October 17, 2012

An Easy Diet Plan

By D. Ekstrand ¶ Posted in Health ¶ Tagged Dieting

I started training again to do a marathon next year. In case you didn’t know, distance running is a perfectly legal and culturally acceptable way to get stoned on opiates. You probably know these opiates by their street name, “endorphins”, which comes from the Greek words for “morphine from within”. They’re naturally produced by the pituitary glands and the hypothalamus in response to the stress caused by compound fractures, eating extremely hot peppers, having children and distance running.

So naturally I’d like to lose a few pounds to reduce the wear and tear on the body whilst pounding out the miles necessary to maintain my opiate high. Plus it should cut my finishing time as well. A rule of thumb is that every 10 pounds of weight lost equals nine minutes shaved off your marathon time. My last marathon on a flat course was about 3:40 and I’m guessing I was about 180 pounds at the time. The ideal racing weight for my height and build is probably about 160 pounds. Thus, I might be able to shave 18 minutes off my time if I lose 20 pounds. That should give me a finishing time of 3:22 plus the sexy physique of a guy who lacks the strength to use a push mower.

The problem was how to diet without all the side effects such as hunger, cravings, weakness, the shakes, sweaty palms, irritability, etc. And the diet itself needed to be real simple: no complicated recipes, easy to obtain and inexpensive ingredients, and it needed to support the dietary needs of a runner. So I did a little experimentation:

Experiment 1:

My first attempt was to limit my serving sizes at each meal time. Instead of a giant plate of spaghetti with sausages, I would eat a medium sized helping. The other thing I tried to do was not snack after dinner. A former co-worker told me her older brother, an ultra marathoner, did this. I was unimpressed at the time, but just recently I saw a study which showed that limiting when mice could eat to just one eight hour block of time each day dramatically improved their health compared to mice that could eat anytime they wanted. [1]

Results:

I was frequently starving between meals, and would start feeling tired and dizzy sometimes when standing up – a serious medical condition requiring immediate oral administration of Doritos™ if available. I was able to avoid food after dinner, however, so I’ve got that going for me.

Net weight loss: Zero.

Experiment 2:

I thought about going vegan or on a raw food diet because I’ve heard that these seem to always result in weight loss, and because a low carbohydrate, high plant protein diet may prevent cancer growth, [2] but I can’t see myself eating a plate of leaves and beans every meal. I am, however, strangely attracted to the idea of human chow (sometimes called “bachelor chow”) – scientifically formulated, nutritionally complete, food pellets containing all the nutrients needed for humans. If you were dieting, you would estimate how many calories you burn per day and then look up how many ounces of chow you get given the amount of weight you want to lose that day. Unfortunately, these don’t actually exist.

Then I happened across someone by the name of Rich Roll in a video mixing up fruits and vegetables in a blender. [3] He was stuffing in an entire beet plant, the root and leaves, followed by a bunch of celery stalks, a carrot, kale, an apple, a banana, blue berries, grass clippings, etc. He drank this down, and then rode his bike for twelve hours or whatever. He competes in ultra long triathlon events. He claims this vegan diet is how he converted himself from a overweight lawyer into an elite athlete.

I noted that this diet is also somewhat similar to how Kenyan runners eat. Many of them come from poor families who can’t afford meat, so they subsist- nay, thrive? – on corn meal porridge, green leafy vegetables, and beans.[4] (They also don’t develop a taste for sweets.)

Naturally this caught my attention. I thought this might be a way to eat healthy plant food that tastes like leaves and twigs – so I’ve got to check it out. Now, I have no interest in becoming a strict vegan, but I thought if ate most, but not all of my meals like this, I would be eating healthier and might lose some weight, and wouldn’t have to obsess about whether I’m getting enough omega-3′s, vitamin B-12, iron, and whatever else vegans worry about.

Then I discovered Roll uses a $420 blender. I complain about kitchen appliances if they cost $60, so this looked like a deal breaker. Luckily, I found an old KitchenAid™ food processor in our kitchen that’s hardly been used and I tried using it to emulate what he’s doing. It actually works just fine. Similar new processors are about $160 and I’ve seen cheaper ones online for under $30. (If you decide to buy, check out Consumer Reports first.)

So I started mixing up a green sludge for my three meals. A typical batch of sludge contained some combination of the following:

A finger length of raw carrot
A stalk of celery
A handful of baby spinach leaves
A small roma tomato
Fourth cup of canned red beets
Half an avocado
Quarter of a medium apple
Half a cup of frozen blue berries, raspberries, and blackberries
Half a banana
Two or three small raw kale leaves
Two or three small raw red chard or collard leaves
Eighth of a cup of garbanzo beans or kidney beans (canned)
Eighth of a cup of walnuts, pumpkin seeds or cashews
Either a cup of SO chocolate coconut milk or orange juice

At first I didn’t add any liquids and I ate the sludge with a spoon. After I starting adding liquid, I could use a straw to suck down the stuff like a milk shake. I didn’t necessarily down the whole sludge batch all at once – I would refrigerate what I didn’t use and suck it down later. Oh, and I didn’t eat after dinner.

Results:

Lost about a pound per day over one week eating just sludge, had greatly reduced hunger between meals, no hypoglycemic symptoms, no craving candy bars and just a little for tortilla chips and, although I didn’t feel fantastic all the time, I felt I could maintain this diet for an extended time. On the second day or so, however, my bowels were in an uproar and I remember having nausea all night once (though never actually puking), but it was gone the next day. Roll mentions in his book, “Finding Ultra”, [5] something about getting sick when adjusting to big changes in the diet, presumably due to the time needed for radical changes in the intestinal flora population.

There was some negative effect on my stamina, however. I would sometimes bonk after a couple of miles of running, so I started experimenting with taking a banana and a Balance™ bar with me and/or eating a bowl of rice cereal with coconut milk just prior to running. This evolved into taking a squeeze bottle of Hammer Gel™ and sucking down some prior to running and every mile or so for the first couple miles, and then all was fine.

The downside was flatulence. I mean it was so bad that I judge this diet to be unacceptable unless you work on a dairy farm and sleep in a barn.

Net weight loss: Went from 184 pounds down to 177 in a week.

Advertisement, article continues below

Experiment 2.1:

Obviously, the flatulence problem needed to be addressed. Many vegetables (legumes and cruciferous vegetables, for example) contain complex sugars that aren’t digested well. So I nixed the beans in the recipe. I also thought that steaming the green leafy vegetables (kale, collard, and chard) for 10 minutes might break down some sugars, so I started doing it.

Other modifications: I got rid of the raw beets, since they didn’t taste all that great, although occasionally I added some canned beets. If I used orange juice, I had to dilute it with water, or else cut back on the berries, banana, and apple, otherwise the mix is too sweet and I get a bit hypoglycemic. Also, the taste is improved if I add only half a celery stalk otherwise everything tasted like celery.

A finger length of raw carrot
A half stalk of celery
A handful of baby spinach leaves
A small roma tomato
Half an avocado
Quarter of a medium apple
Half a cup of frozen blue berries, raspberries, and blackberries
Half a banana
Two or three small steamed kale leaves
Two or three small steamed red chard or collard leaves
Eighth cup of walnuts or pumpkin seeds
Either a cup of SO chocolate coconut milk or a half cup of orange juice plus water

Note that this is just a representative formula and isn’t set in stone. I usually add something special or different for each sludge batch. Sometimes I added a few artichoke hearts, or fruit such as melon or pineapple. A mix could be as simple as an avocado, a banana, berries, walnuts and coconut milk for breakfast. The other change to the diet was that I ate a reduced portion of a regular meal each day with the carbs cut down. For example, if we were having garlic chicken with vegetables and rice for dinner, I would eat the chicken and vegetables with a little rice.

Results:

Dramatically reduced the gas production, but I got real hungry in the afternoons sometimes.

Net weight loss: None, weight stayed at around 177 to 178 pounds.

Experiment 2.2:

Saliva is essential to starting the process of digestion of starches and fats, but by watering down my sludge too much and drinking it through a straw I was bypassing this step, and perhaps leaving some sugars for my gas flora that they otherwise wouldn’t get. Thus I began adding less liquid and more nuts and eating with a spoon instead of using a straw. Even though the nuts are finely chopped by the processor, they provide something to chew on, like crunchy peanut butter, and I made an effort to thoroughly masticate the sludge before swallowing. The hope was that I would digest more of the food and starve the gassy flora.

