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One of my sons (27 YO) has some money he wants to get invested.

Thanks for any thoughts.

There are three main things to consider.

(1) Safety against the possible permanent loss of capital.
I think both are fine on that front. I consider Berkshire to be as safe as an index, but some people would disagree, saying the diversification of an index gives a little something extra.

(2) Rate of value generation
I continue to assume Berkshire will rise in value at around inflation + 7%/year for the next 20+ years. Possibly 8% if we're lucky, but probably fading a bit. Recent results have been better than this for the last several years, but I consider that to be a string of luck that may not last.

QQQE has risen in value at around inflation + 8%/year, plus about .5% dividends, for ages. Pretty much since 1997 (the start of my data) but particularly so since 2005. Even if you pick the most pessimistic amount of history, the number is around inflation + [7.2 to 7.5%/year] + .5% dividends. BUT...(a big but)...there is no truly logical reason for this to be the case. It's only by convention that the fastest growing firms tend to be among the Nasdaq 100 list. It's not a law of nature, and in fact contravenes a number of investment theory axioms. (both QQQ and QQQE are merely the 100 largest firms by market cap listed primarily on the Nasdaq exchange, excluding financials). As a result, the good performance could change to ordinary performance at any time.

(3) Valuation level on purchase day
Berkshire is a little more expensive today than its average in the last 10 or 20 years, but not hugely so. On the order of 10% high. The current situation for QQQE isn't all that much different. On the order of 20% more expensive than usual, perhaps? Not nearly as stretched as the S&P 500.

A valuation that's richer than usual by 10-20% isn't nearly enough to say "you'd be a fool to deploy your capital now, you really oughta wait". Since both are safe and growing in value, likely the worst case for the long run is just a flat spot for a while, with uncertain timing.

That being said, my gut feel is that within 12-18-24 months both of these will be available at valuation levels that are at least somewhat cheaper than average rather than more expensive than average. But it's not usually a good idea to base investment decisions based on the gut feel of some rando on the internet. I think I currently have my highest ever cash allocation, as a percentage of portfolio value. So maybe I'm just rationalizing my position.

Jim

KPS

Regarding QQQE,

There is much to be said for doing it yourself rather than buying a fund. No management fees, to start with. Several brokers have one-button order entry from a list, and one-button rebalancing. But the main advantage is that you can eliminate a few firms if you so desire. For example, personally I would probably eliminate about 5 companies and buy the "Nasdaq 95 Equal Weight". (4 Chinese/Cayman domiciled VIEs last I checked, and one firm whose management I find a bit too smelly)

You can also lag changes in index membership. I don't have the data for the Nasdaq 100 list, but for the S&P 500 you do quite a bit better simply by not doing t he index inclusion changes the same day that they do...wait a year instead. The ones being added have usually just had an unusually good streak, and the ones being dropped have usually just had an unusually bad streak. On average, such streaks don't last. The added advantage is that it's a whole lot less work do to the index changes late!
This is worth reading. https://www.researchaffiliates.com/publications/ar...
By my calculation, the mere fact of Tesla having entered the index at a temporarily high valuation around end 2020 has cost investors 1.5% of their wealth. i.e., that's how much richer they'd be if instead of buying SPY they had bought the other 499 stocks the day that Tesla was added, in their usual proportions and tracking changes since, and held until yesterday. That's not because Tesla is a bad company, but just a comment on a flaw in the index tracking system.

Jim

Jim,

Thanks so much for the thoughts. He ended up buying some Berkshire today. This is in his retirement account, so it’s a super long term time frame. He bought some qqqe fairly recently around 83, and he’s about 50/50 Berkshire/qqqe right now.

Regarding QQQE,

There is much to be said for doing it yourself rather than buying a fund. No management fees, to start with. Several brokers have one-button order entry from a list, and one-button rebalancing. But the main advantage is that you can eliminate a few firms if you so desire.

Or you could simply buy the top 10 or 20 or even 50 holdings of QQQ in equal weight.
The top 10 are 47.38% by weight.
Top 20 are 63.70%
Top 50 are 85.82%

The #50 stock is MRVL at 0.46%.

