Honoring the Legacy of Singapore’s ‘George Washington’

Written by Nicholas Vardy, CFA.

SNAG Program-0816

On Monday, the world lost one of the most prominent, controversial and arguably most effective political leaders of the last 60 years, Singapore's founding Prime Minister Lee Kuan Yew. He passed away peacefully at the Singapore General Hospital at the age of 91.

Lee Kuan Yew wasn't just your ordinary garden-variety politician. In terms of his impact on a newly independent state of Singapore, he was more of a "Founding Father" like George Washington — with Thomas Jefferson and Benjamin Franklin thrown in for good measure.

Lee Kuan Yew served as the leader of Singapore between 1959 and 1990, shepherding this former British colony through its own "declaration of independence" in 1965.

As the Wall Street Journal pointed out Monday, Lee "helped attract massive investment and many of the world's biggest companies to Singapore after he became prime minister in 1959, catapulting living standards to First World status from Third World levels in hardly more than a generation."

And although few Americans know much about Mr. Lee, he was an éminence grise in the global diplomatic community and universally admired across several political generations.

As I wrote nearly two years ago in The Global Guru, even former U.S. President Richard Nixon speculated that, had Lee lived in another time and another place, he might have "attained the global stature of a Churchill, a Disraeli, or a Gladstone."

That said, Lee Kuan Yew was by no means universally loved, remaining a controversial figure throughout his lifetime.

On the one hand, Lee helped Singapore raise itself by its bootstraps to transform itself from a dirt-poor colony to a shiny, modern city-state.

On the other, Lee never ceased to raise the hackles of critics made uncomfortable by his interventionist methods that flew in the face of Western individualism and democracy.

Relentlessly Politically Incorrect

It was only after I read a book, "Lee Kuan Yew: The Grand Master's Insights on China, the United States, and the World," by Graham Allison, Robert Blackwill and Ali Wyne, that I learned to appreciate just how much Singapore owes its success to the vision and determination of a single man.

Via a jarringly honest and relentlessly politically incorrect combination of policies, Lee maintained a laser focus on non-corrupt, efficient government, business-friendly economic policies and often harshly meted out social order.

Lee Kuan Yew once defined himself as "a liberal in the classical sense of that word."

The libertarian economist Friedrich Hayek described himself in the same way.

Yet the two could be hardly more far apart.

Instead, Lee Kuan Yew was, I think, much more about pragmatism and "street smarts" than an overarching philosophy.

As Lee himself put it:

I am not fixated on a particular theory of the world or of society. I am pragmatic. I am prepared to look at the problem and say, all right, what is the best way to solve it that will produce the maximum happiness and well-being for the maximum number of people?


Why My #1 Bet on Europe Is Soaring: ‘I Told You So’

Written by Nicholas Vardy, CFA.

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It was just over a month ago that I appeared on the Fox Business Network and recommended that U.S. investors put their money to work in Europe.

To say that my recommendation was greeted with skepticism would be an understatement.

After all, as the host pointed out, Europe was on the verge of bailing out a Marxist government in the form of Greece.

And my closing recommendation to invest in Germany was greeted with a roll of the eyes and a barely stifled yawn.

Fast forward one month, and Germany is the hottest market on the planet. The German DAX closed above 12,000 for the first time and is up a whopping 24.1% in 2015.

That compares with a U.S. S&P 500 Index that is up a mere 1.48%.

Once you hedge out the currency risk, Germany is the single-best-performing stock market this year among the 46 I track on a daily basis at my firm Global Guru Capital, a Securities and Exchange Commission-registered investment adviser that is not affiliated with Eagle Financial Publications.

No wonder U.S. investors are descending upon the city of London trawling for European money managers as they shift assets out of the U.S. markets.

And they are moving money in a big way.

Some $35.6 billion has flowed into European equity funds so far in 2015, even as $33.6 billion has flowed out of U.S. equity funds over the same period, according to data provider EPFR.

Europe's QE: The 'Draghi Effect'

So why are German and European shares so hot?

