The Rothschild Portfolio

[quigleydoor]

Sometimes I feel dumb for failing to have conviction and passion for the ideas presented in this bulletin board. So many predictions, so many swell investors with track records, spouting their beliefs about the future. Why follow?

The only investing theme which has really held my attention over the years is the dream of the perfect asset allocation policy. (I am not a paying member, and I haven't seen EJ's tool.) For the whole retirement nest egg, with an expected time horizon of 40 years, what is the best return/risk profile that can be achieved? Is 12% annualized growth (since 1999), with only 2% maximum drawdown, good enough?

Adding diversification always interests me. So I think back to something Niall Ferguson once said about the Rothschilds. He said their allocation policy was one third financial assets, one third land, and one third art.

How can a small individual investor emulate the Rothschild portfolio?

For the land portion, I am thinking deeded parking spaces—tiny lots which allow even a small investor to manage their exposure to the asset class.

For the art portion, I am thinking certain types of collectibles might have enduring value. A friend of mine has a large set of wooden chairs made in the 1840s. I forget exactly what pedigree, but at appraisal they have certainly retained their value against inflation. For a smaller portfolio, perhaps more recent furniture pieces might do as well—e.g. modern designs from the 1950s would be less expensive, and if well preserved could serve well.

[Jim Nickerson]

Re: The Rothschild Portfolio

Sometimes I feel dumb for failing to have conviction and passion for the ideas presented in this bulletin board. So many predictions, so many swell investors with track records, spouting their beliefs about the future. Why follow?

quigleydoor, unless I have forgotten or missed it, I don't think there is any information on any contributor to iTulip regarding his/her actual investment record over any period of time. If I am wrong, anyone, please correct me. I think you are right about people "spouting" their beliefs about the future, not only on iTulip but anywhere almost that one reads about investing in markets. Yogi Berra didn't say, "Opinions are like assholes, everyone has one, and they all stink." but someone said that, and I think whoever it was was not far off the mark.

The only investing theme which has really held my attention over the years is the dream of the perfect asset allocation policy. (I am not a paying member, and I haven't seen EJ's tool.) For the whole retirement nest egg, with an expected time horizon of 40 years, what is the best return/risk profile that can be achieved? Is 12% annualized growth (since 1999), with only 2% maximum drawdown, good enough?

Tool, schmool! Don't spend money to see what that is. It is a good idea, but nothing of value is actually being derived from it by anyone, I don't believe. It is a good idea, but I don't think it has evolved to the degree that it actually reflects the performance of those very few who initially put up portfolios, and it is not being tracked/updated even weekly.

I dislike all contributions here where there is lack of clarity. Are you writing and thus apprising anyone reading your post, that since sometime in 1999, you have actually averaged gaining 12% per year, with a maximum loss from any peak of only 2%, or did your neighbor say that was what she has done over this period, and you are wondering is that good or bad? Also, the market (SPX) went up ~20& from 1/2/1999 to 12/31/99. 12% annual average gains from the end of '99 is more impressive than from the beginning. A 2% drawdown at anytime since 1/1/99 is truly remarkable in my opinion.

Adding diversification always interests me. So I think back to something Niall Ferguson once said about the Rothschilds. He said their allocation policy was one third financial assets, one third land, and one third art.
How can a small individual investor emulate the Rothschild portfolio?

Personally I don't think a small investor, say anyone with anything less than a millions bonars, and even a million bonars is way small, can emulate the Rothschilds. I am a small investor, with about a million dollars/bonars and to me it is idiocy to consider putting a third of that into real estate and a third into art or antiques. The problem with either is the lack of liquidity. If you have multiple millions (100M), and only say 33 million in reasonably liquid assets, then you can afford to sit on your ass a long time with 33M in real estate, and 33M in objet d'art and perhaps someday you can really make some big bucks by selling the RE and art stuff.

If I had made 12% compounded since anytime in 1999, and objectively considered it was due to my skill as an investor, I would be hard pressed to consider that I should be doing something else besides what I have been accomplishing.

For the land portion, I am thinking deeded parking spaces—tiny lots which allow even a small investor to manage their exposure to the asset class.

