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« Dave Ramsey is Living Large | Main | The Truth about Market Timing »

November 23, 2010


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This kind of thing is hard. There are a lot of people making guesses, and a lot of noise in the system. Some guesses will be right for the wrong reasons, and others will be wrong for the right ones. If you flip a coin 10 times and get 10 heads, you might start thinking there was something special about that coin - but if you're flipping thousands of coins, it's not unlikely that it's a perfectly ordinary coin. There may be something special about any or all of the strategies given - or there may not.

Okay, but this is looking at things after the fact. For every WBND that beat the market, I bet there are at least 10, um, "non-WBND's" that did not beat the market.

Here's a discussion of my investment results for a 15 year period starting on 12/28/1992 shortly after I retired and ending on 11/6/2007 when I made the decision to switch to a conservative investment style. During this period when I outperformed the Buy & Hold performance of every mutual fund in my database I used primarily no-load mutual funds, fund selection, and market timing, with no use of margin, or inverse or index funds. I did use some of the Fidelity Select funds in my early days when they used to carry a load fee. I believe in "momentum investing" i.e. always being in funds that are in nice uptrends by switching out of weakening funds and moving into improving funds. I was aided a great deal by the once in a lifetime DOT.COM Bubble from 1/1995 through 3/15/2000 and the Bull market from 7/2002 through 11/2007.
Performance: Average annual return of 21.63 percent versus 8.71 percent for the S&P 500.

I am a successful private investor that has consistently beaten the market but I am certainly not "your Warren Buffett next door". For one thing I didn't start investing the bulk of our money myself until after I had retired. You cannot replicate what I achieved when you are very busy working in a job where you have lots of responsibilities and work long hours most days, as well as raising a family and taking care of your home. In my own case another vital factor was that I spent my life working as an engineer and first started using computers back in 1956 when they were giant vacuum tube IBM main frames surrounded by a host of fans that attempted to keep them cool. When I finished my career I was primarily writing software and submitting runs that ran all night on the fastest computer in the world which at that time was the Cray XMP4. I am also a very disciplined and logical person with a very strong mathematics background. When I retired I bought myself a few books, taught myself about the technical analysis of the market and started writing a variety of small programs to help me in my investing. After a couple of years the many small programs became one, easy to use large program that could access the database of funds to which I subscribed and I was off and running. At first I gave my software away for nothing to other database users and received many gifts in return. These users became my beta testers and finally I sold the software for several years until finally taking it off the market because of MS-DOS memory restrictions and because I was unwilling to spend my golden years learning how to program using the Windows system. It's one thing learning how to use new languages when you are a member of a group of very talented programmers and it's a whole different story when you are home every day, with no mentors and colleagues to consult with.

The following table was generated from some old MS-DOS software that I wrote many years ago but the data was produced using a proprietary mutual fund database and their software that came on the market in 9/1/1988 and to which I subscribe. The data contained shows my own performance and the next best five mutal funds out of 6,906 no-load mutual funds. The range of the data is between 12/28/92, the day I walked into a Fidelity Service Center, took charge of my IRA and consolidated the remainder of our investments. The ending date for the data is 11/6/2007 which is when I made the decision to stop taking large risks and become a very conservative investor. I became very conservative because large daily losses sere becoming too hard for me to take and our portfolio had reached the size where there was no point in taking large risks to try to keep it growing at the annual rate of return of 21.63% which I had achieved over the prior 15 years. My annual rate of return since 11/6/2007 has been 7.96% and since October 2008 when I became extremely conservative and moved into CDs amd municipal bonds my annual rate of return has been 4.54%. Funds that didn't exist on 12/28/92 were discarded from this study.

Full Name Ranking on: 11/06/07 - Family: TOP6 - Sorted by column: ANN%
Symbol..... --------------------------------------------------------Ui%-------Ann%-----upI%-----Mdd%-----START
BEANS...... My Portfolio Bean counter........................4.97..... 21.63..... 3.27 .... -15.90 .... 12/28/92
FSESX...... Fidelity Sel Energy Service/43..............22.02..... 20.16..... 0.67 .... -62.21 .... 12/28/92
LDF............ CLOSED Latin American Discovery....27.79..... 19.34..... 0.50 .... -67.20 .... 12/28/92
VGENX...... Vanguard Energy/51............................. 10.24..... 19.01..... 1.33 .... -36.25 .... 12/28/92
FSDAX...... Fidelity Sel Defense & Aero/67...............8.88..... 17.91..... 1.41 .... -32.89 .... 12/28/92
FSLBX...... Fidelity Sel Brokerage & Investm...........14.39..... 17.77.... 0.86 .... -47.43 .... 12/28/92

