by calculating the standard deviation of the stock/bond over a period of time.

The followings are example of the different types of risks and their impact to the portfolio returns.

Individual security/unsystematic risks – unsystematic risks related to the idiosyncratic behavior of individual stocks/bonds which can be diversified away by owning a wide portfolio of disparate stocks/bonds.  Because you can diversify away such risks, unsystematic risks are not rewarded by the market.  If you get high returns by owning a non-diversified portfolio, it’s because of the investing four-letter word – luck.  Not putting all your eggs in one basket is such a no-brainer application that all investors with IQ’s above room temperature should comply with (I’m talking about degree Celsius and not Fahrenheit).

Systematic/market risks – this is the opposite of individual stock risks mentioned above.  Systematic risks are risks that you cannot diversify away.  No matter how many gazillion stocks you own, the securities of the portfolio will fluctuate according to the sentiments of the markets.  For those who notice, the fluctuation can be pretty wild.  The best weapon against such risks is to invest for the long term.  We should hold onto stocks and let the up years and the down years cancel out each other over the long run and arrive at an average result.  Short-term funds should not be committed to the stock market because of this reason as evidences from the professional fund managers show that it’s impossible to time the markets.  Attempts to predict the ups-and-downs of the markets are often futile net of costs.  Market risks are very well rewarded as can be seen from the multi-folds increase in popular stock indices such as the S&P500 index over the very long term.

Credit/default risks – this relates to the failure of a debtor to pay the bond/preferred stock its interest coupons or principal.  The company in question usually faces financial difficulty or is in default.  These types of bonds are frequently in the junk bond category and have poor credit ratings.  Assessment of credit risks is pretty much a complex process and you need to evaluate the terms/covenant of the bonds and the future earning capability of the company to see whether the company can fulfill its obligations.  The conservative investors who have not much interest in analysis is best advised not to take up too much credit risks as it’s more of an art than a science.  If he seeks higher returns, instead of going for high-yield bonds, he is advised to expose this part of the portfolio to equities.  Of course, it might be the case that the credit risks rewards are so high in future that it exceeds the returns from equities but such is not the case right now.  High-yield bonds have ceilings on returns as per the terms but high ups-and-downs in prices.

Term risks – most of the time, longer-term debts have higher interest rates than shorter-term debts.  This is likely because longer-term bonds have higher volatility in the secondary markets than shorter-term bonds.  Investors are advised to take short-term bonds (less than 5 years), or at most intermediate-term bonds (up to 10 years).  This is because long-term bonds of up to 30 years are highly volatile and have stocks-like behavior in this regards.  However, the long-term bonds do not have the attractive returns characteristics of stocks.  Such an assessment might of course change in the future, but as of now, especially in this low-interest rate environment this can’t be truer.

Beta risks – beta is a highly complex finance tool.  To put the long story short, it’s a tool to measure the relative volatility of a stock against the benchmark.  High beta stocks move more aggressively than the benchmark and vice versa.  The general consensus of this facility is that the beta curve is more or less flat, i.e. some researches show that as the betas of stocks increase, the returns increase only very minimally, whereas other researches show that as the betas of stocks increase, the returns actually reduce.  Thus, most professionals advise that either the investor diversifies as widely as possible or take a low-beta approach.

Emerging-market risks – emerging markets such as China, Brazil, India, Russia and South Africa are the brave new world of the stock markets.  Because these are developing countries, they might be less researched, less efficient and have poorer financial disclosure.  These countries also have political and currency risks.  Emerging markets have a shorter history than developed markets, but evidence from these stock markets shows that a diversified portfolio of emerging market stocks yields higher returns at a correspondingly higher volatility compared to developed markets.  You should be able to get better returns investing in emerging markets when valuations of those markets are low provided you can stomach the zigs and zags of the prices.

Small-cap risks – over the history of the US financial markets, small-cap stocks have out-performed large caps with a higher volatility.  At the company level, small-caps are capital inefficient compared to large-caps as can be seen from the lower return-on-equity figures for small caps.  However, at the stock level, because small-cap stocks are lowly priced, they have higher returns to the investors than large-cap stocks.  Thus, investors with a long horizon can profit from small-cap exposure.  Do not be deceived by the word ‘small’, a lot of funds that specialized in small-caps buy companies with capitalization of USD 1 billion or more.  Small is a relative term, if you want to be smaller than that, you’ve to invest in a micro-cap fund.

