Many regular FMF readers are familiar with Old Limey, a regular, popular commenter here. Through his comments we know that he is a retired engineer who took his relatively modest retirement savings, invested it during the dot com boom, and turned it into a multi-million dollar portfolio.
I recently emailed Old Limey to ask if he'd write a series for FMF on "how to be successful as an active investor." Since he has regularly made comments about how others can/should be successful at active investing (versus passive/buy and hold investing), I thought he surely had suggestions for how the rest of us could succeed as well. I even thought I might give the effort a try with part of my portfolio. And, of course, I knew the readers would LOVE hearing from him.
He responded quickly with the following thoughts (edited for length):
For the following reasons I am not willing to write a series on active investing.
1) I am no longer an active investor. These days I primarily only own municipal and corporate bonds, and CDs, that will be held until they mature between now and 2040.
2) Being an active investor requires a lot of knowledge that requires much reading to acquire. You also need to subscribe to a large database of funds, ETFs, and indexes, the cost of which is about $900/year. The database also needs to come with a very comprehensive charting, ranking, and analysis program. Learning how to use this software is beyond the capability of the average person and requires a great investment of time, first to get up to speed, and then on a daily basis whenever you feel that it's necessary to move money from one investment into another. It's really out of the question for a person that has a very busy and time consuming day job. You need to have a passion for making money as well as an education that is very solid in mathematics and analytical techniques.
3) Once you start you need to do a post mortem on every trade that you make and learn from both your successes and failures.
4) Active investing is an ongoing learning experience and it takes a very disciplined individual to become successful. You have to be the exact opposite of a Buy and Hold investor. You have to abhor losing any of your precious money, especially since the more money you have, even small percentage losses can result in losing a large amount of money.
5) You need to attend lectures and seminars, read some books on investing, and learn from some of the most experienced active investors around.
6) In order to become a successful active investor you have to be very disciplined and not allow your emotions to get in the way of your decisions.
7) The more experienced you become, the more successful you will be, but you have to have a sense of when to be a participant and when to stay out.
8) I went through some stressful periods as well as some very exhilarating periods. Some people just aren't cut out to be active investors, especially if they are also experiencing stress from other sources such as work related and family related situations.
9) I was very active from 1993 through 2007 and it was a great relief to reach a point where I had enough money to quit the rat race, move to the slow lane, and settle for income rather than capital gains.
10) Lastly, I feel that the current state of the US economy, debt, and employment situation is far too dangerous to take the kind of risks that are needed. Don't underestimate the unique and incredible impact that the Internet and the Computer revolution made. This revolution fortuitously started just as I was retiring and was starting down the path of becoming an active investor.
When I was writing the software that I was able to market very successfully, I was working at home, for 2 years, 7 days/week, from 8am to midnight with small breaks for food.
That mammoth task ended one day when my wife came into my office with a hammer in hand, vowing to smash my computer if I didn't find a way to wrap it up soon and market it.
She was a great help when an ultimate 1602 orders started to roll in and we were kept very busy making CDs, having manuals printed, and hauling packages to the Post Office. That MS-DOS software is now obsolete.
A fellow program developer of mine told me that he used to stay in his office and his wife would put a tray of food outside his door, He came to the same resolution that I did in order to save his marriage.
These days, I don't see anything comparable for an extended Bull market on the horizon, all I see is a lot of strife, tension and unrest all over the world.
This is a totally different and far more dangerous world than existed from 1993 through 2007.
Here's my summary of Old Limey's thoughts above on why it's very difficult to be a successful active investor:
1. It requires a VERY unique individual -- one who has just the right temperament, abilities, and amount of time to make such an effort successful. This criteria alone eliminates all but a handful of potential candidates.
2. The market conditions need to be correct even for those with the talents in #1. It was just right when Old Limey invested, but today's market is not a fertile field for investment gain.
This basically says that virtually no one can be successful with active investing today.
I was a bit surprised at this response since Old Limey seems to be such an advocate of active investing. I noted this in my response and he replied:
Active investing is of course still alive and well today, particularly with many investors that trade stocks.
