Investment Strategies 02 (Jun 10 - Jun 13)

[winston]

How to Invest for Just Half the Year And Beat The Market
By Dr. Steve Sjuggerud


It's crazy, but true…

You can invest for just half the year and take the other half off… and beat the market.

It sounds crazy, but it's worked extremely well over the last 60 years.

Let me explain…

Down in my office, we're putting the finishing touches on an advanced, systematic way to safely invest in stocks and commodities. It's called True Wealth Systems.

Computer and statistics expert Richard Smith – one of the Ph.Ds on the True Wealth Systems team – tested this particular simple system:

You own stocks for the six months starting October 31. And you don't own them for the six months starting May 1.

That's it.

Simple… but powerful…

Out of 60 trades, 46 were winners and 14 were losers, for a winning percentage of 77%. The average gain for those trades is about 7% in six months (not including dividends).

Astoundingly, that's better than the market's 12-month compound annual gain over those 60 years. Said simply, you can beat the market's 12-month return with just six months' investing. (We didn't count transaction costs, but we didn't count any interest on our cash for each half-year out of the market, either.)

Past performance is no guarantee of future results, of course. But the weight of the evidence is stunning… One academic study on this phenomenon shows it's true over time in 36 out of 37 countries tested.

Richard dialed it in even deeper for us…

He found that most of the gains come between the end of October and early January (after the January Effect – a general increase in stock prices in the month of January)… And the winning percentage is higher, too.

In hindsight, the optimal trade was October 26th to January 10th. The average gain was 5.7%… and there were only five losing years. (Richard used a 9% stop-loss on this as well.)

No guarantees about the future, of course. But the history is powerful… Richard adds, "Even taking this trade back to 1920 has strong results … Using a 15% stop, it's been profitable 83% of the time (only had 14 losing years) and made 5.9% profit, on average."

Why should this simple system work? Nobody knows for sure. I think that's a good thing. If everyone knew WHY it worked, it WOULDN'T work.

Want to take half the year off, and still beat the stock market's return? Then put on the Halloween Trade.

I don't blame you for being skeptical of this type of trade. I'm typically skeptical of these sorts of timing systems. It sounds "too easy." But the historical results are extraordinary… so it's worth paying attention to them.

At the very least, you can add one "Halloween Trade" to your portfolio… maybe a double-long stock index ETF (like SSO) as your Halloween Trade position.

Another alternative is Richard's October to January trade… You capture most of the gains, with a higher winning percentage, and you're in the trade for just two-and-a-half months. Something to think about this Halloween…


www.dailywealth.com

[winston]

BRIDGEWATER: BETTING ON THE D-PROCESS by TPC

There is a great article in today’s Wall Street Journal regarding Bridgewater (the world’s largest hedge fund) and how they’ve managed to guide a $86B fund through this market. Their flagship fund is up an astounding 38% this year. How did they do it?

They’re betting on what Ray Dalio, the firms founder, calls the “d process” – the de-leveraging process. Ray Dalio has long said that the global economy was experiencing its first real de-leveraging since the great depression and he’s been putting his money where his mouth is by betting on macro trends that perform well in such a scenario.

Their big bets:


1) Treasuries

“One of Bridgewater’s biggest gains came from its bullish investment in Treasurys, says Mr. Jensen. The fund believed demand for such government bonds would remain high as investors sought safe returns amid heightened economic uncertainty.

In the spring, when some investors thought signs of economic growth would prompt the Federal Reserve to raise interest rates, Bridgewater stuck by its thesis that rates would stay near zero and Treasurys would remain attractive. The Dow Jones CBOT Treasury Index is up 12% this year.”


2) Japanese Yen

“Also helping drive Bridgewater’s returns: a bullish investment in the Japanese yen, which has risen nearly 16% since May. The yen’s rise is being driven by a weaker dollar and China’s recent purchases of the Japanese currency.”


3) Gold

“Another big moneymaker has been gold, a commodity that has risen roughly 20% in value this year as investors flee major world currencies in decline.”


4) Leverage

“Like many macro hedge funds, Bridgewater uses leverage to amplify returns. Mr. Jensen called Bridgewater’s leverage a “moderate, controlled amount that has been tested through many crises, including 2008.”


What is their outlook currently? Bridgewater sees a higher risk of deflation than inflation in the US with China leading the global economy:

“Looking ahead, Mr. Jensen says deflationary pressure will continue to outweigh inflation concerns in the U.S., and he expects the Fed will have to do another round of quantitative easing—increasing the money supply to stimulate the economy—even after the $500 billion move that is expected in the near term.

