Putin’s disinformation campaign claims stunning victory with Capitol Hill ‘coup’

Russian information warfare ops have had one goal ever since the Cold War began: to sow chaos and undermine Americans’ sense of a shared reality. Trump was just a means to that end

By Omer Benjakob

As a shirtless, horned man stood at the dais of the U.S. Senate on Wednesday, the words Harvard Law School Prof. Yochai Benkler told Haaretz ahead of the 2020 election sprang to mind. Since the Cold War began, Soviet – and then Russian – information warfare campaigns have never been about pushing out a single message.

Prof. Benkler, one of the leading authorities on disinformation online, explained that the primary role of Russian propaganda “is to create a world where nothing is true and everything is possible.

“As the chaotic scenes played out on Capitol Hill, I also recalled what researchers at the Rand Corporation said after completing a massive study into disinformation efforts on Twitter ahead of November’s election: The Russian campaign’s goal was never to push out a coherent, pro-Trump message, but instead to subvert America’s democratic institutions and sow distrust. President Donald Trump was just a means to that end.

Morgan J. Freeman (@mjfree) January 6, 2021

We tend to think of disinformation as a social media problem. We also tend to think of it as a new issue. However, research such as Benkler and Rand’s shines a light on the infrastructure of the #StopTheSteal campaign, which morphed into Wednesday’s violent attack on democracy.

Research into disinformation paints a more complex picture, helping us understand the events that led up to the ridiculous yet seemingly sincere bid to prevent the formation of a democratically elected U.S. government. It also helps explain why Trump’s attempts to send his saboteurs “home” – or Facebook and Twitter’s decisions to remove his “call-to-arms” videos – failed to be as potent as the lies he propagated through social media in the previous months.

The fraud that led to a coalition of far-right conspiracy theorists besieging the Capitol was one founded on a baseless, thoroughly debunked and intentionally distorted perception of the election. Benkler’s study, conducted by the Berkman Klein Center for Internet & Society, actually focused on disinformation about the U.S. presidential election’s integrity – the purported justification for the Trumpists’ assault on the legislature that was voting to certify President-elect Joe Biden‘s victory.

Titled “Mail-In Voter Fraud: Anatomy of a Disinformation Campaign” and published in early October, it found Trump’s efforts to cast doubt on the validity of the voting process to be “the central disinformation campaign of this election.” That campaign, Benkler explained, was specifically designed to “raise doubts about the validity” of vote counts, and the goal was “generally to raise questions about the election’s legitimacy.”

A supporter of President Donald Trump carrying a Confederate battle flag on the second floor of the U.S. Capitol near the entrance to the Senate, January 6, 2021. 

Mike Theiler/REUTERS. The fact that such claims were given front-page coverage – even in The New York Times and other outlets that toiled to debunk them – gave them a credibility that Russian President Vladimir Putin could only dream of.” They only win if we retell their story as if it’s true,” Benkler told Haaretz last autumn.

Yet retell it the U.S. president did: ahead of the election, on Election Day itself, and in the subsequent months following his defeat. But other stories were also told. The Rand study, led by former marine-turned-social scientist William Marcellino, focused on online foreign interference in the 2020 election. It mapped out the different networks of Russian bots active on Twitter. More importantly, the study provided a small glimpse into the actual content different U.S. political groups were being targeted with.

“The pro-Trump troll camp could actually have been labeled the pro-QAnon camp,” Marcellino explained. “It’s always the same type of story: Someone has some devastating information that would help Trump take down the swamp or deep state, but someone – usually the Jews or the media – is preventing them from making the information public.” Jake Angeli, 32, sporting horns and body paint, yells his thanks to President @realDonaldTrump and Q.

The latter is presumably a reference to QAnon, a controversial far-right group. @azcentralpic.twitter.com/RJ990L0xA2

BrieAnna J. Frank (@brieannafrank) After the election, with swamp-draining information no longer a viable political flag to rally around, the talk online increasingly shifted to the coming “storm” – and storm the capital its proponents eventually did. But they were not alone. This conspiratorial logic, the Rand researchers found, was a particularly viral idea. As a theme, it was disproportionately used in the Russia campaign to target the U.S. right and far right, extending well beyond QAnon.

However, this logic was also used against far-left voters by, ironically, enhancing conspiratorial claims that Trump was Putin’s puppet, that the Kremlin had compromising material on the U.S. president, and that Trump colluded with Moscow to steal the election from Hillary Clinton in 2016.

As Marcellino put it at the time, “This is how [the Russians] undermine America’s democracy – by fostering mutual distrust and polarization that will keep us so busy that we won’t have time to focus on them and what they’re doing to us.”

It’s not the first time such parallelism has been employed. Emails leaked online in 2016 that were purportedly from Putin’s adviser and chief ideological spin doctor Vladislav Surkov revealed a similar plan to foment chaos in Ukraine.

According to the so-called Surkov leak, the Russians planned to “support both nationalist and separatist politicians, and to encourage early parliamentary elections in Ukraine, all with the aim of undermining the government in Kiev.”

The tactic of pushing contradictory forces as well as disinformation campaigns was also seen in Georgia and, more recently, Belarus. Supporters of President Donald Trump are confronted by U.S. Capitol Police officers outside the Senate Chamber, January 6, 2021, in Washington.