Even an index fund investor could become an active trader if he followed a simple trading strategy. For example, a very simple approach would be to follow four indexes and maybe put 60% in the strongest one and 40% in the second strongest. You would then need to use an analytical method that calculated the relative strength of the four indices. Then, every day you would check the relative strength values to ensure that you were still invested in the strongest two out of the four.
To refine it even more you could layer on market timing by saying that if the S&P 500 falls below its 200 day moving average you would sell your two positions and move into some kind of income investment. Then when it moves back above its 200 day moving average you sell the income investment and move back into the two strongest indexes out of the four you have chosen. A simple system of this type would have saved a Buy and Hold investor from taking such a beating in the huge drop and then got him back in soon after the recovery started.
One module in the software that I wrote would have enabled a person to test out this strategy from 9/1/1988 (or a later date of your choice) to the present day and then play around with all of the variables until you found the combination that had the greatest success as measured by making the largest overall gain along with experiencing the smallest max. drawdown. It's the drawdowns that are so hard to live with. On the day that the max drawdown occurs you are sitting there having experienced a huge drop in the value of your portfolio but you have no idea whether you have hit bottom. That's the whole purpose behind active investing. It's attempting to extract the greatest gains while suffering through much smaller drawdowns.
The obvious criticism of approaches like this is that history usually doesn't repeat itself, but it would almost always be better than Buy and Hold. What I have described is just one simple strategy. There are of course scores of different strategies that have been developed. The software I developed had over 80 modules, each one using a different strategy. When I wrote my software I was in contact with over 250 users of the database and received lots of good ideas from the best of these experienced investors. I also gained a lot of information and ideas from attending the annual conference that was held at a different city each year.
Another thing is that 20 years ago there were only a fraction of the investors that exist today and news travelled a lot slower. This helped the active investor to outshine the investors that were not using any kind of backtested fund selection and market timing techniques. Today we have a very different environment with the Fed supplying stimulus money to the large investment banks that use it, largely for their own benefit to drive the market the way they decide. They also use supercomputers that run preprogrammed methods to make thousands of stock trades per day, some trades the buy and sell orders are less than a minute apart in order to reap thousands of small gains with negligible losses. I read an article that mentioned that the very best graduates of MIT in Computer Science end up working at the huge investment banks and not in technology companies here in Silicon Valley.
The other thing I should mention is that if your active trading is taking place in a market and during a time period in which the general trend is strongly upward everything gets a lot easier. My huge gains between 1993 and March 2000 were the result of trading in funds that concentrated in the Nasdaq companies that were in steep uptrends. When the top arrived and it then started steeply down there was a huge rush for the exits and I got totally out over 3 trading days, and stayed out for quite a while until things settled down. A very good sector that follows the rise and the fall of the stock market is the Junk Bond sector. Its huge advantage over stocks is that it has far, far less volatility. This very low volatility gives you a lot more time to make your trading decisions. A friend of mine runs a small Hedge fund and sends me a copy of his monthly market letter, all he ever owns are junk bond and various income funds and yet he far exceeds the performance of stock indices and maintains very low drawdowns. This market letter would help most Buy and Hold investors but for people that aren't invested in his fund the price is $1,400/year. I get a free copy because he used to use my software, as did quite a few people that published market letters. If you look at a longtime chart of the Nasdaq 100 index you will see the huge peak that topped in March 2000, this peak outshines every other stock market index and looks like a profile of Mt. Everest (a peak I was very close to in 1983 when I climbed a nearby trekker's peak that was close to 20,000ft.).
Ok, so you can be successful with active investing today (or at least better than the results you get with passive investing), but it requires:
1. A VERY unique individual -- one who has just the right temperament, abilities, and amount of time to make such an effort successful. This criteria alone eliminates all but a handful of potential candidates.
2. The market conditions need to be correct even for those with the talents in #1. Today's market is not conducive for active investing success.
Personally, this is disappointing to me, but not surprising. I had hoped that active investing was available for the masses (or at least a good sub-section of the population) since I wanted to give it a try (and share my results with you.) But having this conversation with Old Limey reinforced my thinking that it's very difficult (if not impossible) to be a successful active investor. So I'll stick with my simple index fund investing on one hand and concentrate on real estate investing on the other. This seems to be a good balance between growth (stocks and appreciation of real estate) and income (generated by the real estate).