Meanwhile, the economies of developing nations like China will keep getting stronger, while the U.S. stays relatively weak”

Source: WSJ

http://pragcap.com/bridgewater-betting-d-process

[winston]

A 91% Return Is the Norm Here… Our Gains Could Be Much Higher
By Dr. Steve Sjuggerud
Monday, November 1, 2010


In 1973-74, stocks fell in half, peak-to-trough. At the time, it was the worst stock market bust since the Great Depression.

The 1973-74 bust has a lot in common with today's bust.

So what worked in investing after the bust back then? One area of the stock market soared 20-fold back then… and right now, it's completely ignored.

Today, I'm going to show you what that is and a few ways to buy it. But first, let's take a quick look back at 1973-74…

Back then, we hit a long recession – just two months shorter than the current one. Stock prices dropped in half back then, just like in today's Great Recession. The dollar was crashing, having just come off the gold standard. The price of gold soared threefold in 1973-74. And commodity prices nearly doubled.

What happened next? What happened starting in 1975 as we exited the recession?

You'd be surprised…

Gold crashed nearly in half, bottoming out in mid-1976 near $100 an ounce. Commodity prices had their worst performance of the 1970s, also. After a nice bounce in stocks in 1975 (similar to the bounce we got in stocks starting in March 2009), the stock market went nowhere for the rest of the 1970s.

So stocks, gold, and commodities all did nothing, at best. But there is one little-mentioned segment of the stock market that went absolutely nuts…

That segment was smaller companies.

If you had invested $10,000 in stocks ranging in size from $25 million to $100 million, it would have turned into over $100,000. If you had chosen even smaller stocks – under $25 million in market cap – $10,000 invested would have turned into over $192,000. Said another way…

You'd have made 20 times your money in a basket of the smallest microcap stocks, coming out of the 1970s recession.

And it turns out, this wasn't an isolated incident…

I looked at every recession going back to 1950 (as far back as I have data on smaller stocks). If you'd bought small stocks during the year the recession ended and held for three years, you'd typically have made a 91% gain.

Coming out of nine recessions, you never would have lost money.

Your biggest gain, as you might think, was coming out of the worst bust. That was a 167% gain after the 1973-74 bust.

The last recession before the most recent one was mild, and it ended in 2001. But still, tiny stocks soared… A basket of small stocks returned 120% for the three years from the start of 2001 through the end of 2003. In that same time, the S&P 500 fell 12% and the Nasdaq lost 18%.

The message is crystal clear… after a bad recession, you want to own small stocks – the smaller, the better.

So where are we? We know microcaps soar after recessions. We know the tiniest ones can do ridiculous things – like go up 20-fold in eight years after the 1973-74 bust.

But so far, after the Great Recession, microcap stocks haven't exploded – yet. They've done fine, just nothing exceptional. Since the start of 2009, a basket of small stocks has performed in line with the S&P 500 and has underperformed the Nasdaq. The total return is around 30%.

Microcaps have a history of strong outperformance after recessions. Just under triple-digit gains are the norm, over a three-year holding period. So you haven't missed anything yet.

To spread your risk across a basket of microcaps, you have a handful of microcap funds to choose from, including the PowerShares Zacks MicroCap Fund (PZI), the First Trust Dow Jones Select MicroCap Fund (FDM), and the iShares Russell Microcap Index Fund (IWC).

The story is simple… When a recession is near its end, you want to own small stocks. The easiest way to do it is through one of these funds.


Source: Daily Wealth

[winston]

TOL:-

Buying on dips have worked for me over the past few months. However, I need to remind myself not to be too complacent, in case the next dip is the real McCoy.

Sentiment and Liquidity has certainly taken priority over Valuation nowadays. There's not much "Margin of Safety" and things are priced for perfection.

Maybe it's time to take a Trading Break and watch things from the sidelines.

At the same time, I want to also remind myself of the following, which is quite appropriate for the current situation: " Bulls makes money. Bears sounds smart."

So do I want to make money or do I want to sound smart ? Being 100% in cash sounds smart but I'm not making money...

[winston]

Are you afraid to invest ?

Or are you afraid not to invest now, especially when this party can go on for 8 months ?

[kennynah]

make risk taking a friend, not a foe...otherwise, one will be too afraid and this business of investing/trading is not a suitable endeavour...

[winston]

TOL:-

Buying on dips have worked for me over the past few months. However, I need to remind myself not to be too complacent, in case the next dip is the real McCoy...

Looking at the market action, buying on dips may be the way to go until the next big downdraft. But only those with "fair valuation" only

[winston]

The 7-Minute Technique To Making Better Investing Decisions By Tim du Toit

Investing, in its simplest form, is about finding investment ideas, analysing companies and making decisions.