In the table it is important to look at Ann%, Ui%, UPI%, and Mdd%. Ann% is the annual rate of return, Ui% is the Ulcer Index a measure of downside volatility, upI% is the Ulcer Performance Index a measure of the risk adjusted rate of return, and Mdd% is the maximum possible drawdown in the value of your portfolio between the starting and ending dates.
The most critical of these in my opinion is Mdd%. Just think about it. Let's assume you had a very large amount of your portfolio invested in FSESX. On 3/1/1999 you would be looking at an investment that was DOWN by 62.21% and you wouldn't have any idea whether it was going to continue going down or whether it has hit bottom and would soon start going up again. This is the big dilemma that Buy & Hold investors sometimes face. Most investors would throw in the towel long before their loss became 62.21%. I have owned FSESX many times in the days when I used to trade the Fidelity Select funds but I would follow every fund I owned on a daily basis and use a variety of technical indicators to guide my decisions. Sometimes the decision is to just get out of funds that your methods tell you to sell, other times I would sell everything I had and go into a MMF for a while until I sensed that the slide was over and that things were looking a lot better. The Fidelity Select funds were priced every hour at that time and on some stressful days I would follow the market from the opening bell.

Does anyone else get the impression that these folks gambled and won big? We have 10 people/couples out of millions of people playing the market game everyday that got lucky (I don't see the book about all the people that lost all their money doing the same things). Sounds a lot like the lottery. :)

Dude, don't confuse skill with luck. These guys are more likely to be lucky than skillful. I would like to seem them replicate their success for the next 20+ years. Most of the examples provided only have a track record of 5 years, the longest being 10 years. In any 5-yr period, there is about a 30% chance of beating the market (this study was done on mutual funds). Extend this over the period of one's working life (30-40yrs) and see that number drop.

I agree with Garrett. I was fortunate enough to retire at a good time, September 1992. I took control of managing my investments just after President Clinton had been elected, the Cold War had ended, and what followed was eight wonderful years of peace and prosperity. The period was called the "Goldilocks economy", not too hot, not too cold, but just right. I started his presidency with $320K in the market and it peaked at $3.369M on 3/9/2000 soon after he left office. After such an unsustainable rocketship ride I was waiting for the top to form and as soon as the Bubble burst I started getting out and by 3/15/2000 I was safely in a MMF, having quickly lost $348K in just 4 market days, but with $3.021M remaining. It was about 6 months until I started to find funds that were trending nicely upwards again. At times like that you don't need a timing signal to get you out - the pain in your gut is plenty good enough when you follow the market closely like I do, and hate to see your hard earned money disappearing down a rat hole.

What are the chances of being able to replicate my experience in the years to come. Considering all the negative factors of high joblessness, high budget deficits, high national debt, the price of oil, the permanent loss of millions of jobs overseas, being entangled in two irrational and costly wars, and having a disfunctional government, I would say the short answer is ZERO.

If I was starting my aerospace career in 2011 rather than 1956 I would not be very optimistic about my future prospects. That's just the way life is. Sometimes you can do everything right but become a victim of the times. If I had been born 20 years earlier I might have been shot down during the Battle of Britain or killed on the beaches at Normandy on D-day in WWII - such is the crap shoot we call Life.

It seems we have a lot of pessimists here. Sure there are lots of people losing money in the market, but that doesn't mean people can't make money in the market. It isn't that hard to beat the averages. The averages for the last 10 years included companies like AIG and GM. If you paid attention at all you should have known that GM was not a good company to own. You will lose money on some stocks. It will happen. However, it is far from impossible to have good returns that beat the market, and certainly luck is not the only way to make money. As in most things in life, hard work is a much better metric than luck.

Derek: I worked ultra hard at work and this helped me get good raises, to keep my job, and get promotions. However there was one event that was necessary or my working life would have never been nearly as prosperous. That event was outside of my control and it was the Cold War that spurred a huge arms race between the USA and the USSR.

I also worked ultra hard on my investments after I retired. However once again there was a major event that dramatically increased my success. That event was also outside of my control and it was the introduction of the greatest invention of the last 100 years which was the Internet and the boom in the stocks of Hi-Tech companies that followed. A person is very lucky if they experienced one such major event that affected them so positively. In my case there were two such events that came at the perfect time for me.

This is where I am not in complete agreement with you.
I believe that hard work is a necessity for success but if you also have good fortune on your side it can greatly amplify the results of your hard work.

Old Limey:

As always, it was a pleasure reading your responses. Working hard is working hard, but sometimes you need a bit of luck on your side too. :)

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