I also added seedless red grapes, or turmeric (a spice) as these foods contain natural COX-2 (cancer) inhibitors, and turmeric has anti-inflammatory properties. [6] [7] (By the way, I don’t add enough turmeric to actually taste it.)

Finally, concern about excessive oxalate (which can lead to kidney stones) motivated me to reduce the amount of spinach and replace chard and collard with mustard greens. [8]

A representative list of sludge ingredients for experiment 2.2:

A finger length of raw carrot
A half stalk of celery
A small handful of baby spinach leaves
A small roma tomato
Half an avocado
1/4 of a medium apple
1/2 cup of frozen blue berries, raspberries, and blackberries
1/2 cup of red grapes and/or 1/4 tsp of turmeric powder
Half a banana
Two or three small steamed kale leaves
Two or three small steamed mustard greens leaves
1/4 cup of walnuts and/or pumpkin seeds
Either 1/2 cup of SO chocolate coconut milk or 1/4 cup of orange juice plus 1/4 cup water

As I felt comfortable that I could maintain my weight by eating sludge twice a day with one regular meal, I decided to see if I could lose another 7 pounds by eating three meals of sludge for a week, still avoiding food between 6 pm and 7 am. For snacks, I ate romaine lettuce salads, pumpkin seeds, and drank water or V8™ juice.

Results:

I was able to lose almost a pound per day on this diet. Drinking regular old V8 juice really helped to curb hunger between meals. This definitely has a negative effect on running stamina, however, probably due to the low carbohydrate content.

Net Weight Loss: Went from 177 down to 171 pounds in a week.

Conclusions:

I’m rather surprised at how quickly I lost weight on this diet considering how much food I ate. I wasn’t very hungry most of the time; many times I felt stuffed. Strangely enough, I think the reason this diet works is the same reason that the Atkins™ diet works – low carbohydrates. While the Atkins diet is mostly animal protein and fat, the sludge diet is mostly mostly plant protein and fat.

Now that I’m half way to my weight loss goal, I’m going to switch back to a normal diet for the most part so I can run harder, but eating smaller meal portions as needed to maintain the loss, and I’ll return to the sludge later to lose another seven pounds or so.

N. B. I wouldn’t stay on a diet consisting of only green sludge (or any small subset of foods, for that matter) for more than a week or so at a time unless a doctor approved it. You may find yourself forming kidney stones, suffering from some weird imbalance between calcium and magnesium or vitamin toxicity or deficiency. If you have serious kidney, liver, or insulin issues, a radical new diet could kill you. Always check with your doctor prior to trying something like this.

References

[1] M. Hatori, et al, Time-Restricted Feeding without Reducing Caloric Intake Prevents Metabolic Diseases in Mice Fed a High-Fat Diet, Cell Metabolism, Volume 15, Issue 6, 848-860, 17 May 2012

[2] J. Ho, et al, A Low Carbohydrate, High Protein Diet Slows Tumor Growth and Prevents Cancer Initiation, Cancer Research, July 1, 2011 71; 4484

[3] Rich Roll’s post-run Vitamix Youtube video, link

[4] T. Tanser, Train hard, win easy: The Kenyan Way, Tafnews Press, 1997, pp 67-70

[5] R. Roll, Finding Ultra, Crown Archetype, 2012, pp 232-233

[6] K. Chun, et al, Curcumin inhibits phorbol ester-induced expression of cyclooxygenase-2 in mouse skin through suppression of extracellular signal-regulated kinase activity and NF-κB activation, Carcinogenesis (2003) 24 (9): 1515-1524.

For an overview of Curcumin and Cancer see Cancer.org/Turmeric

[7] B. Aggarwal, S. Shishodia, Molecular targets of dietary agents for prevention and therapy of cancer, biochemical pharmacology, 71 (2006) 1397– 1421 [pdf]

[8] See [pdf], for example, for list of oxalate content in various foods

October 9, 2012

Effective Employee Performance Appraisals

By D. Ekstrand ¶ Posted in Career ¶ Tagged Career, Motivation

How to assess performance and get results

During my 15+ years in the high tech management world I must have written a stack of performance reviews that was 3 feet high. At one point I remember plopping down a stack of reviews that was 2.5 inches tall on my manager’s desk for his signatures. So I think I know something about performance assessments. Since you are reading this, I assume you want someone’s take on the mechanics of how things should be done in the “real” world, and not a dry primer on how things are done in theory. Good. I’ll start at the beginning.

“Tell me how you are going to measure me, and I’ll tell you how I’m going to behave” - Eliyahu Goldratt

The job description

If you want high performance from your employees, you must tell them what is expected of them. The basic idea is that your employee’s job is to make you look good to your supervisor(s). Unfortunately, you can’t actually write this on any formal document because HR will call you into a conference room, pin you to the floor and spoon hot sauce onto your eyeballs. So you tell your employees this verbally and explain that you’re just joking. But it conveys the point that the employee, should s/he ever be confused about how to behave, is expected to align their efforts to your supervisors priorities. This is why you will hold periodic staff meetings with your employees and blabber about the scuttlebutt going around at the next higher management level. At least, that’s what your employees think. What you are actually doing is communicating to them what your supervisor thinks is important. So if the Big Cheese mentions in her staff meeting something about always seeing too many people milling around the water cooler, you bring it up – half jokingly – in your staff meeting and your people bring it up in their staff meetings. Soon Mora Hydrate, one of your first level employees, knows that she needs to get a drink and get back to work next time she’s thirsty.

Of course you still need to write something about the job expectations for your employees for a couple of reasons. First, you need a yardstick to measure their performance so you have something to beat them over the head with whilst demanding improvements. Second, your reports need to have something to proudly point to and say, “See, I’m in charge of the damn coffee machine!” But it needs to be at an appropriate level for the employee. You can mutter to an experienced employee that they’re in charge of lawn clippings, they’ll understand what you mean, they’ll figure out how to measure their performance and even write their own job description and set goals. But then there’s the laziest employee imaginable, William deSlacker, who will use your written job description to justify doing a lousy job because it makes his life easier.

For example:

What is desired: William maintains the copy machine himself using the manufacturers recommended procedures and rarely does anyone complain about the copier being down.

What you wrote for a job description: “William is responsible for maintaining the copy machine.”

What actually happens: William puts a sign on the copy machine whenever it’s broken that says “Do not use!” Then he calls around town to schedule an emergency visit by a qualified repair person. The office is in an uproar.

Second try: “William is responsible for performing all the manufacturers recommended maintenance and all repair work required to keep the copy machine in working order.”

What actually happens: William complains that people are breaking the copier because they aren’t using it correctly so he moves the copier to his office and limits the use of the copier to certain people who must obtain certification from him. Returning to your office after lunch, you find a “love note” from your boss stuck on the middle of your computer screen. “See me. Now.”

Third try: “William is responsible for ensuring the copier is available for use by all office personnel by performing maintenance and repair of the machine as needed.”

What actually happens: William puts a note on the copier table everyday at 3 pm, “Down for scheduled maintenance”, and takes the copier to his desk to clean out the machine with iso-propyl alcohol for two hours and run diagnostics afterwards. You find the copier on your ergo chair when you arrive the next day. There is an unhappy face drawn on it using a dry-erase marker and a voice mail from your boss waiting for you.

Fourth try: “William is responsible for ensuring that office personnel productivity is not negatively impacted by copier downtime by performing maintenance and repair of the machine as needed in a safe and cost effective manner.”

What actually happens: William, newly aware that office personnel complaints can ding his performance, is somewhat boxed in and is not happy. He complains that you haven’t told him what good performance is. Is it less than 3 complaints per month? Or zero? This is intolerable! You explain to him that you will evaluate each complaint to determine if it was preventable, that continuous improvement is ALWAYS expected, and that he needs to clean off the copier’s unhappy face.

Note that you don’t have to invent and maintain a new monitoring routine; the data comes to you without effort on your part. It is in this manner that you can achieve the prime directive for supervisors in stable organizations that lack the intrinsic motivational driver that comes from fighting just to survive: to keep your reports in a state of constant paranoia about whether their performance is adequate or not. As an added bonus, it relieves you of the difficult task of specifying what level of performance is good and what is bad.