I change my mind about QQQ vs. QQQE (or QQEW) on alternate weeks, despite the attraction of equal weight vs. cap weight.
The backtests show QQQ has better CAGR than QQEW with slightly higher volatility and better MaxDD and better sortino.
https://testfol.io/?d=eJy1j7FOxEAMRP%2FF9RahodgaUV...

If you want to do a roll-your-own, M1finance.com is a good choice. Once you enter all the stocks, just one click buys or rebalances the portfolio. The limit is 100 stocks in a portfolio, so the entire QQQ holdings would fit.

-----------------

Oh. "One of my sons (27 YO) has some money he wants to get invested."

BRK.B is a great choice for a beginning investor.

"has some money" implies a small amount, undoubtedly less than $10,000. So a DIY method like Jim mentioned is probably not particularly feasible.

Yeah I appreciate the DIY idea, but his retirement account is pretty small and he doesn’t have the interest or time for the diy index approach I’m afraid.

I think I currently have my highest ever cash allocation, as a percentage of portfolio value.

Why don't you write cash secured puts for Berkshire?

I change my mind about QQQ vs. QQQE (or QQEW) on alternate weeks, despite the attraction of equal weight vs. cap weight.
The backtests show QQQ has better CAGR than QQEW with slightly higher volatility and better MaxDD and better sortino.

It is hard to tell how to interpret this. Generally, mid-caps did better at the beginning of this century, and large caps have done better about the last 10 or 15 years or so--about the time QQQE was introduced. Maybe it is a secular thing where mid-caps and large-caps rotate in and out of favor over fairly long periods of time. QQQE is certainly cheap compared to QQQ right now. Not sure what that holds for the future.

It would be very interesting to see a backtest of equal weight vs. Nasdaq over the last 30 years or however long that is possible to do.

It would be very interesting to see a backtest of equal weight vs. Nasdaq over the last 30 years or however long that is possible to do.

Generally, market cap weighted performed better from 1972 until Jan 1994. Then from Jan 1994 until March 1999, market cap did significantly better. Starting March 1999, a year before the Nasdaq peak, equal weight out performed market cap until June 2011. After June 2011, market cap out performed.

Interesting to me that equal weight started out performing 1 year before the peak.

GTR1, equal weight Nas 100 extended back to 1972. https://gtr1.net/2013/?!N1TE


CAGR: 10.929167
SAWR(20; 0.95): 6.198401
GSD(20): 25.785336
DIGSD(20; 0%): 28.725798
LDD(20; 0%): 16.250643
LDDD3: 15.276988
MDD: -79.945168
UI(20): 25.826406
Sharpe(20): 0.381001
Beta(20): 1.224635


GTR1 market cap weighted Nas 100 back to 1972. https://gtr1.net/2013/?!N1T

CAGR: 13.291441
SAWR(20; 0.95): 6.076887
GSD(20): 25.525864
DIGSD(20; 0%): 28.283720
LDD(20; 0%): 15.693014
LDDD3: 15.264377
MDD: -81.059181
UI(20): 31.633331
Sharpe(20): 0.475891
Beta(20): 1.156633

Aussi

Continuing the previous post, here is a link to some graphs for market cap wt vs equal wt.

https://discussion.fool.com/t/etf-compare-equal-we...

Aussi

GTR1, equal weight Nas 100 extended back to 1972. https://gtr1.net/2013/?!N1TE
...
GTR1 market cap weighted Nas 100 back to 1972. https://gtr1.net/2013/?!N1T
..

No doubt your screens are right, but just my own personal take on this subject...

First, a geeky note, the Nasdaq 100 is not market cap weighted, nor float-adjusted cap weighted. When something gets too big (highly discretionary) they cut its weight back, then when its market cap inevitably shrinks back it shrinks back to much less than cap weight, then it happens again...the weights are all messed up.

But more to the point, I suggest that nobody should ever be long or short QQQ, not as a fund purchase, futures, or options. Just forget about it. I also suggest that the historical return comparison between cap weight and QQQ weight is meaningless.

The reason is the wildly huge (and weirdly unpredictable) concentration of QQQ. The fact that it outperforms equal weight or underperforms it in any given month or year or decade is almost entirely random: it's the luck of the draw of how the stock prices around 4 companies are doing at that time.