I assume you are literally talking about "parking spaces." Pardon my cynicism, but that sounds lame to me. I once knew a guy who made millions owning parking lots and parking garages, but he owned a lot of them.

For the art portion, I am thinking certain types of collectibles might have enduring value. A friend of mine has a large set of wooden chairs made in the 1840s. I forget exactly what pedigree, but at appraisal they have certainly retained their value against inflation. For a smaller portfolio, perhaps more recent furniture pieces might do as well—e.g. modern designs from the 1950s would be less expensive, and if well preserved could serve well.

Appraisal, schmaisal! I had a French chest left to me by an aunt who was a rather adept collector of serious antiques (however, certainly not on the scale of the Rothschilds). In 1993, I had the chest "appraised" by a local in Nashville who presumably knew antiques. She said $5K. I've had that chest in an antique mall for the past 10 years, and, hellsbells, it is not even getting bids. It's like the burst Bear Stearns' hedge fund holdings.

Read what Finster and JK, sorry if I am omitting anyone, have said on these fora about diversification as a starting place. Whatever either of them wrote, I don't think either has said he has made 12% compounded since anytime in 1999, though hopefully they both have.

Good luck, my advice is you should not abandon a winning strategy if it is your strategy that has appreciated at 12% compounded since anytime in 1999.

Edit: One other thing, if it is you who has done 12% compounded, look at the SPX. Just at the end of May this year did it finally surpass its 2000 top. If you are bright enough or lucky enough to compound your investments at 12% for the next 40 years, I'll wager you'll do okay, though odd are, I shall not be around to collect.

[Tet]

Re: The Rothschild Portfolio

Is 12% annualized growth (since 1999), with only 2% maximum drawdown, good enough?

I would think you'd want to do better than that.

Adding diversification always interests me. So I think back to something Niall Ferguson once said about the Rothschilds. He said their allocation policy was one third financial assets, one third land, and one third art.

How can a small individual investor emulate the Rothschild portfolio?

I would think you'd want to concern yourself more with the land and the financial assets. You make no mention of what the mix of financial assets is for your allocation, stocks? bonds? Since this is Rothschilds portfolio is it just IOU's? Should I just lend money to neighbors? I can't imagine land would be any land, is it agricultural? residential? commercial? barren? What kind of land?

Now as far as the art portion goes for the Rothscilds that's very easy. Vincent Van Gogh? Andy Warhol? Rockwell? Picasso? Monet? O'Keeffe? If you can own one of these than I agree. Now if it's not any of these than no it's not art. But that's only one third of your portfolio, what about the other two thirds?

[quigleydoor]

Re: The Rothschild Portfolio

I dislike all contributions here where there is lack of clarity. Are you writing and thus apprising anyone reading your post, that since sometime in 1999, you have actually averaged gaining 12% per year, with a maximum loss from any peak of only 2%, or did your neighbor say that was what she has done over this period, and you are wondering is that good or bad? Also, the market (SPX) went up ~20& from 1/2/1999 to 12/31/99. 12% annual average gains from the end of '99 is more impressive than from the beginning. A 2% drawdown at anytime since 1/1/99 is truly remarkable in my opinion. . . .

If I had made 12% compounded since anytime in 1999, and objectively considered it was due to my skill as an investor, I would be hard pressed to consider that I should be doing something else besides what I have been accomplishing.

Jim, thanks for your constructive feedback.

The 12% gains per year is my own result since mid-1999, based on Excel internal rate of return calculations based on all my retirement fund contributions. The 2% drawdown is more of a guess. My records from 1999 to 2002 are not very detailed, so it is possible there was a slightly larger drawdown in that period.

I achieved that by cutting back my exposure to stocks and buying into an emerging market bond fund, in 2000. I did that without much knowledge, but with a gut feeling, that this asset class would be largely uncorrelated with others. And it paid off handsomely.

More recently a vehicle in local-currency-denominated emerging market bonds has been available to me. Since this is not dollar denominated, I saw it as an opportunity to diversify my nondollar holdings even further. (I used to work for a team of global bond portfolio managers, and a big chunk of my nest egg is still inside the old firm's remarkable retirement plan, which has many interesting, private vehicles.)