Like all managers, you know good and bad performance when you see it, just don’t ask for the definition beforehand because that would be handing out ammo to the enemy. Too much detail ~~can~~ will be used against you in perverse ways.

For example:

What you wrote: ”William is responsible for ensuring that office personnel productivity is not negatively impacted by copier downtime by performing maintenance and repair of the machine as determined by the manufacturers schedule in a safe and cost effective manner.”

What actually happens: William follows the instructions of the manufacturer to the letter. The manufacturers maintenance schedule is overly aggressive in order to blame all customer problems on inadequate maintenance. So William constantly has the copier in the shop, cleaning it with benzene, because he’s following the manufacturers schedule and methodology. EXACTLY. When you complain that you’re being yelled at in your bosses staff meeting, his defense is that he’s just doing his job as you defined it. As your left eyelid begins to tick involuntarily, he points out that he doesn’t think office productivity is suffering and since you aren’t actually measuring it, what are you gonna do?

So always define a job based on the expected outcome, not the process, unless there is a specific process that actually is the job. Make sure there is someway you can measure performance, even if you don’t have a hard target. And don’t invent a new monitoring process if it requires effort from you. Your job is to get the monkeys off your back and onto your reports, not to add new ones. If a new data collection process is needed to monitor performance, assign the task to someone else. If you do have hard performance targets, like customer returns, or reliability failures, or water usage, etc, well, that’s great.

“He uses the carrot and stick approach with employees. First he beats them with a stick. Then he beat them with a carrot.” – Name withheld by request

Assessing the relative performance of employees

You probably have to (or you should) attend a meeting where you and your manager peers have to pool all of your employees and order them by their value to the organization. Once this is done, their salaries are listed alongside the names. This ordered list is used to prevent as well as detect anomalies, like the top person being underpaid relative to their peers, all the employees of a certain manager are underpaid, or one employee’s performance is dropping relative to their peers, or whatever. Sounds pretty straight forward – until you actually try to do it. Who should go at the top of the list: the person who was lucky to be in a position to make a critical contribution to the organization’s success, or the person who has critical expertise without which the organization would collapse, or the guy who didn’t do much but he saved the organization that one time when he pulled an all-nighter to complete a critical project?

Advertisement – Article continues below

To illustrate:

Terry and George are junior engineers with similar experience levels. Terry was responsible for reducing the number of nose hairs contaminating the final product, and George was responsible for finding ways to reduce the amount of gold consumed in the manufacturing process. Terry reduced the number of hairs from 43 to 11 ppm, well within the legally allowed limit and better than your competitors, although it will cost the organization roughly $1 million a year in added inspections. But it makes hair related recalls of product, which can cost millions, less likely than they were before. On the other hand, George found a way to save $40 million in gold costs per quarter. George’s supervisor thinks George should be ranked higher than Terry because George is saving the organization over $100 million a year, almost guaranteeing everyone a fat bonus, whereas Terry’s contribution might save the company from an embarrassment someday but will likely have little or even negative impact on the firm’s revenue going forward. Who should be ranked higher?

Solution: There’s no way to tell from the information I’ve given. And I swear, sometimes managers will present exactly this kind of information and ask the group to agree. So, how do you figure this out? There are two things I need to know: what was the level of sophistication required/used to approach the problem, and how well did the employee perform given the constraints on them. George’s money savings doesn’t even factor into it. Sorry George.

Here’s my thought process: Imagine that, instead of a junior engineer, you assigned someone who had the skills to be a top contributor on today’s rank list to the employee’s task. Contrast how this imaginary top contributor might have approached the problem with how it was actually done. It’s the magnitude of the sum of these performance/methodology deltas that I use to determine how far down the rank list each individual belongs as a first pass. So I want to know if Terry set up an efficient system to monitor where nose hairs were contaminating the manufacturing process, recruit the best people to work with him, determine possible root causes using a process to expand the search space for non obvious causes, systematically address the possibilities, leave in place a monitoring system, negotiate with suppliers to do their own final inspections, document his findings, etc? Does his solution ensure that the problem doesn’t reappear in the future after all the personnel familiar with the issue are gone? What level of coaching was required by the supervisor – minimal or constant hand holding? Did he seek out the advice of the appropriate experts? Sometimes an obvious solution is apparent after only a little investigation – a top contributor would put in a quick fix and move on to another task. A lower level contributor might miss an easy solution and burn lots of calories unnecessarily.

If you come up with a list of attributes your imaginary top contributor might have beforehand, either by yourself or with your staff, things will go a lot smoother. One issue that is sure to come up is how do you determine the magnitude of each delta? I go by how long it will reasonably take to correct the deficiency, not by the effect of the delta on the contribution. If this doesn’t make sense to you, imagine you are have spent two years developing a product and right before introduction the lawyers, whom no one has ever heard from, get wind of it and nix it because of some pending litigation. The only correction you have to make for your next project is to add legal to the list of possible stakeholders to check with early on in the project. Meanwhile, your peers have completed their wimpy projects unopposed by legal and are getting promotions, but you get a cost of living raise. Does this make sense?

Many senior contributors perform services for their organizations that aren’t directly related to their responsibilities. They might be expected to perform at a high level on a range of different tasks. Is Terry a hair defect specialist, with few skills outside his bailiwick? Do others seek out his wide range of expertise and advice and does he spend time coaching them? Does he role model your organizations values?

Typically, you shouldn’t rely on the supervisor’s opinion of their employee’s skill level. Supers are biased, normally for the employee, although sometimes not. Sometimes an employee’s poor performance reflects poorly on the manager. Think of an employee who basically didn’t do anything for six months and the supervisor never suggests to them that this might be a problem prior to formal performance appraisal time. So to ascertain where each employee ranks you will have to ask to-the-point questions to the supervisor as if cross-examining a witness for the defense. In other words, don’t ask for the supervisors opinion of the level of supervision required by an employee, ask them how much supervision the employee actually received.

The second factor to consider is what cards the contributor was dealt. Joe, a senior contributor, has his area of responsibility running smoothly due to his efforts over the past few years. His peers have been working overtime attacking and resolving complex problems in their areas. Do you ding Joe for not working as hard as the others? Jess just moved into her position a year ago. Her experience is in a much different area and she is still learning the ropes. Before she was on the top of the contribution list. This year her contributions are much lower. Allen has had a series of serious medical issues over the past year. His contributions were weak. For all the above situations, my experience is that you should probably neither ding them nor reward them. Place them at roughly the same level that they were at in the past. The issues here are not addressed by using pay to motivate performance. Joe needs to given more responsibility, Jess needs a reasonable time frame to ramp up, and Allen may need to be moved from his position to “Special Projects” where the workload can vary with his health until his issues work themselves out.

What about the salaried guy who chooses to work 16 hours a day including weekends? (I personally shared a cubicle with someone who worked from 9 am until 1 am everyday). In general, I’d say that if someone has desirable skills or attributes beyond what you would expect from your imaginary top contributor, then give them a positive delta which can be used to offset their negative deltas. In this particular case, I’d give a positive delta if their output was outstanding, and I’d make sure that this person was fed more responsibilities and that they received some coaching on any skills they needed in order to advance. As much as I hate to admit it, the fastest way to advance up the corporate ladder is to have a high skill level combined with massive hours.

Finally, when it comes time to deal with poor performance issues, like deciding to give a zero raise or a demotion, be aware that fatigue makes decisions more harsh. Take a break first.

“Sloth, like rust, consumes faster than labor wears, while the used key is always bright” - Ben Franklin

Goal setting

The hard parts are over. You’ve given your employee a job description and you’ve given them feedback as far as roughly where they stand performance wise. Now you need to point them to areas they need to work on in order to advance up the ordered list and to help them set goals for the upcoming year. The areas to work on are easy – they are the deltas we discussed earlier. Just present them to the employee as opportunities to improve, not as dings used against them.

Now, with respect to goals, understand that intrinsic goals are better than extrinsic ones. In other words, I’m likely to be more motivated to do something if I’m excited about doing it in the first place than if my boss tells me I have to do it. Hell, every 5 year old knows this. Best case, you find out what your employee wants to work on and you combine it with the organization’s business requirements and, viola, goal identified! This is easier than it sounds because organization needs are almost always weighted higher. You need Sally to ramp up marketing efforts for a new product, and she wants to lead a task force. Fine. Combine the two. A task force to ramp up marketing efforts is hers.