Win McNamee – AFP Truth decay Benkler’s report caused a minor storm by defying the conventional wisdom regarding fake news and social media, claiming that Trump, his GOP surrogates and the network of far-right media outlets serving as their mouthpieces were actually the main sources of disinformation. They created an ecosystem of lies, of which social media was but one small facet, he observed.

The Russians, both offline and online, were merely amplifying them. “I’m not a Russia expert, but everything I’ve read from what I consider to be good work on Russian propaganda suggests that its primary role is to get us not to trust anything anymore,” Benkler told Haaretz. In the United States, this tactic tapped into what another group of Rand researchers called “truth decay.” This is the social process in which the question of what constitutes a fact is politicized, its distinction from opinion becomes blurred, and trusted institutions of truth are rendered obsolete – a process certainly aided by social media, and more so by Trump, but also extending far beyond it into the wider media ecosystem and back in time.

“From the perspective of Russian propaganda efforts, if your goal is to disorient your opponents’ population, then nothing is better than the mainstream media saying that we live in a post-truth age,” Benkler said. “There’s only a small segment of American society that actually lives in a post-truth world. But it’s like that because it has been subjected to decades of disinformation and propaganda,” he added, citing Fox News and climate change denial as pre-social media examples.

Russia’s social media campaign ultimately played a marginal role, according to Benkler, but the media was elevating both its importance and its messaging. “The media is taking all the remaining trust and authority it has not yet lost to Putin, and using it to say exactly what he wants” – that Americans no longer have a shared sense of reality, Benkler explained. All of these facets were on display Wednesday when self-described “proud American nationalists” desecrated one of America’s holiest political sites at one of its most sacred moments.

No matter how hateful, false or inciting tweets may be, it takes more than just 140 or 280 characters to create the conditions necessary for an adult man sporting horns to seriously attempt a raid on the capital of his own country. Watching him on that dais, with no plan and no shirt, a bewildered look on his face, brings to mind what Trump’s former national security adviser, H.R. McMaster, called the biggest threat to the election – and it wasn’t Russia.

Rather, he said last October, “It’s what we’re doing to ourselves. The Russians cannot create these fissures in our society, but they can widen them.”

Omer BenjakobHaaretz Correspondent

Tehran’s 20 percent enrichment is designed to extort Washington | Opinion

Newsweek · by Behnam Ben Taleblu and Andrea Stricker

Iran has informed the International Atomic Energy Agency that it is now enriching uranium to 20 percent purity at its underground Fordow enrichment facility. The move is Tehran’s most egregious violation of the 2015 nuclear deal, officially titled the Joint Comprehensive Plan of Action (JCPOA), to date.
It serves as a dangerous reminder that the regime has always retained the ability to weaponize its nuclear program-both literally and for extortion and intimidation-at any time of its choosing. The Islamic Republic is reportedly using six cascades of its 1,044 currently installed first-generation IR-1 gas centrifuges at Fordow to increase the concentration of uranium-235 in 4.1 percent enriched uranium hexafluoride feedstock to 20 percent.

In other words, it’s producing uranium that qualifies as “highly enriched”-the level needed for nuclear weapons. Although states prefer to enrich uranium to higher purities for nuclear weapons-typically to 90 percent or “weapons-grade”-producing 20 percent enriched uranium takes most of the overall effort required to make weapons-grade uranium. In other words, Tehran’s 20 percent gambit drastically cuts down the time needed to get “weapons-grade” uranium.

Technically, Iran is resuming 20 percent enrichment, having previously attained this level from 2010 to 2013. While the United States and the European Union had traditionally diverged in their approaches to Iran, that historic peak in enrichment was key to bringing them together to address the nuclear issue through tough sanctions.

In November 2013, the U.S., Britain, France, Germany, China, Russia and Iran reached an interim nuclear deal known as the Joint Plan of Action (JPOA). Starting in 2014, in exchange for partial sanctions relief, Iran halted 20 percent enrichment but retained the equipment and knowledge to resume it at will. With the attainment of the JCPOA in 2015, despite continuing to enrich at lower levels, Iran managed to score another victory and keep the Fordow facility open. Iranian officials prize Fordow for its alleged “invulnerability” to military strikes, and was initially built in secret to produce weapons-grade uranium for its early crash nuclear weapons effort.

Fast forward to the aftermath of the killing of Iran’s top military nuclear scientist in November 2020. The country’s hardline parliament passed a law calling for a resumption of enrichment at 20 percent purity, among other escalatory measures. Seen in this light, Tehran’s decision to go to 20 percent avenges the loss of a key scientist, but still aims to elicit sanctions relief from the incoming Biden administration, should the new president hesitate to reenter the JCPOA, exited in May 2018 under President Donald Trump.

The move also signals, however, a greater tolerance for risk taking, which if not met with equal pressure, will be a harbinger of greater challenges. The Islamic Republic embarked in May 2019 on a policy of graduated escalation, designed to raise American security risks while overtly violating the JCPOA. But even then, it still did not cross the 20 percent threshold. That is, until now.

A picture taken on November 10, 2019, shows an Iranian flag in Iran’s Bushehr nuclear power plant, during an official ceremony to kick-start works on a second reactor at the facility. 


Two factors helped to dampen Iran’s drive to resume 20 percent enrichment. The first was the Trump administration’s demonstrated willingness to meet pressure with pressure, and the second was the regime’s desire to keep the transatlantic community divided and Europe in Tehran’s corner. Now, with the Trump administration’s term in office nearing a close and Europe unable to serve as a foil to American economic pressure, elites in Iran understand that greater nuclear boldness is likely to result in a greater reward.