Personally I don't think a small investor, say anyone with anything less than a millions bonars, and even a million bonars is way small, can emulate the Rothschilds. I am a small investor, with about a million dollars/bonars and to me it is idiocy to consider putting a third of that into real estate and a third into art or antiques. The problem with either is the lack of liquidity.

Thanks for this opinion, it makes sense to me. The thought exercise was worthwhile, even if the investment idea is stupid in the end.

I assume you are literally talking about "parking spaces." Pardon my cynicism, but that sounds lame to me. I once knew a guy who made millions owning parking lots and parking garages, but he owned a lot of them.

Deeded parking spaces in preindustrial, crowded cities like Boston have appreciated very handsomely, as have rents that may be earned. The market is not very transparent, but in some neighborhoods a deeded space can be bought for $40K. A few years ago the same space might have been $10K.

Good luck, my advice is you should not abandon a winning strategy if it is your strategy that has appreciated at 12% compounded since anytime in 1999.

Edit: One other thing, if it is you who has done 12% compounded, look at the SPX. Just at the end of May this year did it finally surpass its 2000 top. If you are bright enough or lucky enough to compound your investments at 12% for the next 40 years, I'll wager you'll do okay, though odd are, I shall not be around to collect.

Someday, I will write more about the asset allocation studies I am using as my guide.

[Jim Nickerson]

Re: The Rothschild Portfolio

Jim, thanks for your constructive feedback.

The 12% gains per year is my own result since mid-1999, based on Excel internal rate of return calculations based on all my retirement fund contributions. The 2% drawdown is more of a guess. My records from 1999 to 2002 are not very detailed, so it is possible there was a slightly larger drawdown in that period.

Machts nichts. 2-5%, still if the 12% is close, in my opinion you have done very well. The challenge is to continue doing as well.

I achieved that by cutting back my exposure to stocks and buying into an emerging market bond fund, in 2000. I did that without much knowledge, but with a gut feeling, that this asset class would be largely uncorrelated with others. And it paid off handsomely.

Choice of being good or lucky, take lucky.

More recently a vehicle in local-currency-denominated emerging market bonds has been available to me. Since this is not dollar denominated, I saw it as an opportunity to diversify my nondollar holdings even further. (I used to work for a team of global bond portfolio managers, and a big chunk of my nest egg is still inside the old firm's remarkable retirement plan, which has many interesting, private vehicles.)

Unless you worked there as a security guard or janitor, it seems to me you should be giving advice more than asking for it.

Thanks for this opinion, it makes sense to me. The thought exercise was worthwhile, even if the investment idea is stupid in the end.

Deeded parking spaces in preindustrial, crowded cities like Boston have appreciated very handsomely, as have rents that may be earned. The market is not very transparent, but in some neighborhoods a deeded space can be bought for $40K. A few years ago the same space might have been $10K.

A seriously hard question to attempt to answer is: what is the value of anything? It is just difficult for me to believe that I would pay anyone 40K for a parking space, even if I thought I could rent it. What the freak does one do with a piece of property that size if you can't rent it? You know a lot of things have gone up mightily in prices these last years, decades, but to me it does not mean they have as much real value (whatever that is) as the prices being paid for them suggest. Remember, everyday I am more of an old fart, recalcitrant to change, so take my opinions with a grain of salt, if you haven't already.

Someday, I will write more about the asset allocation studies I am using as my guide.

I ain't gonna be around forever, so please do write something soon, I am sure it will be of interest to many of us.

[quigleydoor]

Re: The Rothschild Portfolio

I would think you'd want to concern yourself more with the land and the financial assets. You make no mention of what the mix of financial assets is for your allocation, stocks? bonds? Since this is Rothschilds portfolio is it just IOU's? Should I just lend money to neighbors?

You raised a good point—the world has changed since the Rothschilds' time. I think you are saying that the financial assets portion of their holdings was all bonds. These bonds were probably denominated in many currencies, all backed by gold or silver. So it's not immediately clear how that would be emulated in today's wacky system.