Now your employee skips down the hall whistling to herself, expecting to lead a life of work related fulfillment, right? Nope. You need to add nine more items to her number one priority list. Okay, I’m half joking. But having an excess of priorities is a good thing: it ensures alignment with your priorities, it may reduce a subtle form of discrimination where certain classes of people (women, for example) aren’t pushed as hard as others, and nothing is more inefficient than having an employee without enough to do.

Is having too many top priorities abusive? Hey, people volunteer for special forces school in the military, where they are pushed until they puke and beg for more. Just remember that they are closely monitored by the instructors and they feel that there’s something in it for them – a deeply intrinsic reward. Your employees will never achieve the level of motivation of special forces trainees – just do what you can to weave as much intrinsic reward into each person’s priorities and watch for and address stress issues immediately.

April 20, 2012

Stock System Trading

By D. Ekstrand ¶ Posted in Investing ¶ Tagged Investing

How to develop an ETF trading system that works

Technically speaking, a multi-asset 1/N equities portfolio with uncorrelated assets and periodic re-balancing is “system trading”. It’s just a set of rules or a methodology that one follows mechanically to make investment adjustments with the typical goal of increasing investment returns and decreasing the variability of the returns. But usually the term “system trading” refers to more complex, and typically computerized, trading algorithms. And that’s what I want to talk about: sophisticated systems which require some mathematical programming skills to implement.

Parameter estimation error

The biggest problem associated with system trading is called “curve fitting” or “over fitting”. Trading systems typically consist of a model or a set of rules which have a number of free parameters. These parameters are usually estimated using historical data. If there are too many parameters and/or too little historical data, the model will read too much into the historical data and will be inaccurate on new data – sometimes extremely inaccurate. And this problem isn’t unique to just highly sophisticated models with lots of parameters. It can occur with even the simplest models.

When you get the itch to optimize a trading system’s parameters, think about this example:

For example, pretend it’s January of the year 2000, and we want to build a simple asset allocation portfolio, which we will periodically re-balance, consisting of two low correlation assets: stocks and bonds. We have only one parameter to estimate: the proportion of our portfolio invested in stocks. We pull up 20 years of historical data and, using some trial and error, we estimate that the optimal value of our parameter is around 0.9 or 90%. It’s easy to see why: from 1980 to 2000, stocks pretty much monotonically increased in value – greatly outperforming bonds. Confident that we have a robust portfolio based on twenty years of historical data, and likely to return 30 or 40% this year, we put nearly all our funds into stocks. Two and a half years later, our portfolio will have lost some 40% of its value in the dot com crash.

What happened? Simple. We over-fit a model with only one parameter even though we used twenty years of data. Imagine what could happen if we used a sophisticated model with 5 parameters fit to 10 years of data. We could lose some real money.

The failure of the model on new data was caused by something called “parameter estimation error”. We estimated our parameter based on limited historical data which turned out to have no predictive value for what was coming. We would have been better off assuming that we couldn’t predict the future and used the naive 1/N rule, or 50% stocks and 50% bonds. Unfortunately, if we had back tested such a system in January 2000, we would have been unimpressed by the results. The strategy of buy and hold, which is what most people compare their trading strategies to, would have greatly outperformed our naive strategy. Any investment advisor using such a 50% bonds strategy back in 2000 probably would have been considered a loser who missed the bull market and wouldn’t admit it. Perhaps at this point you have more appreciation for advisors who focus on absolute returns rather than relative returns.

How to tell if a system is vulnerable to estimation errors

If you are contemplating buying, building or subscribing to a trading system, the only way to really know if it’s vulnerable is to understand the model it was built on, how sensitive the system is to parameter values and how they were chosen, how much and the quality of the historical data the system was tested on, and how it has performed on new, previously unseen data since it was built. The best case is a system that has very few, naively chosen, parameters to which it is insensitive to, and tested over a wide variety of economic and profit cycles, crashes, manias, etc, before and after it was developed.

The developers of solid, non-optimized (non-trivial) systems have a number of problems: 1) if they reveal enough information to assure their more sophisticated customers that their system is robust, they practically give the strategy away, 2) non-optimized system performance will always be worse than a curve-fit system, putting them at a marketing disadvantage because, 3) the amount of historical data available is limited, and 4) it may take many years to demonstrate, with any certainty, that a system performs as well on unseen data as it did in back-testing, and 5) customers tend to ignore boring, non-optimized systems and go after shiny new systems that bolt upwards right out of the gate.

Even if you do get access to all this information, you still need to have enough knowledge to properly assess the system and to ask intelligent questions.

Example of a system with a minimum of estimation error

As an illustrative example, I will introduce you to a multi-asset portfolio system that adjusts its allocations weekly and is based a the four asset 1/N portfolio (using short term treasuries, long term government bonds, stocks, and gold) but use a little bit of Machine Learning to tweak the allocations slightly to follow the trends.

But only a little. If stocks are in a strong trend upwards, I want to be slightly over exposed to them. If gold trends monotonically down in the future, I want my portfolio to be slightly underweight gold.

But to do this I’ll need to add another asset to the portfolio which I am pretty confident will tend to go up in value during a crisis. I want to do this because over-weighting cash will not offset loses in the other asset classes during a financial panic as the system is essentially constrained to make only minor adjustments to the 1/N allocations. For this example the asset I’ll use is an inverse S&P 500 fund. This introduces a serous drag on this portfolio, essentially canceling out stocks, so I’ll simulate the use of leveraged (2x) long bond funds and stock index funds to overcome some of this friction. Secondly, I’ll need a specific technique to do the tweaking. For this I’ll use something called Direct Reinforcement Learning [1].

Advertisement – Article continues below

Though Direct Reinforcement Learning requires a lot of parameters, methods exist which can reduce the effective number of parameters for this type of system. Instead of optimizing the parameter values, I’ll use the average of the recommendations of the system over a wide range of parameter values. For example, if I have three parameters, a, b, and c, and we give each a range of 0 to 1 and an increment of 0.1, then I could average the recommendation of the system over all 11³ combinations: [0,0,0], [0.1,0,0], … [1,1,0.9], [1,1,1]. Hopefully the system will be relatively insensitive to some parameters and I can just use a representative value or just a few widely spaced values to approximate using the full range and save a great deal of computational time.

Most systems will inevitably perform much better over a tighter range, say, for example, from 0.2 to 0.4. But remember the curve fit example at the beginning of this article when you observe this and are tempted to tighten the range. The example would also have performed much better in back-testing at a tighter range, say 0.8 to 1.0, than it would over the full range of 0 to 1. (You’ll note in this particular case that averaging the recommendations over the full range from 0 to 1 is just the recommendation at the middle, 0.5).

The graphic below shows the back-testing results of this system (the black line). The foundation of the system, the 1/N base portfolio (aka the permanent portfolio), is the blue line. As you can see, except under exceptional circumstances, like the long bull market from 1997 to 2000, or the 2008 financial system crash, the system is pretty much tracks the permanent portfolio, which is supporting evidence that we haven’t tweaked it too much.

Click the graphic for a larger picture:

This system has an average yearly ROI of about 11%, a maximum (end of week) draw down of 9% and Sharpe ratio of about 1.3 over the period of September 1995 through the middle of April, 2012, based on weekly data. By comparison, the permanent portfolio has an average yearly ROI of about 8%, a maximum draw down of 18% and a Sharpe ratio of about 1.0.