Most notably, there's the launch of the European Central Bank's (ECB) program of quantitative easing (QE) by its President Mario Draghi.

Draghi has committed to buying €60 billion per month of various forms of debt, thereby expanding the bank's balance sheet by €1.1 trillion between now and September 2016.

Knowing what happened with QE in the United States and Japan over the past few years, investors know which direction shares tend to go.

And flooding European financial markets with liquidity stands in sharp contrast to the Fed, which is expected to raise interest rates this year.

No wonder the German DAX made a monster breakout on Jan. 22 from its one-year trading range, the day after the ECB announced its version of QE.

Germany: The King of the Euro Zone

Considering it boasts the largest economy of Europe and the fourth-largest economy in the world, Germany has a remarkably low profile among U.S. investors.

Given its size and efficiency, Germany has been long considered the European Union's growth engine. This wasn't always so. The collapse of East Germany in 1990 and German reunification led to more than a decade of chronically high unemployment rates as more than 3 million former East Germans entered the labor force.

By 2005, German unemployment hit a peak of 11.208%. (Note that economic statistics in Germany are calculated to three decimal points!)

Market-oriented economic reforms introduced by then-Chancellor Gerhard Schroeder helped the German economy find its feet.

Following a rapid recovery from the 2008-09 recession, with gross domestic product (GDP) growth rates of 4.02% and 3.01% in 2010 and 2011, respectively, German economic growth slowed significantly in 2012.

Today, boosted by both the slide in oil prices and the tumbling euro, the German economy once again has a spring in its step.

German officials have suggested that they may raise their current forecasts for 1.5% GDP growth. Employment stands at record highs and real wages and consumption are growing at a healthy clip. The unemployment rate is expected to drop further, to 6.6%, in 2015, down from 6.7% last year. German consumer confidence just hit a 13-year high. Finally, higher-than-expected tax revenues helped the government to balance its federal budget last year, one year earlier than planned.

And lest we forget, Germany is also the global export champion. Eighty million Germans generate about as much value in exports as 1.36 billion Chinese.

Even before the collapse of the euro, Germany's current account surplus hit €215.3 billion ($244 billion) last year from €189.2 billion in 2013.

That's the largest current account surplus by any economy in history!


Be the ‘Alpha Dog’ with this Hedge Fund ETF

Written by Nicholas Vardy, CFA.

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When it comes to leadership qualities, it helps to be an "alpha."

The same applies in the world of investing.

In the language of finance, "alpha" refers to the amount by which a portfolio outperforms its underlying index, adjusted for volatility.

Put more simply, alpha refers to your market gains in excess of the average buy-and-hold investor.

"Alpha" is what the sophisticated hedge funds promise their investors.

To most investors, hedge funds are the glamor boys of the investment world. Say the word "hedge fund" and you picture big gains, big yachts and big egos.

Sometimes that reverence is warranted. Sometimes it is not.

Still, there's little doubt hedge funds are the investment world's alpha dogs.

But here's the problem. And it is a very big one.

Even if you pony up the big bucks to invest in a hedge fund as an "accredited investor," these hedge funds are way too expensive.

After all, you are likely to be paying a hedge fund manager's traditional "2 and 20" fee structure, which is a 2% management fee and 20% of any profits.

And once you pay up for the big gains, big yachts and big egos, there's not much left over for you.

The ETF Hedge Fund Alternative

So, how can you become an investing alpha dog without the help of high-cost hedge fund managers?

Thanks to a handful of newish ETFs, you no longer have to be an accredited investor to invest like the alpha dogs that manage hedge funds.

That means that today replicating some major, stock-only hedge fund strategies is as simple as a owning a couple of easy-to-buy "hedge fund replicator" ETFs.

Each of these ETFs is designed to mirror the holdings of some of the world's best-performing hedge funds.

In fact, in 2014 I used two of these funds to replace the hedge fund allocations in the "Ivy Plus" Investment Program offered by my firm Global Guru Capital, a Securities and Exchange Commission-registered investment adviser that is not affiliated with Eagle Financial Publications.