I can't imagine land would be any land, is it agricultural? residential? commercial? barren? What kind of land?

Diversified, methinks.

Now as far as the art portion goes for the Rothscilds that's very easy. Vincent Van Gogh? Andy Warhol? Rockwell? Picasso? Monet? O'Keeffe? If you can own one of these than I agree. Now if it's not any of these than no it's not art. But that's only one third of your portfolio, what about the other two thirds?

Works by these people are not likely to increase in value, but at best could retain value vs. inflation. (This is just my intuition: don't buy things that are already expensive and high profile.) And I think you could expect the same from other types of collectibles which have some permanence; for example furniture or antique cars. But, you need to evaluate the carry cost (maintenance) as well as the likelihood of permanence.

Artwork as a "growth" investment is another story entirely. If you want any hope of appreciation (in financial value), you have to choose artists by their pedigree, credentials, and friends (both present and future). Otherwise even a good art piece will not have a story behind it, and will join the hordes of the forgotten.

I think the idea behind diversifying among land and art as "real assets" is to diversify between the most raw resource available and the type product with the finest finish, made by the best human hands. So between the "raw" and the "cooked" among real assets seems like a good axis on which to think about diversification.

Of course, I know next to nothing about the Rothschilds. All of this is inspired by an interview with Niall Ferguson, which I read sometime ago.

[quigleydoor]

Re: The Rothschild Portfolio

A seriously hard question to attempt to answer is: what is the value of anything? It is just difficult for me to believe that I would pay anyone 40K for a parking space, even if I thought I could rent it. What the freak does one do with a piece of property that size if you can't rent it? You know a lot of things have gone up mightily in prices these last years, decades, but to me it does not mean they have as much real value (whatever that is) as the prices being paid for them suggest. Remember, everyday I am more of an old fart, recalcitrant to change, so take my opinions with a grain of salt, if you haven't already.

Likewise.

Just to be clear, I did not mean to announce, "Deeded parking spaces look like a good buying opportunity today." I was asking, "Do deeded parking spaces serve as a proxy for land in an investment portfolio? Does land belong in my asset allocation policy?"

As for what the freak you do with one: If you live in town and your luxurious lifestyle demands a car, you derive some use value for parking it in a deeded space (i.e. you're not paying rent to some other guy). If you don't live in town—or have discovered it's not so hard to survive on public transit and ZipCar—then you extract rent from somebody who requires a car.

Most outsiders are quite astonished by the shortage of parking spaces in Boston.

[jk]

Re: The Rothschild Portfolio

1. if you're making 12% with a 2-5% max drawdown, keep doing it. in fact, tell me how - i would be interested in what you've been invested in and what you're doing now.

2. there was an article in the ny times yesterday about parking spaces going for up to $225K PLUS monthly maintenance fees. but i don't think that's a good way to get exposure because of lack of diversification. i'd prefer an international real estate fund, closed or open ended, or directly buying shares of reits in various countries. the big question is whether to buy anything now, or wait in the expectation that asset prices will go down sometime soon.

[Jim Nickerson]

Re: The Rothschild Portfolio

1. if you're making 12% with a 2-5% max drawdown, keep doing it. in fact, tell me how - i would be interested in what you've been invested in and what you're doing now.

2. there was an article in the ny times yesterday about parking spaces going for up to $225K PLUS monthly maintenance fees. but i don't think that's a good way to get exposure because of lack of diversification. i'd prefer an international real estate fund, closed or open ended, or directly buying shares of reits in various countries. the big question is whether to buy anything now, or wait in the expectation that asset prices will go down sometime soon.

jk, did you put the hyperlink into the red "real estate", or did the system do it? This has happened to me, a hyperlink was created in the post and it was not something I intended or liked.

Is iTulip hooked up with Amazon to sell books and that is why these hyperlinks are appearing.

I don't like it. Edit: now after my post, the red hyperlink has disappeared. I am undoubtedly confused. Sorry.

[spunky]

Re: The Rothschild Portfolio

I would highly recommend dabbling in the retail forex market. If you have the nutsack, discipline and are willing to spend about 12-17 hrs a week doing your homework, you can do well.