Suggested Steps

If you haven’t had much programming experience, I suggest you use the programming language R. It’s free, relatively easy to learn and there are lots of free resources available on the web. Search for “programming R”.
Download the papers below and duplicate Fig. 2 in the second paper, which is a single artificial asset trend following exercise.
Duplicate Fig. 10 in the first paper, which is a portfolio with three artificial assets.
Modify your portfolio system to average over a wide range of parameter values if you haven’t already.
Replace the artificial assets with weekly data from the funds “VFINX”, “VUSTX”, “TWUSX”, “CEF”, and “RYURX”. These are easily downloaded from Yahoo finance. You’ll need to write a function to double the returns of the first two funds to simulate 2x leverage.
I used training periods ranging from 50 to 75 weeks, 10 epochs for training, regularization factors ranging from 0.1 to 0.5 and I averaged the results over a rho vs. eta matrix with values ranging from 0.01 to 0.1. I used a softmax output with a=2 (see equation 5 in the first paper).
Feed the system with data up to the year 2000 and optimize the parameters to this data. Then test it on data from 2000 to present.
Determine how sensitive the system is to increasing transaction costs.
Try using other mutual funds or ETFs.
Try simulating the use of higher leverage (x3) funds. How much leverage can the system handle?
Check out other approaches, for example, this.

References

[1] J. Moody, et al, Performance Functions and Reinforcement Learning for Trading Systems and Portfolios, Journal of Forecasting, Volume 17, Pages 441-470, 1998 [pdf]

[2] J. Moody, M. Saffell, Learning to Trade via Direct Reinforcement, IEEE Transactions on Neural Networks, V. 12, No. 4, July 2001 [pdf]

April 15, 2012

Warnings re: Exchange Traded Notes or ETNs

By D. Ekstrand ¶ Posted in Investing ¶ Tagged Investing

If you are interested in purchasing an exchange traded note, better read the prospectus extremely carefully, or, better yet, hold off purchasing any for the time being:

From Invest with an Edge:

The industry has promulgated the idea that what makes ETFs and ETNs unique is their ability to create and redeem shares on demand through in-kind and cash exchanges with Authorized Participants. I, and the majority of investors, believe this feature constitutes the soul of an ETF, makes it a unique vehicle, and provides investors with the confidence that these products will trade at prices close to their net asset values.

However, investors are often not aware that it is even possible for this process to be broken. Furthermore, there is not an easy way to determine if a given ETF or ETN has a broken creation/redemption process. Investor perception is that ETFs and ETNs trade very close to their NAVs. As a result, investors can be caught unaware when these broken ETFs and ETNs are trading at premiums as high as 1,000% or more, as was the case for the former ELEMENTS MLCX Gold Index ETN (GOE) back in 2009.

Read the entire article here.

And from the Intelligent Investor:

Or consider the Credit Suisse Long/Short Index ETN, which seeks to replicate the returns of certain hedge-fund strategies. The front page of the prospectus reports the ETN’s “annual investor fee” as 0.45%. Not until page 30 of the 84-page document can investors determine that they also will incur an “accrued holding rate” of 0.7% (adjusted quarterly) and an “accrued index adjustment factor” fee of 0.5%—implying a total annual cost of 1.65%, or more than triple the reported fee.

High management fees aren’t the only way these instruments can raise investors’ costs. According to XTF.com, eight ETNs were trading at premiums of 5% or more this week. In one extreme example, to buy $100 worth of assets at iPath Dow Jones-UBS Natural Gas ETN, you would have had to pay up to $196.

Read the entire article here.

Finally, according to Reuters, the FINRA is currently investigating ETNs:

A spokeswoman for the Financial Industry Regulatory Authority said on Thursday the regulator is “looking at the events and trading” activity surrounding a sharp plunge in the price of an exchange-traded note designed to track stock market volatility.

“We have a review under way looking at a host of issues relating to ETNs and other complex products,” the spokeswoman said.

Read the entire article here.

April 12, 2012

Best Investing Sites

By D. Ekstrand ¶ Posted in Finance, Investing ¶ Tagged Investing

There are a huge number of investing sites on the web. Many of these are attention grabbing sites that try, for example, to induce investors to buy a stock just because it’s attracting everyone’s attention. [1] I think investors should avoid the “stocks in the news” sites and concern themselves with broader issues such as global economics, currency news, fund innovations, fraud, lower trading fees, taxation issues, emerging opportunities, disruptive technologies, etc. Here are some suggestions for equity investors:

Aggregators

1. The Whole Street

Current Topics

1. Forbes
2. Financial Advisor
3. Bloomberg
4. Citron Research
5. Advisor Perspectives
6. Inc.
7. Technology Review
8. Reuters Alpha NOW
9. Institutional Investor

Investing Fundamentals

1. The American Association of Individual Investors
2. Bogleheads Wiki
3. Efficient Frontier

Stock and Fund Data and Screens

1. Yahoo Finance
2. Investing.com
3. Nasdaq.com, and Nasdaq stock screener
4. Portfolio123

Disruptive Technologies

1. Kurzweil Accelerating Intelligence
2. MIT Technology Review

Technical Charting Online

1. FreeStockCharts.com

Economic Data (US)

1. Federal Reserve Economic Data
2. Economagic.com

Search Engines for Academic Research Papers

1. Google Scholar
2. CiteSeer

Advanced Portfolios (for programmers)

1. CSS Analytics
2. Systematic Investor

Pundit Commentary

1. The Big Picture
2. Project Syndicate
3. Calculated Risk
4. Portfolioist
5. The Capital Spectator

Reference Books (no, these aren’t sites, but I’ll park this here for now)

S. Klarman, Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor (1991)

B. Graham, The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)

R. Gibson, Asset Allocation, 4th Ed or W. Bernstein, The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk

C. Reinhart, K. Rogoff, This Time Is Different: Eight Centuries of Financial Folly

C. Kindleberger, R. Aliber, Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition

————————————————–

[1] Brad M. Barber , Terrance Odean, All that glitters: The effect of attention and news on the buying behavior of individual and institutional investors, [pdf]

Also, see the intro to:

B. Han, D. Hirshleifer, Self-Enhancing Transmission Bias and Active Investing, (2012) [pdf]

January 13, 2012

Mutual Fund Correlations and the Data Snooping Bias

By D. Ekstrand ¶ Posted in Finance, Investing ¶ Tagged Investing

I claim that it’s best to consider all equity funds as one asset class because they’re all correlated, but I haven’t backed it up with any data. My aim here is to rectify this. While we’re at it we can look at the correlations between equities and other assets such as precious metals, long bonds and short term bills.

The funds I considered were:

VFINX -Vanguard index trust 500 index fund
VUSTX- Vangard long term treasury fund
MGSDX – Managers Short Duration Government fund
CEF – Central Fund of Canada Limited
FSELX – Fidelity select electronics portfolio
FSENX – Fidelity select energy portfolio
MALTX- Blackrock latin america fund
FSAIX – Fidelity select air transport
FSDAX – Fidelity select defense and aerospace
FLPSX – Fidelity low-priced stock fund
FSPCX – Fidelity select insurance portfolio
FSEAX – Fidelity emerging asia fund
FSNGX – Fidelity select natural gas portfolio
FSDPX – Fidelity select materials portfolio
FSAGX – Fidelity select gold portfolio

Results

Below is a visual representation of the correlation matrix calculated from fund data pulled off Yahoo for the interval of Jan. 1997 through Dec. 2011. The colors correspond to the correlation values, with blue = 1.0, black = 0.0, and yellow = –1.0. In other words, since we’re looking for uncorrelated assets, blue or yellow are bad and black, dark blue or dark yellow are good. Solid yellow would imply a strong negative correlation, and what we need for a diverse portfolio is actually non-degenerate asset prices, i.e., no asset is just a constant multiple of another. [click on the image for a larger view]

Fund correlations

Looking across the top row, we see FVINX, the S&P 500 index, is correlated pretty well with the other equities, which is everything except long bonds (VUSTX), T-bills (MSDGX), and gold (CEF and FSAGX). The lowest correlation outside of these four funds was the emerging asia fund (FSEAX) which had a correlation coefficient of about 0.6.

★ My claim is now backed up with at least some data. ★

For comparison, the correlation coefficients between the first four assets, the permanent portfolio assets, are all less than 0.15.

Permanent Portfolio Correlations
	FVINX	VUSTX	MSDGX	CEF
FVINX	1.0	-0.26	0.13	0.013
VUSTX	-0.26	1.0	0.09	-0.02
MSDGX	0.13	0.09	1.0	0.11
CEF	0.013	-0.02	0.11	1.0

The outlier here is the Fidelity gold fund, which is roughly 80% gold miners and up to 20% physical gold. It has correlation coefficients of 0.23 with FVINX, and 0.66 with gold, so adding it to a portfolio would just over-weight both gold and equities, and replacing gold with it just under-weights gold.