Value/growth risks – Value stocks, i.e. companies rich in earnings and assets relative to prices, perform better over the long term compared to growth stocks.  Notwithstanding the higher returns, value stocks do not show much higher volatility (measured by standard deviation) compared to a market index such as S&P500.  If you want to improve upon the market portfolio without taking too much extra risks, value-oriented investing is the way to go!

Leverage risks – not leveraging against the portfolio is a no-brainer as you could face margin calls to liquidate the portfolio in times of distress – exactly the time when you should not divest.  It’s also not a good idea to invest in highly-leveraged companies.  Those companies drowned in debts might shoot up during bull markets but later go into a tailspin in bear markets.  The best examples are highly-leveraged banks during the financial crisis from ’07 till ’09.  By the time they’ve de-leveraged after the crisis a large part of their equities are already eaten up by non-performing loans.  They’ll probably take many years before the banks can regain their glory before the crisis.  It appears that the leveraging and de-leveraging of the American banks are systemic, you cannot diversify that risk away by investing in as many banks as you can find.

Expense ratio – this is not a risk per se but voluminous evidences show that expenses are something you pay for nothing.  High expense ratio funds underperform low expense ratio funds.  The overwhelming consensus is that the index funds are the best deal in town.

Downloading Stock Prices into OpenOffice/LibreOffice Calc


Sample OpenOffice Calc file to import Yahoo! stock quotes and historical data into spreadsheet

In the example, I enter Yahoo! stock symbols into cells A5 till A12.  Cell A12 is a dummy variable – more about it later.  To retrieve the stock details, i.e. price, stock name, last date, bid, ask and volume, I select cells B5 till G11, enter “=GETSTOCKDETAILS(A5:A12)” and then press the keys control-shift-enter together.  It will retrieve the quote details in a single web query.

Often, you might want to refresh the quote info as the quotes might change during the day.  To do that, just change the dummy variable (cell A12) to another value.  This will force another fetch from the Yahoo! server.

The historical data is imported on a similar principle.  I hope the 2 examples in the file is self-explanatory.  The function name for historical data is GETSTOCKHISTORY.

Downloading Stock Prices into Excel Spreadsheet
Downloading Stock Prices into Google Spreadsheet

Historical Returns by Asset Classes

Historical Returns by Asset Classes

The above link is the historical returns by asset classes created by Simba from the Bogleheads forum.  The author uses the data to simulate backtesting of hypothetical portfolios.  It’s highly US and Vanguard centric but nevertheless contains ex-USA information and is highly informational for investors with regards to risks and future expected returns.

You can also read a discussion about the data file here.

World Net Worth Ranking

I’ve created a global net worth ranking system.  It calculates the percentile net worth among the worldwide adult population.

The data points are derived from the Credit Suisse Global Wealth 2016 report.  Basically, the cut-off data points for the top 0.7%, 1.0%, 8.2%, 10.0%, 26.7%, 50% are culled off from the report to generate the actual percentile.  The intermediate points, except those in the top 0.7%, are all derived via linear interpolations.  The calculation assumes that all have a non-negative net worth so some values below the median might be out of tune.  Anyway, the median net worth is a miserly 2,222 USD, so if you live in the developed world, you probably have more than that.

For those who are technically savvy, this script is written entirely in Javascript.  As such, no net worth info is transmitted via the Internet.  All the processing is done locally on your machine.

To use it, just enter your net worth in USD and click the submit button.  A percentile figure will be shown below the text box.  If the figure is 10%, you’re at the richest 10% of the world adult population.

Benjamin Graham’s The Intelligent Investor


The Intelligent Investor is an everlasting investment classic by Benjamin Graham, the father of value investing.  The first edition was released in 1949 and its thesis has withstood the test of time.  While time changes and markets ebb and flow, the literature is as relevant today as it is in its times.

The followings are the 2 stock selection strategies quoted from the investment book (the 4th revised edition).  Comments by me are in red.

Basically, he recommends cheap and safe stocks – cheap as in the prices of the stocks are low compared to the earnings and equities of the companies, and safe as in the companies are financially sound and are low in liabilities.  To a certain extent, he also seeks stability and growth, though the criteria he stipulates is not particularly stringent.