And in case you're interested, here are a few other pieces I've written through the years that suggest it's rare to be a successful active investor:
Great feature, thanks for sharing. Disappointing, but good to know.
Posted by: evilhomer | December 10, 2012 at 08:47 AM
Very in depth! This just reinforces my thought that I don't have the time or skills to pull it off. I will still learn more but for now I am buy and hold. When I know more and have more time I may try to time the market a little bit but I think buy and hold is best for my situation right now.
Posted by: Lance@MoneyLife&More | December 10, 2012 at 09:13 AM
Even if you are the next Warren Buffett you need over half a million to invest before it is worth your time.
-Rick Franics
Posted by: Rick Franics | December 10, 2012 at 10:53 AM
@FMF,
"Personally, this is disappointing to me, but not surprising. I had hoped that active investing was available for the masses (or at least a good sub-section of the population)"
Active investing may be available for some people but the hope that it could be available for the masses is mathematically impossible. When it comes to the masses, it doesn't actually have anything to do with the difficulty of it, it's simple math.
The idea of active investing is to beat the market. The market is the average of everyone's results. If the average was a 10% return and 75% got a 13.333% return the other 25% would have to get 0% to get a 10% return average for the market. I think most active investors are trying to do better than and extra 3.333% too.
If 50% of the investors got a 20% return then the other 50% would have to get zero and of course if 50% are getting zero they would eventually quit playing.
If 25% got a 20% return then the rest would get a 6.666% return. I suppose that is a possible scenario but likely 25% don't do this. 1% do it and then the other 24% struggle with it doing little to nothing and the other 75% get about a market return.
People need to realize that out performance by definition must be for a minority. Hard work combines with unique talents to allow it to happen. That is true of nearly every incidence of vast out performance.
Do you have what it takes to put in the huge amount of work and do you posses the right talents to put you in that upper echelon.
Probably, many of us overestimate our abilities in both areas. How much work is hard work? More than you think. How much of the unique talents do I need? More than you think.
Posted by: Apex | December 10, 2012 at 11:11 AM
Wow, that sounds super stressful. It's like another full time job, but I guess if you're good at it, it would be worth it.
At this point, I would be happy with 6-7% gain over the long haul and enjoy my life with my family.
Posted by: retireby40 | December 10, 2012 at 11:23 AM
Good post and very keen insight. I would agree that it takes a very unique individual to be successful at this. I think it also takes someone who is strongly able to separate emotions from their investment decisions.
Posted by: John S @ Frugal Rules | December 10, 2012 at 11:49 AM
Apex --
And when you factor in post-cost returns (which is the "real money" part of investing), the chances to do well in active investing look even worse.
Posted by: FMF | December 10, 2012 at 11:50 AM
Have you not heard of the whole quant revolution? Algorithmic trading? Dark pools? All of that is new and makes it much much harder if not impossible to beat the house.
Posted by: Brooklyn Money | December 10, 2012 at 01:20 PM
I've finally come to the conclusion that investing in public markets is merely a matter of find a good risk versus reward point for ones situation (accepting potential higher reward means higher risk precisely as averages and Standard deviations relate them).
An investment has a price, one that factors in future potential, that the market has come to an agreement on. To assume I know that price is incorrect, and in what direction, given the size of the markets and the amount of time and effort put into them, just doesn't seem realistic. I think Old Limey alludes to this when discussing how things have changed, the information to determine value used to be much harder to come by and maybe those that worked hard enough could gain an edge. But know I think that would require inside information above and beyond what is legal.
Posted by: Steve | December 10, 2012 at 02:16 PM
Apex-
Your math fails to account for leverage and makes a number of basic assumptions that can adjust the analysis. For example: not every player is 100% invested everyday.
($10mm 10:1 leverage, 3% return= $3mm = 30%. SPY YTD return of 25%. The portfolio under performed, but still out performed.)
FMF-
Post cost- sure its a very really expense, but its pretty minor. $7 per trade (expensive TV add), 100 shares, $30 stock.. Stock has to move 14 cents or .5% to break even.