Article continues after advertisement

Let’s go data-snooping!

A careful examination reveals that replacing the S&P 500 index in the permanent portfolio with the Fidelity Select air transport fund will further lower the correlations, and back-testing confirms that this substitution has a higher ROI (9.9% vs 8.6) and lower draw-down (16.8% vs 17.8%). An exciting finding, yes? Should we use this?

Permanent Portfolio Correlations using FSAIX
	FSAIX	VUSTX	MSDGX	CEF
FSAIX	1.0	-0.22	0.07	-0.07
VUSTX	-0.22	1.0	0.09	-0.02
MSDGX	0.07	0.09	1.0	0.11
CEF	-0.07	-0.02	0.11	1.0

No! That’s data-snooping! I saw something in the data that looked good and then tested it. Of course it did well! Not ready to give up on it? Then develop a hypothesis for why it should be better and then test this hypothesis on previously unseen data.

Advertisement – Article continues below

Reference

HSBC Global Research, Risk On Risk Off, Fixing a broken investment process, April 2012 [pdf]

January 11, 2012

Frequent small pleasures are better than a few big ones

By D. Ekstrand ¶ Posted in Health ¶ Tagged Health

How to be happy and stay that way with little effort

Common sense would suggest that it’s better to have a lot of intense moments of extreme happiness rather than fewer, but researchers have found that this isn’t the case. In fact, it seems that frequent small pleasures and relatively few negative experiences may be both necessary and sufficient to produce happiness.

In three separate studies, investigators assessed the level of happiness of subjects, each study using a different happiness scale, and then tracked the mood of the subjects at random times throughout the day and at the end of each day over a period of six to eight weeks by paging them to record their moods in a notebook.

What they found was that the self-reported frequency of happy moods reported by the subjects was more highly correlated to the happiness assessments than the intensity of their happiness. Individuals who reported feeling happy over 80% of the time but who had very few or no highly intense moments of happiness were all determined to be very happy by the assessments scores. Individuals who reported feeling less than happy more than 50% of the time were all assessed to be unhappy – even though they reported relatively more moments of very high positive happiness.

In fact, all of the subjects from the three studies who reported that they frequently felt happy scored highly on every measure of assessed happiness, independent of the intensity of their happy moods. Conversely, every subject who reported feeling less than happy most of the time scored as unhappy on every one of the assessments. This suggests that being in a happy mood most of the time is necessary to being happy. Although the data was consistent with it, there wasn’t enough of it at the extremes to solidly conclude that a happy mood most of the time is sufficient (i.e., all that is needed) to be happy.

Why don’t intense positive experiences make a person happy?

One reason is probably because they are very rare. For example, in the studies mentioned above, an extremely happy mood was reported on only 2.6% of the subject-days in the study. On the other hand, the majority of the subjects reported less intense but positive moods most of the time.

But there seem to be costs associated with intense feelings of happiness. Subjects who reported experiencing intense positive moods were also the most likely to report experiencing intense negative moods. Anyone who has been to a sporting event and observed hardcore fans has witnessed this firsthand. There’s mass ecstasy when the home team scores, and howls of unhappiness when the other team gets away with a foul. To care intensely about the outcome of something you can’t control is setting yourself up for these ups and downs.

Advertisement – Article continues below

Theorists have produced models to explain why extremely intense happy moods are rare. In one model, extremely positive events must either be something new and novel or something negative that you became adjusted to suddenly goes away. Other models predict why intense ups and downs go together. For example, there’s one model which assumes all events are judged in relation to other events. So extremely good events are judged more positive if extremely bad events have occurred recently, and vice versa. This explains why lottery winners are less happy when small positive everyday events occurred thereafter. Winning the lottery raises the bar, so to speak. It may also explain why some people enjoy novels featuring dystopian worlds – it lowers the bar so their normal lives seem more happy by comparison.

Conclusions

The results of this study suggest that people who are successful at maintaining a low level positive mood will be happy. In other words, we should increase the frequency of low level happy experiences and decrease any unhappy experiences. Relatively intense happy experiences aren’t likely to increase our long-term happiness much and might actually be detrimental.

A large part of the population behaves as if how they spend their time and money in everyday moments is not terribly important but pursuing intense moments of happiness is. This is apparently the exact opposite of the optimal strategy. To paraphrase Benjamin Franklin, everyday moments are the stuff life is made of.

Reference

E. Diener, E. Sandvik, & W. Pavot, Happiness is frequency, not the intensity, of positive versus negative affect, in Assessing well-being: Social Indicators Research Series, 2009, Volume 39, 213-231

January 2, 2012

Quick and Easy Weight Loss

By D. Ekstrand ¶ Posted in Health ¶ Tagged Health

How to lose weight and keep it off

As Americans and others on Western diets continue to suffer from a weight epidemic, they continue to be told to eat less and get more exercise, and they continue to diet but then regain the weight they lose. Unfortunately, recent research suggests this will only continue.

For example, a recent study showed that dieters still feel hungry and obsess over food for long periods of time after losing a significant amount of weight from dieting. Hormones in the blood that help keep appetite in check were still significantly lower than before the weight loss a year after completing the diet. [1] The researchers suggest that, until the problem of reduced hunger reducing hormones is addressed, dieters will continue diet and relapse. Although some research has already been completed on the hunger hormone leptin, the results were “variable”. [2]

For most of human evolution, maintaining body fat actually played a major role in helping us survive and our bodies are apparently unwilling to let us give it up without a fight. [3] If we go without food or with a reduced level of food for even twelve hours, our brains will try to focus all our attention on getting more food. This focus on eating undoubtedly got our ancestors through numerous famines by storing up fat during good times. Unfortunately, we’re apparently having too many good times. Our fat stores an amazing amount of energy – which means we have to go hungry for quite a while in order to lose the pounds. One person underwent a therapeutic fast for over a year to reach a healthy weight. [4]

Food addiction is now receiving consideration as a real phenomenon, and that pharmacological and behavioral interventions similar to those used for drug addictions are needed. Take, for example, sugar-bingeing rats. Rats provided with a sugar and fat solution for just two hours per day consumed the majority of their calories from this solution even though regular mice chow was continuously available. Like opium smokers, they increased their consumption over time during the two hour window and then again after a period when the solution was no longer available daily. [5]

Drinks containing high fructose corn syrup are no longer just considered simply empty calories. Some now consider fructose to be a chronic liver toxin, much as alcohol is. Fructose continues to be strongly implicated in studies for causing cardiovascular disease, type two diabetes, and cancer, and for making our abdomens fat (which is considered a marker for cardiovascular disease). And since table sugar, sucrose, is half fructose, it is similarly implicated. [6],[7],[8] Unfortunately, most Americans seem totally unaware of this. One of the more vocal fructose critics is Robert Lustig, a Professor of Pediatrics at the University of California at San Francisco. A video of his 1.5 hour lecture, “Sugar: The Bitter Truth” garnered a lot of attention since it was released in 2009. If you haven’t seen the Lustig video, I recommend it if you have the time:

And perhaps fructose is making us more at risk for depression. Evidence is mounting that inflammation plays a role in depression, and adipose tissue in the abdomen (belly fat) is a primary source of inflammatory factors associated with depression. If body fat can cause depression and depression can cause body fat, there is the possibility of a viscous cycle. [9], [10]

On a more positive note, a large study was published in 2011 by the New England Journal of Medicine which examined the effect of diet and lifestyle on weight gain in non-obese individuals. The foods most associated with weight gain were not surprising: french fried potatos, potato chips, potatoes, sugar-sweetened drinks, processed and unprocessed red meats. French fries were by far the worst food and anyone who loves deep fat fried foods should take notice. Foods that were associated with weight loss were yogurt, nuts, fruits, whole grains and vegetables. Why yogurt consumption is associated with weight loss is unknown. It’s possible that gut bacteria influence weight gain or maybe yogurt consumers just tend to have more healthy behaviors. [11]

Advertisement – Article continues below

So, what to do?

Until there are interventions for hunger hormones and food addiction, we will have to make use of the tools and knowledge we have now:

Stop consuming sugared drinks, including sodas, chocolate milk and fruit juices, starting now. Fructose in its natural form- fruits and vegetables- is fine. The fiber in these foods slow down the digestion of the fructose and it is processed via burning instead of storage. When you see a sugar drink, think “chronic liver toxin”.

