I pray, you pray, we all pray for I-PRAY!

Today is a proud day in the history of Investing by Accident, as I am (finally!) announcing the newest index for the Tel Aviv Stock Exchange.

For Immediate Release

Investing by Accident’s Israel Price Ratio Asset Yield index is now available. The index is more popularly known by its acronym, I-PRAY, which happened to spell out that way completely by accident. Good luck, investors!

Equally important, today is a very exciting day for my portfolio. As soon as you read this blog, you will rush out and buy the stocks in the I-PRAY index. When you do this, my investments will rise drastically in value and instantly make me rich. Thank you in advance for your support.

What I-PRAY For

I created the I-PRAY index to solve two critical problems with investing in Israel.

First, I want my portfolio to perform well. In a traditional sense, this means that I want to beat an objective benchmark, such as the Tel Aviv 100 stock index. The trouble is that the experts say that the experts are very bad at out-performing the index.

This is why so many experts tell me that I should just invest in the index instead. However, if I do that, I certainly wouldn’t be able to beat the index. Instead, it would make much more sense to create my own index and invest in it. Since my index is not an expert, it should be able to consistently beat another index.

Let me just say that if agree with the logic of the last paragraph, then you clearly understand the “PRAY” part of I-PRAY.

Second, U.S. taxpayers cannot invest in foreign mutual funds without getting eaten by PFIC. One workaround would be to run away from a PFIC by buying an ETN. This is a viable option in terms of taxation (at least until it isn’t), but you may not want to do this because of the added credit risk involved.

In that case, the I-PRAY index is here for you. You can buy the companies in the I-PRAY index and not get eaten. Still better, you will reap the enjoyment of owning real bits of authentic Israeli companies. And, I mean authentic. Like, bamba-level authentic.

                                                         

And also, I’m a geek.

Licensing Agreement

One of the things that I have learned as a professional geek is that “computers” and the “internet” can be used very effectively to help people. I hope the I-PRAY index will help you invest in Israel, whether or not you are a U.S. taxpayer. But also, I hope you will help me make it better by leaving your feedback on which companies you like, which ones you don’t and which ones you think are missing from the index.

In any case, please use the I-PRAY index however you like. Just don’t blame me for any returns you get from it. After all, you are following advice from a blog that calls itself an accident.

Methodology

How did the internet’s foremost non-expert on investing select the stocks for inclusion in the I-PRAY index? By applying a rigorous methodology, of course:

Step #1: Sizing. The I-PRAY index is unique in that its goal is enable you to invest in a sufficiently broad range of stocks so that you are diversified, but also small enough that you can reasonable manage these investments yourself. My first step was to find the number of stocks that would achieve this goal. Fortunately, the people who understand math have shown that we only need 30 stocks to achieve diversity and that is actually fairly manageable. (Phew!)

Step #2: Copy an Index. Like any good index, the best way to create a new one is to copy an existing one. I evaluated the performance of the current Tel Aviv stock indexes and selected the Tel Div index as the starting point for I-PRAY for two reasons. First, “broad market value indexes” have historically performed the best, and the Tel Div is the closest to one of these that we have for the Tel Aviv Stock Exchange. Second, it only has 29 stocks in it which means I didn’t need to work as hard.

Step #4: Add the Experts. To ensure that we have broad market coverage, my next step was to shamelessly copy the investment choices from the expert managers. I selected two funds that have historical performance better than the Tel Div and ripped off their list of investments. The two funds were the “Yeter” fund from Altshuler Shaham and the “Yeter+Small Cap” fund from Tamir Fishman.

Step #5: Remove PFICs. After merging the list of stocks together, I sorted by highest overall allocation amount between all three lists and then reviewed the list to remove any PFICs. This actually removed a large number of stocks from the list, as most real estate companies and all investment holding companies could be considered PFICs.

However, even if you are not a U.S. taxpayer who is scared of getting eaten by a PFIC, it may be a good idea anyway to remove these companies. This would align with my investment philosophy which is to avoid investments in company that depend too much on people’s ability to think. I was greatly influenced in this approach to investing by Arthur Weasley who once said to Ginny, “Never trust anything that can think for itself if you can’t see where it keeps its brain.” 

Basically, what I’m saying is that this simple axiom will keep your portfolio clear of death eaters and PFICs at the same time.

Step #6: Price Ratio Asset Yield (PRAY). This was not a real step, but I need to include it because this is a serious blog and a serious index. For each stock in the list, I calculated a PRAY score by multiplying the stock’s price to earnings ratio by the average dividend yield of its asset class. For companies that are not profitable, I used a negative price to earnings ratio. If any stock did not have a score, I removed it from the list.

Step #7: Random Selection. The resulting list wasn’t so large, but still needed to be reduced to around 30. Mostly, this was done by random selection; however, I did have three distinct biases. First, I wanted stocks that represented a variety of industries. Second, I was biased toward any stocks that had a higher overall allocation in the lists that I shamelessly copied. Third, I like stocks from companies that are profitable and who have a strong dividend paying history even if they had a smaller allocation in the lists that I copied.

As part of this analysis, I also read the websites for each of the companies and took copious notes until I got bored. In an upcoming blog, I will publish these notes and you can read them until you get bored, or use them as a starting point for your own research.

I-PRAY!!!

Here is the I-PRAY index, sorted alphabetically. The allocation is evenly weighted with 3% to each company except for the three biotech companies, אבוגן, מזור טכנולוגיות and קמהדע, which each have 2% because I had trouble deciding between them.

Company	Sector
אבוגן	Bioscience
אגוד	Banking
איביאי בית השק	Finance
אימקו	Manufacturing
אמנת	Logistics
אסם	Food
אפריקה תעשיות	Manufacturing
ארד	Manufacturing & Technology
בזק	Telecom
גולד	Shipping
גולן פלסטיק	Manufacturing
גזית גלוב	Real Estate
דן מלונות	Hospitality
הראל השקעות	Finance
וילי פוד	Food
כיל	Chemicals
כפרית	Manufacturing
לידר שוקי הון	Finance
מגדל ביטוח	Finance & Insurance
מזור טכנולוגיות	Bioscience
מטריקס	Software
מנדלסון תשת	Manufacturing
מנרב	Construction
מעברות	Food & Agriculture
סנו	Household Products & Chemicals
ספאנטק	Manufacturing
פולירם	Manufacturing
פוקס	Retail
פרשקובסקי	Construction
קמהדע	Bioscience
קסטרו	Retail
רמי לוי	Food
שיכון ובינוי	Construction
שנפ	Manufacturing

A Note on Performance

I started to invest in the I-PRAY index in last few weeks of December and the first few weeks of January. This makes it possible to compare the performance of I-PRAY to other indexes. In general, I think performance benchmarking over a short time period is not a helpful way manage your investing. There is too much short term price fluctuations for this to be meaningful.

However, in this case, I think it may be helpful because it shows that the I-PRAY index is really more-or-less as good as any index in terms of giving you the return of the Israel stock market. Also, I like making graphs:

Share it!

In honor the I-PRAY index – and because I finally got around to it – you can now easily share Investing by Accident blog postings by clicking on the “share” button. There is no greater way to celebrate this new feature than by sharing the I-PRAY index.

Of course, it is always a best practice to buy the stocks in the I-PRAY index before you share them with anyone else. This way you can become wealthy like me when all your friends start buying!