Good investments policy should not change from decade to decade, so even though this book is already more than 40 year old, the techniques are as realistic and useful as new.  I expect to make use of the principals lay down for my own investments over my lifetime.  Thanks Benjamin, the cost of the book has already paid for itself several times over from the profits I’ve made.

Stock selection for the defensive investor

1.  Adequate Size of the Enterprise
All our minimum figures must be arbitrary and especially in the matter of size required.  Our idea is to exclude small companies which may be subject to more than average vicissitudes especially in the industrial field.  (There are often good possibilities in such enterprises but we do not consider them suited to the needs of the defensive investor.)  Let us use round amounts: not less than $100 million of annual sales for an industrial company and, not less than $50 million of total assets for a public utility.  (The figures are plucked out in the 1970’s.  Today’s figure will be much higher given the inflation and growth in the capital markets, perhaps at least 1 billion USD?).

2.  A Sufficiently Strong Financial Condition
For industrial companies current assets should be at least twice current liabilities – a so-called two-to-one current ratio.  Also, long-term debt should not exceed the net current assets (or “working capital”).  For public utilities the debt should not exceed twice the stock equity (at book value).  (When I read the literature, I’ve the impression that when Mr Graham said book value, he really meant net tangible assets, i.e. excluding intangible assets and goodwill).

3.  Earning Stability
Some earnings for the common stock in each of the past ten years.

4.  Dividend Record
Uninterrupted payments for at least the past 20 years.

5.  Earnings Growth
A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end.

6.  Moderate Price/Earnings Ratio
Current price should not be more than 15 times average earnings of the past three years.

7.  Moderate Ratio of Price to Assets
Current price should not be more than 1.5 times the book value last reported.  However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets.  As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5.  (This figure corresponds to 15 times earnings and 1.5 times book value.  It would admit an issue selling at only 9 times earnings and 2.5 times asset value, etc.)

Stock selection for the enterprising investor

…Let’s make a preliminary list of stocks that sold at a multiple of nine or less…

In addition:
1.  Financial condition: (a) Current assets at least 1.5 times current liabilities, and (b) debt not more than 110% of net current assets (for industrial companies).

2.  Earning stability: No deficit in the last five years covered in the Stock Guide. (The Stock Guide is a periodical by Standard & Poor’s covering information such as listed-stocks prices and fundamental data of companies).

3.  Dividend record: Some current dividend.

4.  Earnings growth:  Last year’s earnings more than those of 1966. (This particular book’s edition is copyrighted in 1973, so Mr Graham probably meant we should take 5 years earning growth).

5.  Price: Less than 120% net tangible assets.

China and Hong Kong Stock Markets

Take a look at the table below which tabulates the P/E ratios by country.  China, Hong Kong and Singapore the triple Asian countries/regions have cheap stocks!  These stock markets can rightly be classified as value stocks markets where prices are highly depressed.  Assets bought cheap can mean high future returns should the P/E ratios later revert to mean.

Japan on the other hand shows signs of that of a market full of growth stocks.  This might mean that going forward, Japanese stocks will continue to be lethargic if growth were not to pan out.  Japan seems like there is no end in sight of its abysmal market since its peak in 1989.

Country P/E
China 10.76
Hong Kong 11.27
Singapore 11.71
France 12.32
USA 14.41
German 14.62
UK 15.04
Canada 15.20
India 16.18
Australia 17.45
Brazil 19.96
Japan 24.61

I’m particularly optimistic of the China and Hong Kong stock markets because of the following chart in addition to the P/E ratio.  If you look at the Big Mac index, you can see that the Hong Kong and China currencies are highly depressed.  The currencies of both markets can only increase in prices.  Should this be the case, you will gain the currencies differentials in addition to the fluctuations in stocks prices.  It’s probably about time for Hong Kong to re-peg its currency to higher level.  Ditto for China.


Frankly speaking, in recent years, China’s stock market is nothing short of devastating.  The Shanghai composite index has plunged from the 5900 level from the pre-financial crisis era to its current level of 2000.  Sentiments of Chinese investors are particularly poor right now – if you can understand Chinese, you can read their bitter diatribes on the various forums on the net and this is understandably why.  The China stock market has become a bottomless money pit sucking in billions of hard earn money.

This in my opinion is exactly why it is a good time to invest in the China stock market.  To borrow a quotable quote from Warren Buffett, “be fearful when others are greedy, and be greedy when others are fearful.”  This is exactly the scenario right now.  And Mr. Buffett reminds us of his successful strategy, “the lower things go, the more I buy”.  Ask yourself, on your grocery buying trips, do you buy more or less of a food item when the price goes down?