See your doctor about the possibility of a therapeutic fast. Your doctor will probably suggest a restricted calorie diet instead as this is much safer. Fasting can be dangerous without regular blood tests to see what’s happening in your system, so don’t go it alone.

Exercising has long been known for playing a central role in controlling appetite. Exercise also detoxifies fructose by burning it instead of storing it as fat, and increases your metabolism, among other things. The average participant in the National Weight Control Registry (a data base of people who have maintained at least a 30 pound weight loss for one year or longer) burns around 2,600 kcal/week exercising. [12] For a 200 pound person, this is equivalent to one hour and fifteen minutes of walking at 3 mph per day. Even if you can’t adhere to a diet, and even if it doesn’t seem to help shed any pounds, you should still exercise.

Find a dieting plan or plans that you can stick with over a long period of time even though your body is attempting to undermine you at every turn. The safest bet is probably the paleolithic diet since humans evolved eating this diet over hundreds of thousands of years. (See the related link below for an example.) It includes no grains, milk products or refined sugar.

The type of diet you choose is not as important as your adherence to it. [13] You will feel hungry and constantly prompted to eat over an extended period of time (perhaps years) even after reaching your target weight, so put some serious thought into how you are going to deal with hunger.

Advertisement – Article continues below

Don’t try to be a perfectionist. Occasionally you are going to eat something you shouldn’t because it’s too tempting. Attempting to be a perfectionist makes an extremely difficult task next to impossible, so don’t go to tears if you sneak a donut once in a while.

Finally, set a weight goal that is specific and difficult to achieve. The harder the goal, the higher the performance. Specific goals (135 pounds by January 1) are better than vague goals (lose some belly fat) because vague goals are always met even if you don’t even try.

Related

Easy Diet Plan

References

[1] P. Sumithran, et al, Long-Term Persistence of Hormonal Adaptations to Weight Loss, New England Journal of Medicine, 2011, Oct. 27, 2011

[2] K. Masuok, Human Recombinant Leptin Administration as a Potential Obesity Therapy, Immunology Endocrine & Metabolic Agents – Medicinal Chemistry, Volume 10, Number 2, June 2010

[3] J. Wells, The evolution of human fatness and susceptibility to obesity: an ethological approach, Biological Reviews of the Cambridge Philosophical Society, 2006 May; 81(2):183-205.

[4] W. Stewart, L. Fleming, Features of a successful therapeutic fast of 382 days’ duration, Postgraduate Medical Journal, March 1973, 49, 203-309 [pdf]

[5] D. Blumenthal, M. Gold, Neurobiology of food addiction, Current Opinion in Clinical Nutrition and Metabolic Care 2010, 13:359–365 [pdf]

[6] G. Bray, Soft drink consumption and obesity: it is all about fructose, Current Opinion in Lipidology, 2010 Feb;21(1):51-7.

[7] K. Stanhope, P. Havel, Fructose consumption: potential mechanisms for its effects to increase visceral adiposity and induce dyslipidemia and insulin resistance, Current Opinion in Lipidology, 2008 Feb; 19(1):16-24.

[8] Sugar: The Bitter Truth, R. Lustig, (video)

[9] R. Shelton & A. Miller, Eating ourselves to death and despair: The contribution of adiposity and inflammation to depression, Progress in Neurobiology, 2010 August; 91(4): 275–299.

[10] R. Shelton & A. Miller, Inflammation in depression: is adiposity a cause?, Dialogues in Clinical Neuroscience, 2011;13(1):41-53.

[11] D. Mozaffarian, et al, Changes in Diet and Lifestyle and Long-Term Weight Gain in Women and Men, The New England Journal of Medicine, 2011, June 23

[12] V. Catenacci, et al, Physical activity patterns in the National Weight Control Registry, Obesity, January 2008 ;16(1):153-61.

[13] A. Makris, G. Foster, Dietary approaches to the treatment of obesity, The Psychiatric Clinics of North America, 2011 Dec;34(4):813-27.

[14] G. Latham, E. Locke, Self-Regulation through Goal Setting, Organizational Behavior and Human Decision Processes 50, 212-247, 1991

December 22, 2011

Investing in Growth Stocks

By D. Ekstrand ¶ Posted in Finance, Investing ¶ Tagged Investing

How to add Growth Stocks to a Portfolio

If we add some high growth stocks, something I have also referred to as conviction stocks, to our portfolio (and they do well), it is possible that we can raise our ROI without raising our volatility, or decreasing our safety against unanticipated economic crises. Consider a portfolio over the past 15 years containing 12.5% OAKLX, a concentrated value fund, 12.5% AAPL, Apple corporation stock, 25% VUSTX, the Vanguard Long Term Treasury mutual fund, 25% VFISX, the Vanguard Short-Term Treasury Fund and 25% CEF, the Central Fund of Canada Limited which holds precious metals. This is the Permanent Portfolio we saw previously but with the equity investment split between the Oakmark Select fund and Apple’s common stock. As I stressed before, it’s best to combine all equities into a single bucket unless you have good reason not to. This portfolio would have returned an average ROI of 14% with a maximum draw down of 19% and a Sharpe ratio of 1.36. It’s the blue line below.

Performance summary for PP w/ Apple Corp stock

This is the best we’ve seen yet but it’s not something we can invest in with any expectation of the performance continuing – it’s just an example to illustrate a point. But notice that Apple’s stock (AAPL) didn’t exactly rise monotonically. In fact, as we can see from looking at the red line below, it was extremely volatile. At different times it suffered draw downs of 50%, 80%, 40%, and 60%. And yet the portfolio, the blue line, was relatively steady.

Performance summary for AAPL and PP w/ AAPL

We can see that the portfolio apparently acted as a buffer against the wild swings in Apple’s stock while taking advantage of its impressive growth. This is one way of including a volatile asset such as growth stocks or a commodities trend following system, etc, in a portfolio. And, obviously, it would be better to diversify over a number of assets rather than just one.

Can we do better than this? From a risk adjusted standpoint, it’s possible. By hedging a growth stock against the overall market we potentially create an new, uncorrelated asset, raising the number of diversified assets from 4 to 5.

Advertisement – Article continues below

How to add Hedged Stocks to a Portfolio

We can create a new hedged stock asset by purchasing equal dollar amounts of the stock and, for example, an inverse index fund such as the Rydex Inverse S&P 500 Strategy (RYURX) or the ProShares Short S&P 500 ETF (SH), by shorting an equal dollar amount of a security that tracks the S&P index such as the SPDR S&P 500 (SPY), or by purchasing put options on the index. Purchasing an inverse index fund is the simplest to understand so we’ll assume we are using the Rydex fund in the following example.

Treating a hedged AAPL stock as our fifth asset, our portfolio becomes 20% OAKLX, 20% VUSTX, 20% VFISX, 20% CEF, 10% RYURX, and 10% AAPL. This portfolio would have returned a ROI of 12.1% with a maximum draw down of 15.7% and had a Sharpe ratio of 1.46. This is the red line below, which is just under the un-hedged portfolio. Again, we assumed that the OAKLX fund and the hedged AAPL were not correlated, which allowed us to divide our portfolio into five equal parts of 20% each and, presumably, this increase in diversification helped our portfolio’s performance.

Performance of PP w/ hedged AAPL vs unhedged and S&P500

At this point we should review our assumptions. First of all, we used Apple’s common stock, which we now know performed very well over the 15 year time period in question, to obtain a portfolio which returned an average ROI of 14%. We don’t know how to select the next Apple stock for the next fifteen years, but we now know how to include a volatile, high growth stock in our portfolio if, as a result of careful research by ourselves or our adviser or luck, we come across one.

In the real world, it’s not easy to discover the next Apple, so we need to diversify our 12.5% holding of volatile assets to more than a single security. One way of doing this is to use a stock screen, especially one that can be back tested, such as the one found at portfolio123.com, or one of its competitors. As an example, our screen might result in 5 or 6 reasonably liquid small caps with positive cash flow and upward momentum. Every quarter we would have to rerun the screen and make any necessary adjustments.