Specifically, given that the incoming U.S. administration seeks a departure from the Trump administration’s policies, the recent escalation is perfectly timed to add leverage to the Iranian position if nuclear negotiations commence. Today, Iran’s resumption of 20 percent enrichment at Fordow positions it to quickly and consistently reduce the time it requires to make adequate fissile material for a nuclear weapon.

Selling this policy on Twitter, Iran’s foreign minister Mohammad-Javad Zarif framed 20 percent enrichment as a “reversible” move. But in so doing, he inadvertently shined a light on a fact American policymakers failed to heed before, but must now acknowledge if they seek a durable non-proliferation agreement with Iran: any deal that relies on political compromise alone to check the Islamic Republic’s nuclear ambitions is a non-starter.

President-elect Biden would be wise to recognize that staying the course on American pressure is the only hope for reaching a better deal and addressing Iran’s nuclear threat once and for all.

Behnam Ben Taleblu is a senior fellow at the Foundation for Defense of Democracies (FDD), where Andrea Stricker is a research fellow.The views expressed in this article are the writers’ own.

Time To Ditch The 60/40 Rule

By: Jussi Askola


  • The 60/40 rule is a common yardstick that investors to rely on in constructing their portfolios.
  • It says you should put 60% of your portfolio in stocks and 40% in bonds.
  • The problem is that it isn’t suited to the realities of today’s market.
  • In this article we propose an alternative to investing according to the 60/40 rule.
  • Looking for a portfolio of ideas like this one? Members of High Yield Landlord get exclusive access to our model portfolio. Get started today »

The 60/40 rule is an approach to investing that worked well in the past. If you’re not familiar with it, it says that you should put 60% of your money in stocks and 40% in bonds. And rebalance every year so that the weightings always are at 60/40. The stocks increase your expected return while the bonds provide income and reduce volatility.

By all accounts, the 60/40 portfolio has a good track record. According to Schroders, it provided better returns from 1988 to 2018 than stocks or bonds alone:

By rebalancing, you would have achieved better returns with a 60/40 portfolio than with stocks – the higher return asset – alone!

So as we’ve seen so far, the 60/40 portfolio with rebalancing boosted total returns over the last 30 years. It undeniably lowers risk, by getting bonds into the mix. And on top of that, the lower volatility means you’ll have a less stressful experience over the course of your life.

That all sounds good on the surface. But there’s just one problem. 

In 2020, both assets in the typical 60/40 portfolio have serious problems with them. Stocks are extremely overvalued and volatile, and bonds yield next to nothing.

Past performance does not predict future performance. And there are good reasons to think that a 60/40 portfolio might do much worse over the next 30 years as it did over the last 30.

In this article, we make the case that you should avoid investing by the 60/40 rule and buy real assets instead. We’ll start by reviewing the flaws with stocks and bonds and move on to why real assets are superior today.

Stocks are Overvalued

According to the Wall Street Journal, the S&P 500 (SPYhad a 41 P/E ratio as of Dec. 11.

That’s more than double the historical average.

Historically, stocks tend to fall back to the point where their P/E ratio is at about the mean. That would imply they have a long way to fall.


That doesn’t guarantee that stocks are going to be losers over the next 10 or 20 years. But the higher they rise relative to earnings, the riskier they become.

To be sure, corporate earnings have soared over the last decade. But look at what made that possible. We’ve seen continuously low interest rates, culminating in near zero interest rates today.

Low interest rates stimulate spending, which drives corporate earnings higher. But now that interest rates are near zero, where do we go from here? The only option left is negative interest rates, and central banks are reluctant to go there.

So there are few monetary policy options left to stimulate the economy. This is why Ray Dalio recently forecast a “lost decade” with 0% returns, and Jeremy Grantham forecast negative returns.

There’s just a lot of risk factors impacting stocks right now. So far this year, we’ve seen mostly a positive trajectory with extreme volatility in between. But you never know when a new crash will occur that will take a decade to recover from.

Bonds Have Next to No Yield

Now that we’ve reviewed the problems with stocks, we can move on to the second asset class in the 60/40 portfolio: Bonds.

In a traditional 60/40 portfolio, bonds provide the safety and return smoothing component of the portfolio. They return less than stocks but they have more stable, and dependable returns. Having bonds in your portfolio in the first place reduces volatility. If you rebalance, they can even boost total return.

The problem is that today, bonds have so little yield that they’re almost pointless. As of this writing, the 10-year Treasury yield was 0.91%. That doesn’t keep up with inflation most years. Of course, you could up your yield by getting into a junk bond ETF. But that dramatically increases your risk, which defeats the purpose of having bonds in your portfolio in the first place.

Consider the SPDR Bloomberg Barclays High Yield Bond ETF (JNK). This year it went on a wild ride, dropping 22% at one point. And its price is barely up (2.47%) over five years.


Sure, it has yield. But from a total return perspective, it hasn’t done well. And in the meantime, it has delivered a fairly volatile ride this year. So such a high risk bond play isn’t going to smooth out your portfolio.

So, on the one hand, we’ve got the genuinely “safe” bonds that have no yield. On the other hand, we have high-yield bonds which are very risky – going against the whole thesis of holding them in your 60/40 portfolio. So what’s an investor to do?