Your returns can thus be increased by improving any one of the three activities.

In this article I want to give you some ideas on how to improve your decision making.

It is something I started a few years ago that has helped me immensely.

Give it a try.

It may not only improve your investment returns but other areas of your life as well.

I have always been an avid reader of anything written by Peter Drucker (1909 – 2005). His ideas on business and management have always been miles ahead of current thinking.

At least once a year I read an article he wrote called Managing Oneself (Click on the link for a PDF copy of the article) which is an excerpt from his book excellent book Management Challenges for the 21st Century.

In the article Peter describes a technique on how to discover your strengths through the use of feedback analysis.

“Whenever you make a key decision or take a key action, write down what you expect will happen. Nine or 12 months later, compare the actual results with your expectations. I have been practicing this method for 15 to 20 years now, and every time I do it, I am surprised.

The feedback analysis showed me, for instance-and to my great surprise-that I have an intuitive understanding of technical people, whether they are engineers or accountants or market researchers.

It also showed me that I don’t really resonate with generalists.

Feedback analysis is by no means new. It was invented sometime in the fourteenth century by an otherwise totally obscure German theologian and picked up quite independently, some 150 years later, by John Calvin and Ignatius of Loyola, each of whom incorporated it into the practice of his followers.”

I have successfully used this technique to evaluate and improve my investment decisions.

Here is how you can do it.

Every time you make an investment write down the answers to the following three questions:

What is my reason for buying?
What is the security worth?
How did I calculate this value?

Don’t write a long essay- just one or two lines.

I have found that, the longer the reason for buying (the more complex the investment case) is the lower my returns usually are.

The simplest investments ideas are usually the most compelling and profitable.

When you review your investment portfolio, after a price decline or receipt of new information, look at the reason for buying. If the reason is no longer valid I suggest you seriously consider selling.

Also after selling an investment refer back to your purchase decision and add the return on the investment (in total and per year) as well as your reason for selling.

Every six months or so compare your decisions with the results.

But be careful, a profit does not automatically mean you made a good decision.

A good decision would be one where the reasoning behind the decision proved to be correct. Was your thinking process that led you to the buy decision correct?

For example a profit made through a completely unexpected buy-out of the company would not equal a good decision whereas buying because you thought a security is undervalued and then profiting from a buyout would be a good decision (the under-valuation made the company an attractive buy-out candidate).

I urge you to give it a try, you will be surprised at the results.

Here is for example what I found:

I am a very bad coat-tail investor i.e. buying a security because someone else bought it. I am uncomfortable holding the investment and tend to make bad sell decisions. Either too soon or too late, after a gain has evaporated.

Also, if I do too much analysis on an idea I lose my objectivity. I tend to fall in love with the company and tend to see price declines as a reason to keep on buying. Something that has cost me dearly.

That said I am still not 100% sure what my correct amount of research is. But I am sure I am moving in the right direction. Using check-lists as I described in the article What does your checklist look like? was a step in the right direction for me.

I also add securities I have sold to a virtual portfolio as I realised that I often sell investments too soon.

I review this “sold” portfolio six monthly to evaluate the quality of my sell decisions.

I do this for only up to a year after the investment has left my portfolio as thereafter the investment case may have changed and I have stopped following the company.

This has helped my returns a lot as it has, objectively, confirmed my mistake of not letting winners run.

In summary

You make hundreds of decisions every day, some more important than others.

If the quality of your important decision can be improved, even only slightly, it can make a huge difference in your life.

This is of course also true of your investment decisions.

I urge you to put a system in place to improve your decision making. It will make a big difference in your life, sooner than you expect.


http://www.dailymarkets.com/stock/2010/ ... decisions/

[winston]

TOL:-

The market has not rebounded enough, such that one can be aggresively selling and pocket the profits.

And it has not slumped enough for one to be buying aggresively either.

So maybe staying the course is probably to right thing to do, knowing that there's going to be some speed bumps along the way, due to the present of some skittish investors.

If you are long, QE2 and Window Dressing should be your tail-wind.

If you are short, Europe, Korea and Chinese inflation, will be your friend.

And if you are both long and short ( just like me ), do you know what you are doing ?

[winston]

TOL:-

I'm starting to "feel" that market players are no longer willing to chase things. However, I think there's still a lot of Cash on the sidelines, waiting for a good idea or a bargain.

Therefore, it may be the time to take a longer term view of things and to switch from
"Swing Trading" to "Position Trading".

What are your thoughts ?