The first fund, the Global X Guru Index ETF (GURU), invests in the top hedge fund managers' favorite stocks.

Specifically, GURU uses a proprietary approach to invest in the highest-conviction investment picks from a choice pool of hedge funds based on their "13F" disclosure information.

What is a "13F," you ask?



Written by Nicholas Vardy, CFA.

Untitled Document


February 2015

The "Ivy Plus" Investment Program gained 4.02% for the month.
The "Global Gains" Investment Program rose 4.99% for the month.
The "Double Your Dividends" Investment Program added 1.71% for the month.
The "American Alpha" Investment Program increased 5.77% for the month.
The “Masters of the Universe” Investment Program rose 7.90% for the month.


The "Ivy Plus" Investment Program gained 4.02% for the month. The program is up 4.18% year-to-date, through February 28.

It was a strong month for the “Ivy Plus” Investment Program with both U.S. and foreign stocks performing strongly, and recording between 4.68% and 7.45% gains. Hedge fund strategies focused on equities had a similarly strong month.

Fixed income performed poorly, with the exception of high yield bonds which bounced 3.61% after becoming extremely oversold.

Among real assets, I’d note the divergence in performance between U.S. and International Real Estate. U.S. Real Estate has started to drag, while International Real Estate is one of the program’s strongest performers.

The “Ivy Plus” Investment Program positions performed as follows:


Monthly Gain

YTD Gain







US Large Cap



US Mid Cap



US Small Cap



Developed Large Cap



Developed Small Cap



Emerging Markets



Emerging Markets Small Cap



Emerging Markets – Low Volatility



Private Equity



Business Development Companies (BDCs)



S&P 500 Equal Weight



S&P 500 Dividend Payers



Initial Public Offerings (IPOs)



Corporate Spin-offs






Fixed Income






US Treasuries



Foreign Bonds



Inflation Protected



High Yield Bonds






Real Assets






US Real Estate



International Real Estate












Hedge Funds






Global Macro



Hedge Fund Long/Short



Managed Futures



Hedge Fund Managers




The "Global Gains" Investment Program rose 4.99% for the month. The program is up 5.12% year-to-date, through February 28.

Global markets had their strongest month in recent memory, with Developed Markets showing the biggest gains. Emerging markets lagged their developed counterparts, held back in part by an appreciating U.S. dollar.

This month, I am swapping out the “Global Emerging Markets” position in favor of a “Global Deep Value” play which invests in the cheapest stock markets in the world, as measured by the cyclically adjusted price earnings (CAPE) ratio.

The “Global Gains” Investment Program positions performed as follows:


Monthly Gain

YTD Gain




Emerging Markets Low Volatility



Emerging Markets Small Cap



Frontier Markets



International Markets – High Quality



International Dividends



Non-US Developed Markets



Global Emerging Markets



Non-US Developed Small & Mid Caps



Non-US Developed Large Cap



Non-US Small Cap



Global Guru Capital tracks 46 global markets on a month-to-month basis, to gain a better sense overall market trends.

Both Greece and Russia soared in February, after having been sharply oversold. The Greek government kicked the can further down the road and the Russian ruble recovered strongly along with oil prices. Deep value markets like Ireland, Austria, and Portugal also posted double digit gains.

The top five performing global stock markets for the month were:


Monthly Gain

YTD Gain



















Oil dependent emerging markets like Nigeria, Columbia and Turkey continued to have a weak month. Hong Kong was hit by the relative slowdown in China.

The bottom five performing global stock markets for the month were:


My $25,000 Bet against Buffett, One Year Later

Written by Nicholas Vardy, CFA.

SNAG Program-0809

There's no point in putting lipstick on a pig: March 2014 was a lousy time to bet on U.S. small caps.

It was exactly a year ago today that I bet investment manager David Rolfe that U.S. small caps would beat Berkshire Hathaway stock over the next 10 years.