Here’s What We Are Buying Instead

Having established the flaws with stocks and bonds in today’s market, it’s time to dive into what we recommend as an alternative:

Real assets. 

Real assets are assets with a real, physical substance that often produce substantial cash flows.

They include:

  • Apartment buildings.
  • Warehouses.
  • Railroads.
  • Hospitals.
  • Farmland.
  • Timberland.
  • And more.

Today, I invest about 50% of my net worth in real assets that are resistant to recessions. While some real assets get killed in recessions (e.g. hotels), others are very stable. It’s that latter category I’m focused on. Some of the biggest sub-sectors in my real asset portfolio include:

Apartment communities in business-friendly Sun Belt states:

Waller Creekside on 51st Austin, TX | Welcome Home


Service-oriented net lease properties with 10-year leases or longer. Our tenants are major chains such as Taco Bell (QSR): 


Healthcare facilities that are set to profit off the aging population.


Warehouses that are leased to Amazon (AMZN) and other rapidly-growing e-commerce companies.


These real assets allow us to enjoy many of the features you can’t get with most stocks and bonds today. These include:

  • High yield. My portfolio is made up of assets that yield 5%-8% and have regular dividend increases.
  • Predictable cash flow. The assets I own are backed by long-term leases that ensure revenue stability.
  • Upside potential. Most of the assets in my portfolio are trading at their highest yield spreads in a decade. They have 30%-50% upside as yield spreads return to normal.

How Do I Invest in Real Assets?

After having worked in private equity and bought real assets directly in the private market, I have today shifted my focus to the REIT market. 

If you’re used to investing in stocks, then REITs (VNQ) are by far the easiest way to get into real assets. You can buy and sell them through your brokerage account just like stocks, and they’re backed by portfolios of real assets.

Over the past 20 years leading to the recent crisis, REITs easily outperformed the 60/40 portfolio strategy and most other asset classes: 

Today, REITs look poised for another decade of outperformance. After falling in the COVID-19 market crash, many REITs are trading at substantial discounts to fair value, and as a result, yields are higher and the potential upside is greater than usual.

Of course, sometimes assets go down for a good reason. Yet many high-quality REITs remain down even despite not being greatly affected by the crisis. 

Take the example of W.P Carey (WPC). It owns mainly industrial properties that are in great demand and enjoy >10-year leases with high credit tenants. Throughout the whole year, WPC has collected nearly 100% of its rents and has kept buying new properties to grow the cash flow. It also has a strong BBB-rated balance sheet and plenty of liquidity. By all accounts, things are going well for the business, and it has even increased the dividend in 2020, continuing its 20-year-plus track record of dividend growth. 

Yet it’s down 23%, so you can invest in WPC’s real assets, lock in a 6% yield, and enjoy ~30% upside as the REIT returns to a fair valuation. 

High yield. Significant upside. And lower risk. That’s nearly impossible to find in the stock and bond market today. 

WPC-owned distribution center that is leased to Advance Auto Parts (AAP):


Bottom Line: You Need to Adapt Your Portfolio

A 60/40 portfolio has performed well over the last 30 years, but now bonds yield close to nothing, and stocks are overvalued. 

What are your other options?

If like me, you want to earn income and position yourself for double-digit total returns, then nothing beats real assets in today’s market.

As more investors come to the same conclusion, we expect a lot more capital to rotate toward real assets. The time to act is now while others are still fearful, valuations are low, and yields are high. 

Using Human Intelligence To Chart Your Financial Future

Nov. 11, 2020 3:14 PM ETAAPL, AMZN, ARKK.


  • Human intelligence is an under-appreciated ingredient in investing strategies and tactics.
  • The Federal Reserve has generally said that virus control is the factor that will help move the economy toward its potential, simple common sense.
  • Identify an investment theme or two that you can follow, a micro-focus, and monitor the forces impacting the macro-economy.
  • Build trust in your competencies by using your own “intelligence.”
Acacia tree

Human intelligence is behind everything, including artificial intelligence, machine learning, and the internet of things. We invest in technology as if it’s got a mind of its own but neglect what’s behind it. The intangible is becoming more tangible and also elusive in some ways. There’s an investment thesis building here, I promise.

We find ourselves at an inflection point in the world of human activity and in what to invest our time, attention and money. Human capital is increasingly valued in some sectors and industries more than others, except when management or leadership recognizes that the people it employs are the very essence of its model, like goods and services-oriented firms or those selling essentials like Walmart (WMT). Then you have the firms like Amazon (AMZN) and Alibaba (BABA) that use technology really well to scale for “essential” services and products. In a research paper about the valuations of firms with more intangible capital on their balance sheets, the study showed how the market and economy are evolving to include more of the FAANGs as highly valued firms, and why, which includes:

Apple (AAPL)

Alphabet and Google (NASDAQ:GOOG) (GOOGL)

Netflix (NFLX)

Facebook (FB)

The pandemic rewarded many of these firms for a period. Monday, Nov. 9 some of the more traditional firms were back in favor – oil and gas, airlines, and others battered by the pandemic. I’ve written about this since early February that COVID-19’s grip would continue to plague the economy until it was better contained and confidence restored. This current new normal is reflected in the Dallas Federal Reserve’s Index. The trend lines run to Oct. 17 and we know that cases have been rising in all states since that time. The Federal Reserve has generally said that virus control is the factor that will help move the economy toward its potential. It’s just common sense. I’ve participated in several Fed webcasts and read the assessments by various leaders.