Posted by: Tyler | December 10, 2012 at 03:18 PM
@Tyler,
I understand what you are saying regarding leverage, but that doesn't have anything to do with active trading and is irrelevant to the basic math that I was pointing out.
Leverage is used by people to try to get better returns but that is not the same as active trading. Certainly people using margin are probably often active traders but that doesn't make margin an active trading strategy. You could use margin without being an active trader.
It's also the case that the use of margin does not change the math of average returns. If the average returns of the market are 10% and there are people who are getting 20% returns by being active traders (based on their trades not based on margin because this post is not about margin. To my knowledge Old Limey never used margin in his active trading). Then to account for those 20% returns other people have to get less than 10% in order for the market to average 10%. That is simple math and it is irrefutable. If 50% of the money invested in a market returned 20% the other 50% has to return 0% to get a 10% return.
In regards to margin, notice that if someone uses 50% margin to put 10K of their money into 20K of stock then 20K is invested in the market, not 10K. The fact that they borrowed the other 10K to use leverage to increase their returns has nothing to do with active trading. The fact that their return on their original 10K is higher doesn't change the fact that 20K is invested in the market, not just their 10K. In order to outperform the market based on active trading, the margin trader has to beat the market on the 20K that they put in the market, not just based on the 10K that was their original money.
Their increased returns are because of leverage. If you want to make an argument for increasing returns via margin accounts, that is a separate argument and one you can try to make, but that is not what this topic is about.
None of this has anything to do with active trading. Using active trading to increase your returns gives the math results that I already laid out.
Posted by: Apex | December 10, 2012 at 03:51 PM
I think Old Limey was spot on, not just abuot active inesting, but the state of the world in general.
Posted by: Mark | December 10, 2012 at 03:52 PM
I agree with the basic point here from Limey that success in active investing is difficult and rare. I mean I think Limey's own results would put him above >95% of the mutual funds out there. The vast majority of people can't hope to emulate such great success.
We all like to think we have what it takes to beat the average but about half of us don't.
Tyler, I think most people would be really stupid to combine leverage with active stock trading.
Posted by: jim | December 10, 2012 at 04:45 PM
One factor that some people overlook when comparing "Active" investing with "Buy and Hold" investing is the volatility and maximum drawdown that their portfolio will experience.
For example let's just look at the last 5 years and compare Vanguard's S&P500 fund called VFINX with my portfolio.
Near the end of 2007 the chart patterens of the indicators of market health for the NASDAQ and the NYSE that I use were looking really ominous with a pattern of lower highs and lower lows. I immediately decided that the Risk vs Reward was not worth it to stay in funds that invested in the stockmarket so I moved entirely into bonds and bond mutual funds.
First I need to explain two simple market quantities.
ANN is the Annual percentage rate of return for a portfolio over the period being examined.
MDD is the Maximum possible DrawDown of a portfolio over a period assuming that you bought it at the highest point of the period and sold it at the lowest point of the period.
Here's the comparison of VFINX with my portfolio for the last 5 years.
VFINX --- ANN= 0.81% --- MDD= -53.96%
Me -------- ANN= 4.41% --- MDD= -0.81%
What would you rather be? A Buy and Hold investor that is agonizing over a 53.96% drop in the value of his portfolio and not knowing what the fture holds. Or would you rather be an Active investor that did his homework, didn't like what he saw, and moved from a volatile stock portfolio into a far lower volatility bond porfolio until his indicators gave him the confidence to get back into a fund that held a basket of stocks.
OK! My portfolio only gained 24.11% over the last 5 years but it was a worry free 5 years and I still made a lot of money.
On the other hand the Buy and Hold VFINX investor only made 4.87% over the last 5 years and was worried sick all through 2008 and maybe even threw in the towel near the bottom of the market.
There is a lengthy learning period for becoming an active investor but once you have acquired the skills, it takes very little time to look at the parameters you are following and decide what to do. In my own case I have never got back into stocks because I am making plenty just being in bonds and the chart of my portfolio over the last 5 years looks like a straight line going up at the rate of 4.41% per year and I only follow the stockmarket out of curiosity.
Posted by: Old Limey | December 10, 2012 at 05:10 PM
I don't have the time for very active investing. But, I've been able to beat the market by a combination of value-oriented investing, special opportunities, and looking in areas where most people don't. Most of my bad investments have resulted when I've strayed from that approach.