Second, we assumed that the hedged AAPL stock and the concentrated mutual fund OAKLX were uncorrelated and could be treated as separate assets, thereby raising the value of N in our 1/N portfolio from 4 to 5. We might have reasoned that the value of the hedged Apple stock was going to depend on how innovative their products were versus their competition, and not so much on the economy as a whole, and thereby justified this assumption from the beginning.

And if we look at the historical correlation of S&P 500 hedged stocks against the S&P 500, we’ll find that they are typically not very correlated, so this assumption seems reasonable. The following is a correlation matrix for hedged versions of some popular stocks against the S&P 500 index fund VFINX over the last fifteen years. Blue implies a perfect correlation, black is zero correlation and yellow is perfect negative correlation. The dark blue and yellow shades in the matrix show the correlations between the hedged stocks and the S&P 500 are low, as are the correlations between the hedged stocks.

Correlation matrix for stocks hedged against the S&P 500 versus VFINX

This seems to suggest that we can include as many hedged stocks in our portfolio as we want and just count each as an uncorrelated asset, thus raising the N in our 1/N portfolio from 4 or 5 up to 20 or 500 if we want to. Unfortunately, if we perform a more careful analysis or just observe the market for a little while, we’ll find that high growth stocks tend to overreact in unison (relative to the index) during high market stress situations, so hedged stocks really aren’t that uncorrelated when we need them to be. Many investors borrow money to add hedged securities to their portfolio because of the low returns and the belief that they are relatively safe, but forgetting that the hedged stock could plummet while the market shoots upwards, leaving them with a large loss. It’s best to either treat hedged stocks as a subset of your equity asset and not use leverage or hedge a good sized basket of stocks in case a few of them do take a nose dive. Finally, note that if you invest in a S&P 500 index fund and an inverse S&P 500 fund at the same time, they just cancel themselves out.

Advertisement – Article continues below

The big advantage of a hedged stock is that the combination will maintain more of its value during a financial crisis. The disadvantage is that if your growth stock fails to perform better than the market, your hedged asset will not climb in value.

Alternative Investments

Continuing to increase the number of uncorrelated assets in your portfolio is desirable, but increasingly difficult beyond the assets we have discussed. Commodity ETFs are available, but most are correlated to the overall economy, as are stocks. Hedge fund ETFs have only recently come on the market and thus have short track records and low liquidity. You may be able to find uncorrelated assets such as hedge funds, managed futures, private equity, foreign currencies, fixed annuities, etc, but it’s becoming increasingly difficult. [1] In general, the more money you have to invest, the more options that are available because many alternative investments are open only to a limited range of professional and/or wealthy investors.

Related Posts

References

[1] R. Bernstein, Diversification remains difficult, Richard Bernstein Advisors (2012) [pdf]

December 18, 2011

The Permanent Portfolio

By D. Ekstrand ¶ Posted in Finance, Investing ¶ Tagged Investing

The Permanent Portfolio and how to improve on it

The so called “permanent portfolio” of Harry Browne is equally divided among four assets: gold, stocks, long bonds, and cash. As I mentioned before, the underlying theory is that one should hold four equally weighted assets – gold, cash, stocks, and bonds- which tend to move in different directions during different stages of the four economic cycles: inflation, deflation, prosperity and recession. During times of inflation, gold tends to do well, during deflation bonds tend to do well, during times of prosperity stocks soar, and during recessions, cash is best. This portfolio has returned about as much as the overall stock market in terms of returns in the 1974 to 2008 time frame but with dramatically lower volatility, perhaps due to the remarkably low correlations of its components. The hope is that the portfolio will be preserved independent of what happens to the economy: inflation, deflation, boom times or depression. [1]

As before I am re-balancing every three months or so and using the Vanguard 500 Index Investor mutual fund (VFINX) which tracks the S&P 500, the Vanguard Long Term Treasury mutual fund (VUSTX) and the Central Fund of Canada Limited (CEF), which is a closed end fund and is composed of roughly 50% gold and 50% silver assets. For parking cash, I used the Vanguard Short Term Treasury Fund (VFISX).

Performance of permanent portfolio

The average ROI over this 15 year period was 8.6% with a maximum draw down of 17.8%. This is probably the best performance we have seen yet, but it’s becoming difficult to tell based on performance graphs, so let’s look at the average return divided by the standard deviation of the returns, otherwise known as the Sharpe ratio. The permanent portfolio had a Sharpe ratio of 1.02 over the period studied. This is slightly higher than the Simple Plus strategy (0.96) or the Talmud I Portfolio (0.94) but dramatically higher than buy-and-hold the S&P 500 (0.34).

For a portfolio with such beautifully uncorrelated assets, an 18% draw down might seem high. It goes to show that under times of extreme duress – like the financial crisis of 2008 – the normal asset correlations can dramatically change as over leveraged individuals and investment firms are forced to liquidate assets that are doing well (gold, for example) to cover margin calls on others that aren’t. One of the advantages of alternative investments such as art or classic automobiles is that they may hold their value better during crises because investors can’t quickly liquidate them to cover other debts.

As pointed out initially, the beauty of this portfolio is that it theoretically holds its value independent of what the economy is doing and anyone can follow along. There are no parameters to estimate or stocks to pick and the four assets are predetermined. All the user has to do is pick appropriate mutual funds or ETFs for each asset category, subject to the usual precautions on selecting gold funds.

Permanent Portfolio Strategy Plus: Using a Concentrated Mutual Fund

As we saw before with the simple portfolio, if we improve the performance of any of our holdings, we improve the performance of our portfolio. Again, using observation selection bias, I’ll use the concentrated value fund Oakmark Select (OAKLX) to illustrate:

Performance of permanent portfolio plus

Now our average ROI has increased from 8.6% to 9.7%. Although the maximum draw down increased slightly from 17.8% to 18.6%, the Sharpe ratio was higher at 1.13, so we gained proportionally more than we risked. Although the Permanent Portfolio was designed such that anyone could use it, if your financial adviser can get you in an equity fund or combination of funds that outperform the market, you can potentially more than make up for their 0.75% fee.

The performance of the Permanent Plus portfolio is pretty good, but many investors want either a higher ROI (smaller accounts) or a lower draw down (usually larger accounts). It’s possible to do both at the same time without sacrificing the safety of the portfolio in an unforeseen crisis, but it will require some mathematical programming skills.

Article continues after advertisement

The Leveraged Permanent Portfolio

What if we desire a higher ROI from this simple system? Let’s see what happens if we use 2x leveraged exchange traded funds, or ETFs, in a permanent portfolio. Yes, it is also possible to borrow money to increase returns (and this is called using leverage too). The advantage of using leveraged ETFs over borrowing money is that you can’t lose more than you invest so you never have to worry about margin calls.

Since ETFs haven’t been around very long, I’ll use the data from the mutual funds above, but magnify their weekly movements by a factor of two (except for the cash fund) so we can see what might have happened. You may be aware that there is some tracking error in this simulation because leveraged ETFs track the daily movements of the underlying, not the weekly movements. But, under most circumstances, this difference is very small. Only over longer periods of time, like many months or years, can the tracking error become significant. If we are re-balancing frequently this should not be an issue.

The result is the green equity line below, labeled X2X.PP:

Performance of leveraged permanent portfolio

Our average ROI has gone from 8.6% to 15.2% although our maximum draw down has also gone up, from 17.8% to 33.2%. And the Sharpe ratio dropped a little, from 1.02 to 0.94. While the draw down of this leveraged portfolio might seem excessive, for a small account with a long time horizon – for example, a college fund for a small child – a portfolio of leveraged ETFs may be an attractive option. No stock selection skills whatsoever are necessary, just periodic re-balancing. An example of a leveraged portfolio might be the ProShares Ultra S&P 500 (SSO), the ProShares Ultra 20+ Year Treasury ETF (UBT), the ProShares Ultra Gold ETF (UGL) and the unleveraged SPDR Lehman 1-3 month T-Bill ETF (BIL) .

Continue on to a trading system built on the Permanent Portfolio.

Related Posts

References after advertisement

References

[1] H. Browne, Fail-Safe Investing: Lifelong Financial Security in 30 Minutes, St. Martin’s Press, 2001

If you are interested, there’s a new book coming out, The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy.

Related

1. See this for a graphical introduction to the PP and links to investigate if you want a more technical look at the PP.