Currently, epidemiologists and economics are co-mingling more in the mainstream of academia, trying to determine what pandemic economics look like and might reveal in the months and years ahead. The news by Pfizer (PFE) of their vaccine’s efficacy of 90% created the thrust behind the markets move early in the week as well as the election being called. The safety of their vaccine is now under review.

No lack of themes

Another investment theme is obviously climate change and sustainability, encapsulated by ESG (environmental, social and governance) actions by firms. All of the big investment houses are packaging ETFs and funds to appeal to the growing market for investments that help people and planet. That universe of types of firms is growing as are funds flows. Blackrock (BLK), Calvert and others like the American Century funds are increasing their offerings.

Morningstar noted:

Sustainable funds represented about 10% of all flows into U.S. stock and bond funds for the quarter (9/30/20). It wasn’t so long ago when that percentage was routinely below 1%. In September, sustainable funds comprised 24% of the $12.7 billion in net flows of U.S. stock and bond funds. Granted, September was a bad month for overall fund flows, but sustainable funds appear to be on a secular growth path that hasn’t experienced the same ups and downs.

My point is that we are not lacking in firms, funds and assets in which to invest as the ESG world shows. Note also that these funds can overlap each other’s holdings with other funds owned in a portfolio or 401(k). Duplication and thus concentration is an issue. We also witness “the market” being traded increasingly by algorithmic programs and momentum. What’s a human to do in this investment world of AI, the possibilities of technology, and behavioral economics?

Do-it-yourself themes

The pandemic has been like one of those apocalyptic series or movies where advanced technology and the basics of living are smashed together in an odd contrast to each other. Think TravelersInterstellarRevolution, and so forth. Our workforce is reflecting that as are our politics depending on what world of work you occupy to some extent. The big picture, macro, is a challenge to identify and yet, this is the very thing we require as a compass, particularly in the case of investing at this time. I believe human intelligence is the answer. It’s reflected in many a life sciences firm, ESG-leading firms, technology firms and yes, even oil and gas firms as they try to navigate an energy transition that is undoubtedly happening. British Petroleum (BP), Occidental Petroleum (OXY), Shell (NYSE:RDS.A)(NYSE:RDS.B), Enbridge (ENB) and others are finding unique paths within their scope of operations, asset mix and competencies.

No computer program will necessarily be able to identify “the future” though complexity science-types might disagree. The futurist’s impetus usually starts with a person having an idea or vision about the future. I believe we must use our human intelligence for this – sharpening our wits, focus and awareness. Inherent in operating from the theater of human intelligence is intuition, thought, and analysis that a computer or a Google search cannot truly penetrate. This is why analyzing data and finding inferences, data analytics, is a skill that’s in demand, the human side of the equation that finds meaning. Yes, I’ve been researching bitcoin investments of late. I listened to Raoul Pal’s “greatest trade” video endorsing the future of bitcoin. I’m currently intrigued by the Ark funds (ARKK)(ARKW) to name a couple of their funds.

I probably spend more time thinking about investing than investing, until I’m clearheaded about why I’m willing to bank on a stock or fund. Sometimes that does not materialize as success for many reasons – a sector falls out of favor, a black swan event or some other unforeseen circumstance. However, the portfolios I do have had held up from diversification and not acting (holding) as much as thinking (strategizing). Not pulling the trigger has been as equally important as pulling the trigger.

The best advice I can offer is to identify an investment theme or two (and/or their firms) that you can follow, a micro-focus, and monitor the forces impacting the movements of relevant firms and what is happening in the macro-economy. This will offer both risk mitigation and the ability to observe opportunities. The rest of one’s actions are about risk tolerance and investment horizon. Then, whether pandemic or not, there’s some forward movement or strategic plan when one’s timing is right based on your own human intelligence. The trust you build using your intelligence creates confidence for future decision making – your own human capital.

How Many Stocks Do You Need To Be Diversified?

By Logan Kane


  • Research shows that the typical investor has fewer than 5 stocks in their portfolio. This is not an effective way to diversify.
  • Why awareness of mean-variance optimization is better than shooting from the hip with your portfolio, and why owning more positions helps you let winners run.
  • Some interesting implications regarding owning your employers’ stock, short selling, and ETF vs stock investing.

Growing up, when the weather was too cold for golf, I would come home from school and watch Jim Cramer on TV. Cramer was a lot of my early education in the stock market, and his crazy sound effects and viewer call-ins appealed to my adolescent brain on winter days in Missouri. One of the first things I learned from Cramer was that you needed at least 5 stocks to be diversified. To the typical investor who owns fewer than 5 stocks, this is an improvement. However, years later, when I dug into the statistics of the stock market, I found that even owning 5-10 stocks causes you to take too much uncompensated risk. Furthermore, due to the nature of the distribution of stock returns, starting with high concentration will force you to make risk management decisions over time that cause headaches. I’ve found from my research that if you choose to invest in individual stocks, you should aim for 20-25 positions, meaning an initial max concentration of 5 percent in any one company. This gets your non-diversifiable risk to the point where if you’re good at picking stocks, you will know that you’re not just getting lucky.

The Problem With Concentrating Risk In Your Best Ideas

A common line from ex-investment bankers and hedge fund managers is that they like to concentrate their portfolio in their best ideas. However, if you look at the statistics of all the professional investors who do this, the group loses on average to more diversified investors. That’s to say nothing of non-professionals who concentrate risk. I found an excellent report from the research team at S&P which should be required reading for anyone picking stocks. Here’s what they had to say.