My first stock purchase was Philip Morris right after it crashed down 50% because of the big tobacco settlement. As much as I hate smoking, I knew the company would still make gobs of money.
Another early hit for me was buying "dual-purpose closed-end funds" when they were to be legislated away. They were little-known and trading at big discounts. The funds were going to be forced to liquidate or open, either way eliminating the discount. Their stock holdings were pretty conventional, so I was practically guaranteed to beat the market by the amount of the discount.
Another example was with the Clinton health care proposal. Health care stocks crashed. Just buying health care stocks then would have been pretty much a no-brainer, since health care is only going to grow in an aging country. But, instead, I bought a closed-end fund of health care stocks. It was at a huge discount, plus it had enormous tax loss carryforwards, both almost guaranteeing that it would beat health care stocks in general.
Nowadays, my main recommendation is master limited partnerships (MLPs). Most are in relatively safe slow-growth parts of the energy industry, but they come with two big tax advantages. First, the companies themselves don't pay taxes. Second, while they pay out lots of cash to investors, you get to defer taxes on most of that.
As a mostly buy-and-hold investor, I've ridden most of the crashes down and then back up, for better or worse. With the 2008 crash, that meant I was down big. But, I was also reinvesting my MLP distributions at prices where they were paying up to 21% yields.
Posted by: jdgjdg | December 10, 2012 at 05:38 PM
@OldLimey,
You have been a proponent of funds like PIMIX/PONDX or PTTDX in the past. Presumably you are still in PIMIX, is that correct? Do you intend to just stay in a fund like that and ride out any bumps or do you consider it risky enough to watch it with respect to 50 day EMA etc with plans to cycle out of it if it pulls into a downward trend?
Posted by: Apex | December 10, 2012 at 05:56 PM
We are discussing a complex system with numerous variables. The basic math used, leads to basic assumptions that only work on paper.
Money flows in and out of global markets every second of everyday and returns for market participants is not bound by simple math presented as irrefutable. Returns are not as cut and dry as only n participants can be in the top 25%. It’s far more abstract that your standard distribution of returns allow. For your math and conclusions to be valid, at the very least you need to prove markets are zero sum and deal with the variable time.
I think this assumption is at the core of the problem "The market is the average of everyone's results". If we have n investors, I agree with your math when they are compared to each other. But this statement and math does not hold true when you compare all of the investors to the market average.
Specifically, active trading can play with the assumptions of time. What is the annualized return (are we dealing with annualized returns?) of a one tick trade in a millisecond? Even if we agree on year end results, one short term trade (day, week, month) can be bought then sold and change the distribution of year end performance.
What about a market maker who buys from a client outside the bidxask and sells at the bid ask? How does an arb position factor into the distribution of year end returns?
Regardless, you do discuss market returns and then discuss investor returns so my point was not as off topic as you make it appear. Leverage among other variables will cause a dislocation between the two. In order to outperform the market, a leveraged investor does not have to outperform the market returns. (You should know this... you deal with one of the most absurdly leveraged asset class on the planet.) The returns to the investor are not market returns.
I might agree with you if everyone bought and sold at the same time, shorting wasn’t allowed, and there was a clearly defined holding period.
Posted by: Tyler | December 10, 2012 at 06:19 PM
Jim
Why?
I think most people would be really stupid to combine leverage with active stock trading.
What if they could lower their volatility by actively trading? What if they had a 15 Sharpe ratio? Whouldnt they be foolish not to add leverage at that point?
Let me stress, I am not make any argument that people should or should not actively trade. I think Old Limey's analysis is sufficient.
Posted by: Tyler | December 10, 2012 at 06:23 PM
I said "most people". Most people lose money when actively trading stocks and leverage would just compound their losses.
Sure if you're a good investor then leverage might make sense. "most people" are not good investors. They don't have the time, knowledge, patience, luck .etc. Borrowing money won't help the matter.
Posted by: jim | December 10, 2012 at 06:35 PM
The true test of skill is replication. Limey himself says it is unlikely he could replicate his prior return history.
this post alludes more to luck and being in the right place (retired) at the right time (beginning of a record bull market). As is mentioned. skill is impressive, but all cars are fast going downhill.