Sure enough, the day we placed the bet, Berkshire leapt out of the starting gates.

Over the next nine months or so, Berkshire looked like a nimble Olympic sprinter competing against a sadly outclassed wannabe.

Berkshire — also a long-time recommendation in my newsletter The Alpha Investor Letter — went on to have a monster year in 2014 during which it absolutely crushed U.S. small caps. Chock full of large-cap names, as well as a slew of private investments, Berkshire soared 26.6% last year.

In contrast, U.S. small-cap stocks lagged badly, with the Vanguard Russell 2000 ETF eking out a 5.01% gain for all of 2014.

Even more impressively, Berkshire delivered its strong performance despite highly publicized flops in Tesco (TSCO) and IBM (IBM), as well as equally uninspiring performances in long-time stalwarts like The Coca-Cola Company (KO) and Exxon Mobil Corporation (XOM).

Looking for a Better 2015

2014 was not a typical year, neither for Berkshire nor for U.S. small caps.

Relative to the S&P 500, this was Berkshire's strongest year since 2007.

Relative to U.S. large caps, U.S. small caps actually performed worse than they did even at the height of the 2008 financial crisis.

But extreme trends inevitably revert to the mean. And the more extreme the trend, the more pronounced the reversion.

In last week's edition of the Global Guru, I pointed out why I expect U.S. small caps to soar in 2015.

First, after a year of nearly record-breaking underperformance, U.S. small caps now trade at far more attractive relative valuations than the large caps that populate Berkshire's portfolio. The Russell 2000 trades at 19.82 times forward 2015 earnings. That's well below the 84.68 level of a year ago.

In contrast, U.S. large-cap stocks have rarely been this expensive, especially when viewed through the lens of the long-term Cyclically Adjusted Price-Earnings (CAPE) ratio. In fact, the last times U.S. stocks were this expensive were in 1928 and 2007. And we all know what happened the following years.

Second, U.S. small caps are purely domestic businesses, which have few, if any, international operations. In contrast, large caps face the headwind of the stronger U.S. dollar. A stronger dollar has already hit the revenue of 70% of the top 50 companies in the S&P 500 — including several of Berkshire's holdings.

Third, in 2015, U.S. small caps offer investors far better revenue growth prospects than their large-cap rivals. According to Bloomberg, sales per share are estimated to increase 6.6% this year for the small-cap stocks in the S&P 600. In contrast, Bank of America Merrill Lynch forecasts overall S&P 500 earnings growth to be flat in 2015.

Why I'm Not Eating Crow, Just Quite Yet

There are several more reasons why I am not ready to eat crow, even after such a lousy start to my long-term bet.

First, U.S. small caps' volatile performance cuts both ways. One out of three years, small caps tend to have a lousy year, and 2014 was clearly one of those. But as with many asset classes, lousy years are often followed by blow-out ones. That's also why I've been increasing my own personal exposure to U.S. small caps.

Indeed, U.S. small caps already are clawing their way back. Over the past three months — admittedly a short period — small caps have outperformed Berkshire by an impressive three-to-one, gaining 6.61% versus 2.02% for Berkshire.

In fact, Berkshire is actually in the red this year, even as major market indices are hitting record highs.

Second, Berkshire's track record over the past decade is nowhere near 2014's market-busting performance. No matter how you slice and dice it, Berkshire's returns have been waning over the past decade and a half. Up until the year 2000, Buffett's average annual return approached a remarkable 30%. Since then, these returns have shrunk to an annual average of 10.4%.

Size — that is, huge investments in large-cap stocks — is becoming Berkshire's enemy. Recall that during a five-year period, year-end 2008 to year-end 2013, the S&P 500 beat Berkshire's gain in book value per share. That was the first such period in Berkshire's history.

No wonder Buffett himself has advised his own heirs to invest in a low-cost S&P 500 Index Fund, rather than keep the money in Berkshire itself.

That's not exactly betting against yourself. But it is pretty close.

Despite 2014's strong performance, I don't expect that trend to improve over the next nine years.