Passive Investing According To Benjamin Graham

Flower-BeePassive investing, according to Benjamin Graham, is the model I will be applying to the Aristotle PortfolioFor more information, go to this site.  While I’ve been aware of the 75%/25% breakdown for some time, interest in this passive model was renewed after I read The 3 Simple Rules of Investing by Michael Edessess et. al.

Using the familiar ranking system available to Platinum members, when TLT is performing above VTI, 75% of the portfolio will be invested in TLT and 25% in VTI.  When the reverse is true, 75% will be invested in VTI and 25% in TLT.  It is the simplest approach to investing used with any of the ITA portfolios.  These are the simple rules for this “passive” model.

Right now TLT is outperforming VTI so I will be moving equity holdings to the TLT treasury ETF.  I hope to make most of the moves before the Aristotle comes up for its next review.

Instead of waiting till one quarter passes, I will review the Aristotle every 33 days.

 

Comments

  1. Robert Warasila says

    Lowell,

    Typo, think you meant “when TLT…………..”

    Put I have a question: Outperforming based on what criterion?

    Bob W.

    • says

      Bob W.,

      Yes, I meant TLT and the post is corrected. Thank you.

      Outperforming: Based on the current ranking system (using three metrics) in the Cluster software, TLT is currently performing better than VTI.

      Lowell

    • says

      “I have a question: Outperforming based on what criterion?”

      Bob W.,

      I’ve been giving your question (above) more thought and I will likely use the 181 day performance value as the determining factor as to whether to overload into VTI or TLT. I hope to carve out time over the next few days to run a back test to see how the 181 day performance record performs with respect to the VTSMX benchmark.

      Lowell

  2. Marvin Kennebeck says

    Lowell,

    Excellent. I’ve been following Varan for a bit now and he does some good work, i look forward to your implementation in the Aristotle.

    I need a simple tax friendly system for a taxable portfolio. This should be as good as it gets with a max 4 rebalance transactions per year.

    Thanks.

    • says

      Marvin,

      The Aristotle will be the easiest portfolio to follow and manage. It will be even easier than the Schrodinger and Copernicus. Should the trends in the Portfolio Performance data table begin to turn positive for a number of weeks (should know by 2015), I plan to move a few more portfolios to this VTI-TLT plan.

      If you make the shift, please keep us informed of your results. We can learn from each other.

      Lowell
      PS Excuse my Spam filter for not letting your comment go up on the board yesterday.

  3. Richard Dougherty says

    Lowell,
    As a retired investor it would be helpful to know the historical annual return and maximum draw down for this strategy . I could not replicate this strategy on ETFReplay so if you do come across this information it would be great if you could pass it along.
    Thanks,
    Richard

    • says

      Richard,

      Here is the best information I have running from 2003 – 2013.

      CAGR = 12.7%
      Sharpe Ratio = 1.1
      Maximum Drawdown = 14.3%
      Minimum Annual Return = 3.0%

      I’m in the process of running my own back-test for the VTI-TLT combination beginning on 6/30/2006. This will include one bear and one bull market. I’ll report the results when I am finished. I need to do this by hand as I don’t have an easy way to quickly run the calculations.

      Lowell

  4. Willard Oplinger says

    Lowell,

    As I understand it, you are contemplating several changes to Varan’s two-fund system of investing for the Aristotle Portfolio:

    1. He choses the higher ranking of the two by checking which performed better during the immediately preceding quarter (3 months or 90 days) and you will decide on the basis of their performance during a longer period— the preceding 181 days.

    2. You will be reviewing performance of the two funds every 33 days and switching
    percentages if necessary still on the basis of the previous 181 days.

    3. You will likely recommend liquidating either of the two funds which underperform Shy or drop below the 195 day EMA.

    Am I correct?

    • says

      Willard,

      1. He choses the higher ranking of the two by checking which performed better during the immediately preceding quarter (3 months or 90 days) and you will decide on the basis of their performance during a longer period— the preceding 181 days.

      The back-test I ran was based on the top performer over the past 181 days. Yes, you have that correct. I have not run a back-test based on the better performer over the past 91 days or three months. I may give that a test.

      2. You will be reviewing performance of the two funds every 33 days and switching
      percentages if necessary still on the basis of the previous 181 days.

      Yes, I will be reviewing the portfolio every 33 days rather than waiting for a quarter or 91 days to pass. Yes, the performance will depend on which is best over the last 181 days unless I find that a 91 or three-month interval is superior.

      3. You will likely recommend liquidating either of the two funds which underperform Shy or drop below the 195 day EMA.

      Yes, this is my current thinking. However, my back-test did not include going to cash or SHY when one of the two ETFs dropped below SHY. The test I ran is very simple and deals only with VTI and TLT using 75% and 25% divisions.

      One thing about this model is that one is not going to get in a lot of trouble even if it is not “perfect.”

      Lowell

  5. says

    I am running a new analysis using VTI, TLT, and SHY. Again, this is a 75% – 25% division unless both VTI and TLT are under-performing SHY. In that case 100% is invested in SHY.

    The performance ranking is tied to the values over the past 91 days instead of 182 days as I did in the first run.

    I am through the Great Recession and there has been only three draw-downs. That is rather amazing considering the S&P 500 took a three sigma hit during the 2008 and early 2009 period. Can you imagine your portfolio gaining in value while the broad market was going down around 35% to 45%?

    Four times the portfolio was totally in SHY.

    Lowell