Further, it seems Limey's business venture played a major part as well.
And the most important aspect of this post is not the accrual of assets, but the cash flow it provides. There are several investment options that do not require market participation, yet still offer two important distinctions.
They create a similar cash flow.
They can be replicated even now.
That is what I am interested in.
Posted by: troy | December 10, 2012 at 06:41 PM
@OldLimey,
Wrote:
"What would you rather be? A Buy and Hold investor that is agonizing over a 53.96% drop in the value of his portfolio and not knowing what the fture holds. Or would you rather be an Active investor that did his homework, didn't like what he saw, and moved from a volatile stock portfolio into a far lower volatility bond porfolio until his indicators gave him the confidence to get back into a fund that held a basket of stocks."
That presumes that you can unambiguously determine the market health really know it is time to get in/out of the market. From what I've read on market timing- it is just as hard to time the market as it is to pick superior stocks.
If market timing wasn't so hard then shouldn't the research departments for the actively managed mutual funds been able to detect the impending market crash? If they did predict the crash then the funds should have sold all of their long holdings and shorted the market just in time to make a huge killing.
Even if it is really hard at least some of the research departments should have been able to accurately predict the downturn. Yet, I haven't heard of any funds doing that... and reaping the insane returns. Have you?
-Rick Francis
Posted by: Rick Francis | December 10, 2012 at 07:25 PM
Rick
Even if they could predict the market sell off, they are not allowed to go to cash or sell short. Most funds are at best allowed to hold 10% cash. Not saying the overpaid geniuses could predict market sell offs, only that they are really unable to do anything about it if they could.
Posted by: Tyler | December 10, 2012 at 08:19 PM
Rick
Market timing is not a perfect system by any means. For example, when the Nasdaq peaked in March 2000
I obviously didn't sell everything on the first really bad day.
My portfolio at the time peaked at $3,369,053.
The next day it dropped to $3,350,936 so I sold the smallest of my four funds.
The next day it dropped to $3,229,379 and I sold another fund.
The day after that it dropped to $3,144,898 so I sold a third fund.
The day after that it dropped to $3,021,835 and I sold my last fund for a four market day loss of $347,223.
The Nasdaq 100 index followed the dot.com bubble the best.
On 3/24/1997 it was at 802
On 3/27/2000 it was at 4704 ---- A classic peak formation.
On 10/4/2002 it was at 815
By getting out completely within the 4 days after the peak I captured most of the big gain, went on to make more in conservative bond investments and finished that period with a gain of 297.75%.
If I had been a Buy and Hold investor I would have loved the ride up, then lost it all on the way down finishing the period with a loss of 21% instead of a gain of 297.75%.
That's why I like Buy and Hold for income investments where you get all your money back when they mature while earning interest, paid twice/year. However I have a very low opinion of Buy and Hold for funds or ETFs that follow a market index.
Posted by: Old Limey | December 10, 2012 at 09:15 PM
Apex
I still have PIMIX and PONDX in the 4 IRAs that I manage and will be adding to them as some corporate bonds will be either called or will be maturing in the near future. In the three Trust accounts I manage for myself and my son and daughter I am starting to put new money into a good muni and bond fund so that there will be money that is readily available when needed. The fund I have chosed is BCHYX pricipally because it's a hi-yield muni and is tax free for Californians.
Posted by: Old Limey | December 10, 2012 at 09:37 PM
I like concept of "level of effort". There is a cost to our time and energy, which can be described as level of effort. For what one would put into being an acitve investor, what guarantees are there that you'll do better than a market index?
I suspect that for most people, not just the average investor but even onse who are very interested in markets, the expected long-term value of active investing might not be so great. May be better to focus on one's work in order to have more money to invest in the first place, even if the so-called boring index funds.
Posted by: Digital Personal Finance | December 10, 2012 at 11:53 PM
@Old Limey
Do you track them with plans to get out if they appear to move into a downtrend by some measurement of yours or do you not do that with bond funds due to low historical max draw downs?