Over the shorter term of a few years, market sentiments are paramount and prices can sway either way, just like the drop of China’s stock prices right now.  However, over the longer term valuation will stand out.  As Benjamin Graham said, in the short term, the stock market is a voting machine (easily swayed by emotions and sentiments), but in the long term it acts like a weighing machine (that is quantitative in nature).  True value will in the long run be reflected in its stock prices.  That said, if your funds are short term in nature and you’ve no holding power, you should not hold volatile assets of any kind.  You will not have the time frame to let the zigs and the zags to cancel out each other.

Some of you might think that the strategy of buying low P/E stocks is unsound and purely simple minded wishful thinking.  However, numerous academic studies show that value strategies such as buying low P/E stocks historically have the potential to outperform the market by a few hundred basis points per year over the long term.  The data has further been validated over multiple sub-periods and countries.  The future of the China stock market might be the exception by personally I won’t count on that.  Like the China’s economy, the China’s stock market should have a bright future.

Downloading Stock Prices into Google Spreadsheet

This is a sister post for “Downloading Stock Prices into Excel Spreadsheet” http://amourtan.com/2011/06/downloading-stock-prices-into-excel-spreadsheet/

Google Spreadsheet used to be a joke in the spreadsheet arena – it’s slow, unreliable and not that feature rich. However, Google Spreadsheet has now come of age; it has become a bad concept done well! Nowadays, if you want to do heavy numerical crunching, the natural choice would be to use Excel. OTOH, if you’ve structured data which you want to share and collaborate with colleagues or friends, GS is an excellent choice.

GS has means to retrieve stock/ETF/mutual funds data into the spreadsheet. I shall introduce 2 approaches. If your investments are all USA based, you can import it from Google Finance. For example typing =GoogleFinance(“GOOG”; “price”) in a cell will retrieve the price of the ticker ‘goog’ into the cell. Typing =GoogleFinance(“GOOG”; “volume”) will likewise import the volume of Google. You can view the documentation from Google here http://support.google.com/docs/bin/answer.py?hl=en&answer=155178

If you’ve foreign (outside USA) investments such as Singapore stocks, you can import them from Yahoo! Finance. Try typing in the string =ImportData(“http://finance.yahoo.com/d/quotes.csv?s=XOM+BBDb.TO+JNJ+MSFT&f=snd1l1yr”). The cells will import the ticker, stock name, date, last trade price, dividend yield and PE ratio for the symbols XOM, BBDb.TO, JNJ and MSFT. The structure of the data is encoded in the string ‘snd1l1yr’. As for the symbol list, your can check with Yahoo! Finance at http://finance.yahoo.com/ . The documentation of the stock quotation URL is listed here http://www.gummy-stuff.org/Yahoo-data.htm .

On some browsers, you might discover that the cells contain stale data upon subsequent reloads. A quick and dirty fix is to change the URL in the function, e.g. to =ImportData(“http://finance.yahoo.com/d/quotes.csv?s=XOM+BBDb.TO+JNJ+MSFT&f=snd1l1yr&var”) where the string ‘var’ is a random number or text. You can automate the process of changing the random string by referencing the random string in the URL to another cell and change the content of that cell. GS will be smart enough to detect the change and update the quotes accordingly.

If you want to import historical quotes into your spreadsheet, try the following instead, i.e. =ImportData(“http://chart.yahoo.com/table.csv?s=MSFT&a=0&b=1&c=2010&d=0&e=1&f=2013&g=w&q=q&y=0&x=.csv”).

  • s=MSFT specifies the symbol MSFT
  • a=0 specifies the start month (0 for Jan, 1 for Feb, 2 for Mar, etc.)
  • b=1 specifies the start day of the month (1st of the day in this case)
  • c=2010 specifies the start year
  • d=0 specifies the end month (0 for Jan, 1 for Feb, etc.)
  • e=1 specifies the end day of the month (1st of the day in this case)
  • f=2013 specifies the end year
  • g=w specifies the granularity of the data (d for daily, m for monthly, w for weekly)

Enjoy managing your finance!

NB: It seems like WordPress/Word mangled the double quotes. Please replace the “ as shown in the post with ” on your keyboard.  Even though they look the same, they are really of different character set.