Concentrating portfolios, in other words, makes it more likely that good managers will look bad, more likely that bad managers will look good, and more likely that asset owners’ decisions will be informed by luck rather than skill.

In fact, there are clear conflicts of interest when highly educated (often clever but not always highly intelligent) fund managers concentrate their holdings. If they get lucky, investor money pours in, and if they don’t, they get another job at another fund somewhere. I’d conservatively say that 90 percent of the alpha in the stock market goes to 10 percent of the participants. If you’re not in the 10 percent, your best bet is to be lucky, which concentrating makes more likely.

The below graph makes this point clear. If you have an edge in the markets, it will show, and the more independent outcomes you have, the better you’re likely to do, luck be damned.

Source: Standard & Poors

Another immediate consequence and the one that you’ll typically see in the literature is that portfolios that are less diversified almost always have higher amounts of risk, as defined by standard deviation.

Source: Standard and Poors

You can compare the dispersion–or volatility of the typical single stock–to the volatility of the S&P 500 index (SPY). This is a historical graph but single stock volatility has been as high as 2000 and 2008 were in 2020. As such, a lack of diversification is a significant risk management problem in bear markets. The obvious corollary is that the fewer stocks you own, the greater the risk you bear.

One other issue is the extreme right tail in the distribution of individual stock returns. The median stock returns less than 5 percent, around a third return negative over the long run, and about 1 in 7 stocks return more than 20 percent annually. This general pattern holds true across different countries and indices. I’ve previously written about this, what researchers refer to as the “capitalism distribution.” What’s interesting about this also is that research shows the proper approach is to let your winners run and cut your losers, which is harder to pull off if you start with a less diversified portfolio.

If you start holdings at 10-20 percent and they grow massively, let’s say you bought Apple (AAPL) when the iPod came out, you start to have a problem. Your best performing stock starts to take over your portfolio. There are a few Seeking Alpha members who have shared their experience of their portfolio becoming almost all Apple over time. The issue is that you’re strapped into a roller coaster of a stock that’s performed great from point A to point B, but you’re utterly dependent on one stock, which in the case of Apple, has dropped 80 percent once in the last 20 years, 50 percent another time, and 30+ percent two more times. For more, I wrote about this in my article titled “Apple and the Disposition Effect.

What’s the best approach with all of this in mind? If your head is spinning by reading this, the answer is ETFs. With 5-7 ETFs, you can create a set-and-forget portfolio that’s backed by research and tends to outperform your neighbors who pick stocks. If you’re brave enough, you can take the same risk as your neighbors who don’t manage risk well and get extra return on a diversified portfolio via the use of modest amounts of leverage. Do note that since you need to itemize your tax deductions to deduct margin interest, this approach is best for those with a household income of $100,000 or higher, and only if you can borrow for less than a couple of percent per year in interest. What’s more effective is that S&P or NASDAQ E-micro and E-mini futures can offer a solution at a lower price point and a lower implied interest rate, however.

Some Pointers on Portfolio Construction

1. Owning less than 10 stocks exposes you to uncompensated risk. Since investors tend to gravitate to drama and volatility anyway, I would estimate the typical retail investor portfolio has a standard deviation of somewhere between 20-25 percent in a normal year. This is much higher than the 15 percent the S&P averages. By comparison, you could use futures to leverage the S&P 500 at 1.5x, rebalance monthly, and crush the typical investor at the same 20-25 volatility threshold.

2. Mean-variance optimization strongly outperforms random stock selection and closet indexing in reducing risk. There is some fancy software out there for this, but Portfolio Visualizer offers a lot of the same functionality for free. This might mean that owning something like Walmart (WMT) or Kroger (KR) is helpful in a downturn, or if you were savvy enough, buying work from home stocks like DocuSign (DOCU) before the virus shutdowns happened. Mean-variance optimization is not always an exact science, but being aware of industry diversification and correlations in different market environments help you reduce risk.

3. Short selling gets a bad rap but is statistically effective, but with 1/3 of stocks having long-run negative returns and the companies that do so having a lot in common (losing money, high debt loads at expensive interest rates, junk credit ratings), having a few short positions among your 20-25 single stock positions tends to help your portfolio’s risk/return profile. An interesting thought experiment is to consider whether it’s easier to buy the market and short the trash out of it or to short the market and buy the best. Research shows that 63 percent of the alpha is on the short side. The same rules of diversification apply as long-only portfolios, except short selling requires additional attention with regards to risk management. Selling calls on popular stocks that are failing instead of shorting directly also improves the returns from this type of strategy, because Robinhooders have bid up call option implied volatilities to levels that are not found in reality.

4. If you work a corporate job, own as little of your employers’ stock as possible, unless you’re getting stock options. Probability distributions of all the stocks out there indicate a roughly 2 in 3 chance it will underperform the S&P 500, and if you’re VP level or above, your economic fortunes are already somewhat tied to your employers’ success. Don’t do this, even if other people do! Most people don’t make much money in the market.