If you know enough to decide that you understand the economics of those few truly gigantic firms, you should be investing in some or all of them (long or short) individually, not letting the rules of QQQ pick your weights and direction. If you don't know them enough to predict them (and they are notoriously unpredictable, so that's likely the case) then you have no business expressing an opinion or betting money on the direction of their prices, which is to a too-large extent all a position in QQQ is.

So, the best way to think of it is: QQQE is a good characterization of this class of companies. No tail is wagging the dog: no position is over 1% of the collection. The aggregate earnings therefore trend quite well, so the valuation level isn't hard to assess relative to history. And the rate of growth of good old fashioned profits has been both smooth and rapid for decades*.

The returns of QQQ in any period are the returns of QQQE (a thing which makes some sense), plus or minus a really huge random number. The earnings are a different random number, so it's near impossible to peg a range for valuation level relative to history. Consequently, using QQQ is just sentiment gambling.

But what about the desire to have a big holding in the big stocks because they're winners? This has been a very tempting idea lately, because it has worked lately, but on average over time the few very largest firms considerably underperform those that are merely very big. The recent stretch of gigacap outperformance is an anomaly. I have no idea how long the anomaly will last...forever?...but someone thinking it's a law of investing is betting on "it's different this time".

I think there is a good case for individual stocks selected judiciously from this group (by knowing the firms, or via quant methods), or buying them all as an equally weighted slate via QQQE or individually, but there isn't any case for QQQ. Its only advantage is liquidity.

I don't own QQQE, but FWIW I am currently running an equally weighted quant screen that selects from among the Nasdaq 100. It picks only a few high flyers, acting as a little yeast for the portfolio. Not *everything* has to be as boring as Berkshire.

Jim


* There are big earnings dips in recessions, but the average earnings of this group tend to bounce back to the old trend pretty promptly so it's best simply to ignore the dips.

Actually not my screens, they are Robbie Geary's so I have confidence in them.

From Robbie. "^N1T" is my symbol for the market capitalization-weighted total return portfolio whose constituents are those of the actual NASDAQ 100 back to index inception in 1985, and those of the "Pseudo NASDAQ 100" (NASDAQ's current rules for ^NDX applied retroactively at each point-in-time back to 19721214) before that back to 19721214." Post 268261 on the old MI board.

First, a geeky note, the Nasdaq 100 is not market cap weighted, nor float-adjusted cap weighted. When something gets too big (highly discretionary) they cut its weight back, then when its market cap inevitably shrinks back it shrinks back to much less than cap weight, then it happens again...the weights are all messed up.

My understanding is the weights never exceed the market cap weight, so if the market cap weight gets too large, there is an adjustment downwards in the weighting pushing QQQ towards the QQQE weightings. If there is a concern about the QQQ weightings, all 100 could be easily purchased using weightings in the NDX100 rather than QQQ.

I think the graphs I posted, you may not be able to see them as they are on the MF board, clearly show the outperformance of cap weighted vs equal weighted since 1972. If there is a concern that a person does not want a large concentration in a stock, then a lower return may be acceptable.

Aussi

If there is a concern that a person does not want a large concentration in a stock, then a lower return may be acceptable.

For the sake of completeness, I would add this possibility:
If there is a concern that a person does not want a large concentration in a stock, then a HIGHER return may be acceptable.

Again, think of QQQ as "QQQE plus or minus a huge random number for how a tiny number of specific super-cap stocks are doing in the markets".
Emphasis on "or minus". Both outcomes are possible.

Some might who believe the very largest stocks in the US market will forever be outperformers. Fair enough, but they should have a good reason to believe that.

If they do, it won't be based on the statistics from deep history. e.g., an equally weighted portfolio of the 5 largest market cap stocks in the S&P 500 underperformed the S&P 500 by about -3.6%/year 1997-2016 inclusive. That's enough for me not to want to overweight them because of that factor. Note the other thread today on somebody wanting to short some of them.

Jim

I think I currently have my highest ever cash allocation, as a percentage of portfolio value.
...
Why don't you write cash secured puts for Berkshire?

At the moment the price at which I hope to buy back Berkshire is a fair bit enough below the current stock price. Consequently the options in question don't offer a very meaningful rate of return.

