Free Ebook.

Enter your email address:

Delivered by FeedBurner

« Matching College Costs and Salaries | Main | Win $50 from SmartyPig! »

August 14, 2009


Feed You can follow this conversation by subscribing to the comment feed for this post.

That's a really good article on behavior investing. Irrational exuberance always seems to follow right up to the point of the bubble bursting. And then every herd follower *cough* I mean er momentum investor gets slaughtered.

And to qualify my statement, there is nothing wrong with momentum investing, but you have to know when to get out. And clearly, Arnott's model showed him that he needed to get out at that time.

This was a particularly interesting point last year, during the height of the oil bubble.

The psychological influences in trading and investing may never be erased, but what separates the men from the boys is in having a strategy that copes with it. This is why Warren Buffett jokes about trying to get as far away from Wall Street as possible.

From 1992 until late in 2007 I traded mutual funds very successfully. I was a Momentum investor. In other words I could care less why a sector is trending up nicely, all that mattered to me was that it was trending upwards in a very nice, low volatility uptrend. One particular sector in recent years that proved to be a very consistent, and very low risk, sector for me was the Junk Bond sector. I wrote my own software that calculated the best parameters to use for timing a mutual fund using a filtered, exponential moving average. This technique works the very best for sectors that have low volatility such as junk bonds.
I then selected a few of the best no-load junk bond funds from the 111 that are in the junk bond family in the database that I use. I then calculated the parameters for each fund that performed the best over a time period of about 5 years. The timing method got me in soon after a nice uptrend started and got me out soon after the uptrend ended, it was like having a machine that printed dollar bills.

I gave up trading because I wanted to lead a more stress free life, be able to go on foreign vacations with my wife several times/year without worrying about the market, and also because making more and more money wouldn't benefit us, it would just make our estate larger when I'm gone and increase the inheritance taxes for the government.

On 3/9/09 the average of 111 junk bond funds hit bottom. Since 3/9/09 it has gone up 31.87% (an annual rate of return of 89.47%) and during those 5 months the worst possible drawdown was only -1.61%. It is still trending up but who knows when it will end, you have to watch it every day and rely on your software to tell you when to get out.

That's how momentum investing works. Some of the mutual funds have instituted short term redemption fees of late to discourage short term trading, but my experience was that with junk bond funds there were usually no more than 3 or 4 trades/year required.

There is no way, in my opinion, that you can be a Buy and Hold investor. A Buy and Hold investor in the last two years would have undergone a lot of stress in junk bonds. He would have lost in 2008 about the same as he has made in 2009 for a net gain of about 1.8% (including all dividends), and he would be just hoping that the current trend continues - that's not the way you make money year in and year out. I have had one losing year since 1992.

Interesting chapter. Too bad that we're not getting a flavor of the actual investing advice promised for the next chapters. If some of the book reviews I saw are right, it's an interesting book but with noo practical investing advice whatsoever.

(And it would also be interesting to hear Arnott's arguments for a commodity bubble, excluding oil which seemed obvious to me.)

@Old Limey

Care to share your software or your methodology?

My software consists of 85 separate programs, each operated from a main menu so that it appears to the user as if it is a single program. I worked solidly for 2 years, 7 days/week, 16 hours/day constructing it. It was written in Microsoft's QBASIC language that runs on the MS-DOS operating system which is extemely limited in the amount of memory available, regardless of how much memory your computer has. It uses a proprietary database of mutual funds, ETFs, and market indexes that has been around since 1987. The database came with charting software, also written in QBASIC. The database and its charting software is called Investor's FastTrack. I took my software, one of FastTrack's 3rd. party products, off the market in July 2008 since the growth of the database in terms of numbers of funds and numbers of market days had grown to the point where many of my modules required more DOS memory than was available. The task of converting my software to the Windows operating system was one that I was unwilling to undertake since it would have required me to become proficient in that system and would have required giving up at least one whole year of my life to complete the project. Investor's FastTrack's software was converted to Windows and now incorporates a lot of my techniques. I ended up giving all of my source code to the owner of Investor's FastTrack, free of charge, and the last I heard was that he had a programmer in India working on the conversion. Since I am no longer a trader and hold only CDs and municipal bonds to maturity, I have dropped out of the picture and am enjoying a very relaxed retirement doing many other more pleasurable things than watching the market being manipulated by the big boys on Wall St. 5/days per week.

@Old Limey,

I understand that you have achieved financial nirvana, however it seems like if you software served you as well as it did, it had value that could have been exploited. It does sound quite complex however.

In the early stages of development I gave my software away because I needed beta testers so that I could get valuable feedback and suggestions from investors more experienced than myself as to how I could make it better. During that period I received lots of nice non-monetary gifts in the mail. After about a year of non-stop hard work my wife was tired of playing second fiddle to my computer for most of my waking hours every single day so she said, "You need to either sell it or quit working on it", so I decided to finish it, have nice manuals printed and to start selling it. I knew from other developers that it was just a matter of time before the database would outgrow its memory capability and that a Windows version was the only solution, however I figured, at the time, nobody would pay good money for a Windows version that didn't do anything more than the DOS version they had already purchased, other than it would look more modern. It was a simple decision to decide that sacrificing one whole year of our retirement for hardly any reward would not be a smart decision. My customers had great use of it throughout the great decade of the nineties and up through the bubble and made lots of money so they aren't complaining. In general a software product has a life of only about 10 years, and mine far exceeded that.

The comments to this entry are closed.

Start a Blog


  • Any information shared on Free Money Finance does not constitute financial advice. The Website is intended to provide general information only and does not attempt to give you advice that relates to your specific circumstances. You are advised to discuss your specific requirements with an independent financial adviser. Per FTC guidelines, this website may be compensated by companies mentioned through advertising, affiliate programs or otherwise. All posts are © 2005-2012, Free Money Finance.