There are a thousand ways to make a buck in the financial markets, but one of the most popular approaches is one of the least effective. Owning a poorly diversified portfolio has a cost, and the larger the size of your portfolio compared with your income, the greater this cost is. If you want to play around with $5,000, be my guest, but if you have a sizable portfolio, it pays to professionally manage risk. If you’re good at portfolio management, embrace the opportunity to invest money in a higher number of stocks to improve the probability of having one or more long-term 10x winners in your portfolio. Be conservative with your portfolio construction so you have the flexibility to let winners run and cut losses, and the rest will take care of itself. Lastly, ETFs and futures offer the most bang for the buck, allowing for you to focus on leveraging and risk management for the same level of volatility, which is a far more exact science than picking stocks.

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Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Fed Model And The Money Illusion

Larry Swedroe profile picture.

Larry Swedroe


  • The Fed Model has been used by many investors to judge whether stocks are under or overvalued.
  • However, understanding how valuations are impacted by changes in real and nominal interest rates exposes the flaws in using that metric.
  • The Fed Model should not have any predictive value, and the evidence from research shows this to be the case.

There are well-dressed foolish ideas just as there are well-dressed fools. – Nicolas Chamfort

Magic, or conjuring, is the art of entertaining an audience by performing illusions that baffle and amaze, often by giving the impression that something impossible has been achieved, as if the performer had supernatural powers. Practitioners of this art are called magicians, conjurors or illusionists. Specifically, optical illusions are tricks that fool your eyes. Most magic tricks that fall into the category of optical illusions work by fooling both the brain and the eyes together at the same time.

Fortunately, most optical illusions don’t cost the participants anything, except perhaps some embarrassment at being fooled. However, basing investment strategies on illusions can lead investors to make all kinds of mistakes.

There are many illusions in the world of investing. The process known as data mining – torturing the data until it confesses – creates many of them. Unfortunately, identifying patterns that worked in the past doesn’t necessarily provide you with any useful information about stock price movements in the future. As Andrew Lo, a finance professor at MIT, points out:

“Given enough time, enough attempts, and enough imagination, almost any pattern can be teased out of any data set.”1

The stock and bond markets are filled with wrongheaded data mining. David Leinweber, of First Quadrant Corp., famously illustrated this point with what he called “stupid data miner tricks.” Leinweber sifted through a United Nations CD-ROM and discovered the single best predictor of the S&P 500 Index had been butter production in Bangladesh.2 His example is a perfect illustration that the mere existence of a correlation doesn’t necessarily give it predictive value. Some logical reason for the correlation to exist is required for it to have credibility. For example, there is a strong and logical correlation between the level of economic activity and the level of interest rates. As economic activity increases, the demand for money, and, therefore, its price (interest rates), also increases.

An illusion with great potential for creating investment mistakes is known as the “money illusion.” The reason it has such potential for creating mistakes is it relates to one of the most popular indicators used by investors to determine if the market is under- or overvalued, what is known as The Fed Model.

The Fed Model

In 1997, in his monetary policy report to Congress, Federal Reserve Chairman Alan Greenspan indicated that changes in the ratio of prices in the S&P 500 to consensus estimates of earnings over the coming 12 months have often been inversely related to changes in long-term Treasury yields.3 Following this report, Edward Yardeni, at the time a market strategist for Morgan Grenfell, speculated that the Federal Reserve was using a model to determine if the market was fairly valued – how attractive stocks were priced relative to bonds. The model, despite no acknowledgment of its use by the Fed, became known as the Fed Model.

Using the “logic” that bonds and stocks are competing instruments, the model uses the yield on the 10-year Treasury bond to calculate “fair value,” comparing that rate to the E/P ratio (the inverse of the popular price-to-earnings, or P/E, ratio). For example, if the yield on the 10-year Treasury were 4 percent, fair value would be an E/P of 4 percent, or a P/E of 25. If the P/E is greater (lower) than 25, the market is considered overvalued (undervalued). If the same bond were yielding 5 percent, fair value would be a P/E of 20. The logic is that higher interest rates create more competition for stocks, and this should be reflected in valuations. Thus, lower interest rates justify higher valuations, and vice versa.

For a long time after Yardeni coined the phrase, it seemed almost impossible to watch CNBC for more than a few days without hearing about the market relative to “fair value.” The Fed Model as a valuation tool had become “conventional wisdom.” However, conventional wisdom is often wrong. There are two major problems with the Fed Model. The first relates to how the model is used by many investors. Yardeni speculated that the Federal Reserve used the model to compare the valuation of stocks relative to bonds as competing instruments. The model says nothing about absolute expected returns. Thus, stocks, using the Fed Model, might be priced under fair value relative to bonds, and they can have either high or low expected returns. The expected return of stocks is not determined by their relative value to bonds. Instead, the expected real return is determined by the current dividend yield plus the expected real growth in dividends. To get the estimated nominal return, we would add estimated inflation. This is a critical point that seems to be lost on many investors. The result is that investors who believe low interest rates justify a high valuation for stocks without the high valuation impacting expected returns are likely to be disappointed (and perhaps, not have enough funds with which to live comfortably in retirement). The reality is when P/Es are high, expected returns are low and vice versa, regardless of the level of interest rates.

The second problem with the Fed Model, leading to a false conclusion, is it fails to consider that inflation impacts corporate earnings differently than it does the return on fixed income instruments. Over the long term, the nominal growth rate of corporate earnings has been in line with the nominal growth rate of the economy. Similarly, the real growth rate of corporate earnings has been in line with the real growth of the economy.4Thus, in the long term, the real growth rate of earnings is not impacted by inflation. On the other hand, the yield to maturity on a 10-year bond is a nominal return – to get the real return you must subtract inflation. The error of comparing a number that isn’t impacted by inflation to one that is leads to what is called the “money illusion.” Let’s see why it’s an illusion.