True, it doesn't have to be that meaningful. It would be in addition to what I'm earning on the cash. But cash has that lovely advantage of being so flexible. If Berkshire tanks by 15%, maybe something else wonderful will tank by 50% the same day--it would be good to be a buyer of Berkshire that day, but a shame to find yourself limited to only that specific pick.

Jim

If they do, it won't be based on the statistics from deep history. e.g., an equally weighted portfolio of the 5 largest market cap stocks in the S&P 500 underperformed the S&P 500 by about -3.6%/year 1997-2016 inclusive.

I think if you check from the beginning of 1999 to the end of 2013, the underperformance would be even worse than -3.6% per year. However, if you check from 1972 to end of 1998 and from beginning of 2014 until now, about 37 years, the largest market cap stocks performed much better. So yes, market cap weighted does not always perform better, but based on the past 50 years, it has been the way to go to get better returns, but also accompanied by higher concentration in particular stocks.

Aussi

I think if you check from the beginning of 1999 to the end of 2013, the underperformance would be even worse than -3.6% per year. However, if you check from 1972 to end of 1998 and from beginning of 2014 until now, about 37 years, the largest market cap stocks performed much better. So yes, market cap weighted does not always perform better, but based on the past 50 years, it has been the way to go to get better returns, but also accompanied by higher concentration in particular stocks.

Hmm, that's not the way I would characterize the data.
Using the S&P 500 and predecessors since 1930, real total returns, rolling five year returns.
Basically the normal situation is that equal weight wins (69% of the time, and by a whole lot overall) but there are occasional stretches that the biggest caps go into fashion for a while.
Almost all of the five year intervals that cap weight had the advantage over equal weight were in just three stretches:
(a) The post war boom, generally five year stretches ending in the 1950s
(b) The tech bubble
(c) The stretches ending since 2017
Normally the few very largest firms are quite poor performers. But no rule of thumb is true all the time.

You considered only the data from (b) and (c) and the stretch between them, making the historically unusual look like the norm. Clearly this has been an exuberant bull market for tech firms, though at least most of them are much more profitable than during the tech bubble.

Jim

Using the S&P 500 and predecessors since 1930, real total returns, rolling five year returns..

My apologies, I was discussing the Nas 100, I have gone back and looked at the SP. So interestingly to me, the Nas 100 and SP 500 weightings have had opposite performance. Since 1972, the NAS 100 cap weight has outperformed the NAS 100 equal weight by a factor of 3. For the SP 500 since 1972, the SP 500 equal weight has outperformed the SP 500 cap weight by a factor of 2.

Since 1972, the NAS100 equal weight has had about the same performance as the SP500 cap weight. And since 1972, the NAS 100 cap weight has outperformed the SP500 equal weight by about a factor of 1.5. (so in descending order of returns, NAS CW, SP EW, NAS EW, SP CW)

I have posted the graphs here.

https://discussion.fool.com/t/etf-compare-equal-we...

Almost all of the five year intervals that cap weight had the advantage over equal weight were in just three stretches:
(a) The post war boom, generally five year stretches ending in the 1950s
(b) The tech bubble
(c) The stretches ending since 2017

I agree for the SP500, but for item (b) the NAS 100 CW outperformance over the NAS 100 EW was there from 1972 until one year before the tech bubble and for (c), the NAS 100 CW started outperforming 2013 and is still outperforming the NAS 100EW.

Aussi

Since 1972, the NAS 100 cap weight has outperformed the NAS 100 equal weight by a factor of 3.

Out of curiosity, is that the Nasdaq 100 stocks cap weighted, or the Nasdaq 100 index (as tracked by QQQ)? Not the same thing.

Even though I haven't looked closely at the Nasdaq 100 versus Nasdaq 100 equal weight that closely in terms of frequency of advantage, two comments---
* The recent dominance of the giants is still historically anomalous and would be dangerous to extrapolate
* I absolutely stick to my assertion that NOBODY should ever be long or short the Nasdaq 100 index, it's the wrong vehicle for everybody. It's just too dominated by a tiny number of stocks, so it's largely just a gamble on the luck of the draw among those few. If you have a well supported strong view on those few, buy or sell those few. If you don't, then you shouldn't be concentrated in them.

Jim

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