Posted by: Apex | December 11, 2012 at 01:04 AM
Apex
With individual bonds, when I buy them my intent is to hold them to maturity when I receive their par value of $1000/bond whilst receiving their interest for as long as I live or until they are called. Thus there is nothing to track since it doesn't matter to me whether their actual value goes up or down.
With bond funds it's quite different. Since I may sell some shares if I need cash I like them to be in uptrends even if I buy them principally for income.
The three I own are doing very well for the year to date.
PIMIX Ann=22.19% MDD= -.89%
PONDX Ann=21.88% MDD= -.89%
BCHYX Ann=13.14% MDD= -.91% free of federal tax
I would love to know how the returns and volatility on these three bond funds compare with the performance of the Buy and Hold community's stock based ETF funds. VFINX for example has ANN=15.91% but an MDD of -9.6%.
Posted by: Old Limey | December 11, 2012 at 11:13 AM
@ Old Limey
I see at least one area where innovation has not died and that is in Biotechs. A vast amount of discovery has come and will continue to come for many more years. In addition, Health insurance companies must be getting a big bump in the next two years. I wouldn't be surprised if Cigna makes many shareholders wealthy in a few short years.
Posted by: Luis | December 11, 2012 at 11:20 AM
@Old Limey,
I appreciate your response, but I am not really getting an answer to the question I am asking, so I am going to try one more time.
The explicit question I would like to know is if you actively today use some metric such as 50 day EMA to determine when these funds move out of an uptrend and if that would then cause you sell the entire position or at least large portions of it to move out of that fund until such time as you think it is safe to put money back in?
Maybe you simply don't want to answer that question which is certainly your right. But if you are not opposed I am curious if you still employ active trading strategies to these funds or if you have gone totally passive. The reason I ask is that the returns on these funds do not seem to indicate they are the types of funds that it would be safe to be passive with so that is why I would like to know.
Thanks.
Posted by: Apex | December 11, 2012 at 11:37 AM
Apex:
I don't use a set trading strategy on any fund I now own. As long as I feel happy about its performance and that it is still close to its uptrend I don't worry if it drops as much as 1% over several days. Once I start to be concerned about it I immediately go to my database and use it to rank the ALL-BOND family and see if there's another fund that I want to change into. That's the great thing about bond funds, they have such low volatility that you have plenty of time to make up your mind what to do - this is the complete opposite of an individual stock and also far easier to deal with than volatile stock funds that can turn on a dime.
Posted by: Old Limey | December 11, 2012 at 02:10 PM
Luis:
You're quite right about the innovation that has taken place in the medical field. This is my wife's 4th. surgery in 17 years and each time the improvements are very dramatic with new IT devices, new drugs, new surgical procedures, new patient care devices and new techniques, several of which I had never heard of before. This is of course a very new, first class hospital not far from Stanford University, so obviously there are benefits from living in a hi-tech place like Silicon Valley that wouldn't exist in a small town in rural America or one of Hawaii's outer islands. Another thing that you never think about when you are young are the great benefits to be had in your latter years from living in a single story home, close to all the amenities and services that you need.
Posted by: Old Limey | December 11, 2012 at 02:28 PM
Old Limey's strategy was a momentum strategy, in other words one that took advantage of the uptrending markets of the eighties and nineties. In more recent years markets have been trading sideways, which seems indeed less suited for Old Limey's strategy. However, that doesn't mean active investing is dead in this market, only that we may have to use a different strategy than Old Limey did.
I've been an active investor for the last 2-3 years. My performance isn't as good as the general market, but I'm learning from my mistakes, and this is not a sprint, it's a marathon. I do agree active investing isn't for everyone - it takes a dedicated and a bit of a contrarian person, I believe.
I generally don't experience stress from drops in the market if and only if I based my purchase on a thoroughly researched and conservative valuation for the company. The market would drop and I wouldn't mind - because I KNOW the stock will more than recover. It's when you start hoping that you're doomed. And you start hoping when you're not sure because you didn't do your homework properly. Ask me how I know :-)
One more thing that very few people are aware of: regular buying and selling triggers a tax event every time. If you buy and sell once a year after a few decades you're 30% or so worse off than the person who buys and holds an index fund. So show restraint in your transactions.
Posted by: Concojones | December 11, 2012 at 08:04 PM