We begin by assuming the real yield on a 10-year TIPS (treasury inflation-protected security) is 2 percent. If the expected long-term rate of inflation were 3 percent, a 10-year Treasury bond would be expected to yield 5 percent (the 2 percent real yield on TIPS plus the 3 percent expected rate of inflation). According to the Fed Model, that would mean a fair value for stocks at a P/E of 20 (E/P of 5 percent). Let’s now change our assumption to a long-term expected rate of inflation of 2 percent. This would cause the yield on the 10-year bond to fall from 5 to 4 percent, causing the fair value P/E to rise to 25. However, this makes no sense. Inflation doesn’t impact the real rate of return demanded by equity investors. Therefore, it shouldn’t impact valuations. In addition, as stated above, over the long term, there is a very strong relationship between nominal earnings growth and inflation. In this case, a long-term expected inflation rate of 2 percent, instead of 3 percent, would be expected to lower the growth of nominal earnings by 1 percent, but have no impact on real earnings growth (the only kind that matters). Because the real return on bonds is impacted by inflation, while real earnings growth is not, the Fed Model compares a number that is impacted by inflation with a number that isn’t (resulting in the money illusion).

Let’s also consider what would happen if the real interest rate component of bond prices fell. The real rate is reflective of the economic demand for funds. Thus, it’s reflective of the rate of growth of the real economy. If the real rate falls due to a slower rate of economic growth, interest rates would fall, reflecting the reduced demand for funds. Using the same example from above, if the real rate on TIPS fell from 2 percent to 1 percent, that would have the same impact on nominal rates as a 1 percent fall in expected inflation, and, thus, the same impact on the fair value P/E ratio – causing fair value to rise. However, this too does not make sense. A slower rate of real economic growth means a slower rate of real growth in corporate earnings. Thus, while the competition from lower interest rates is reduced, so will be future earnings.

Since corporate earnings grown in line with nominal GNP growth, a 1 percent lower long-term rate of growth in GNP would lead to a 1 percent lower expected growth in corporate earnings. The “benefit” of falling interest rates would be offset by the equivalent fall in future expected earnings. The reverse would be true if a stronger economy caused a rise in real interest rates. The negative effect of a higher rate of interest would be offset by a faster expected growth in earnings. The bottom line is there is no reason to believe stock valuations should change if the real return demanded by investors has not changed.

Clifford S. Asness studied the period 1881-2001. He concluded the Fed Model had no predictive power in terms of absolute stock returns – the conventional wisdom is wrong. (As we discussed, however, this is not the purpose for which Yardeni thought the Fed Model was used. Given the purpose for which the model was designed, it would have been more appropriate for Asness to study the relative performance of stocks vs. bonds given the “signal” – under/overvalued – the model was giving.) Asness also concluded that, over 10-year horizons, the E/P ratio does have strong forecasting powers. Thus, the lower the P/E ratio, the higher the expected returns to stocks, regardless of the level of interest rates, and vice versa.5

There is one other point to consider. A stronger economy, leading to higher real interest rates, should also be expected to lead to a rise in corporate earnings. A stronger economy reduces the risks of equity investing. In turn, that could lead investors to accept a lower risk premium. Thus, it is possible that higher interest rates, if caused by a stronger economy and not higher inflation, could actually justify higher valuations for stocks. The Fed Model, however, would suggest that higher interest rates mean stocks are less attractive. The reverse would be true if a weaker economy led to lower real interest rates.

Before coming to the moral of this tale, it’s worth noting that, when the COIVD-19 crisis drove the yield on 10-year Treasuries to under 1 percent, I have heard not a single reference to Fed Model. That’s because a yield below 1 percent would create a fair value P/E of more than 100! Which, of course, would not make any sense. In other words, the sharp fall in interest rates exposed the “wizard behind the curtain.” However, my guess is that if and when interest rates return to more historical levels, the Fed Model will be resurrected by the financial media. After all, they need something to try and keep your attention.

The Moral of the Tale

While gaining knowledge of how a magical illusion works has the negative effect of ruining the illusion, understanding the “magic” of financial illusions is beneficial because it should help you avoid mistakes. In the case of the money illusion, understanding how the illusion is created will prevent you from believing an environment of low (high) interest rates allows for either high (low) valuations or for high (low) future stock returns. Instead, if the current level of prices is high (a high P/E ratio), that should lead you to conclude that future returns to equities are likely to be lower than has historically been the case, and vice versa. Note that this doesn’t mean investors should either avoid equities because they are “highly valued” or increase their allocations because they have low valuations.

Hopefully, you are now convinced that the Fed Model should not be used to determine if the market is at fair value and that a much better predictor of future real returns is the E/P ratio.

1. Kiplinger’s Personal Finance, February 1997.

2. Wall Street Journal, April 5, 1996.

3. Humphrey-Hawkins Report, Section 2: Economic and Financial Developments in 1997 Alan Greenspan, July 22, 1997.

4. William Bernstein, “The Efficient Frontier,” (Summer 2002).

5. Clifford S. Asness, “Fight the Fed Model: The Relationship Between Stock Market Yields, Bond Market Yields, and Future Returns,” (December 2002).

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions.