Tuesday, May 28, 2013

All Investment Strategies Stop Working At Some Point

I was talking to an advisor earlier in the week about tactical asset allocation and he conveyed a story about how he had allocated money to a tactical strategy that stopped working.    Every investment strategy stops working at some point, either temporarily or permanently: Buy and Hold and asset allocation in 2002 and 2008, the legendary Bill Miller at Legg Mason in 2007, and yes, even a tactical strategy.

Market dynamics are constantly changing, it would be foolish to expect an investment methodology to work all the time in every type of market, or never just stop working.  How do you protect against this:

1. Use multiple, uncorrelated, methodologies.  We use intermediate term momentum analysis that buys into something when it is going up and sells when it starts to weaken, combined with short term counter trend analysis that buys when something is weak and sells when it is going up.  These methodologies do not move in the same direction at the same time and use completely different metrics.  If one stops working the others will not be impacted.  

If you insist on using some sort of buy and hold or asset allocation strategy you would need to combine it with a completely different return stream.

2. Define for whatever strategy you are using what ''stop working'' means.  For us, this is a strategy that doesn't perform as it should.  For example, a momentum strategy that doesn't do well in a market that is favorable for momentum or a counter trend strategy that doesn't do well in a market that is favorable to counter trend.

3. Understand that all strategies stop working at some point and constantly monitor everything for any signs that it is not working properly.

4. If you identify a strategy that is not working as it should figure out why and if it is temporary or permanent.  Err on the side of caution here.  Over the years I can think of two models we had that stopped working as they should.  They relied on inter-market relationships that had always been strong and ceased to be so.  We decided that these changes in the market dynamics were most likely permanent and took the models out of our strategies.

5. Most importantly, always be improving.  It is tempting to find an investment strategy with a great long term track record and assume it will continue, it won't.  Being static and/or relying on track records is a recipe for disaster.  Look at all the companies through the years that went out of business because they assumed that what worked in the past will continue (anyone interested in a buggy whip?) We are in a constant state of improvement.  There is always a better way to do what we do and I spend hours every day trying to find it.  When I do, then I try to find something better than what I just found.

Friday, May 24, 2013

Should You Invest in Frontier Markets?

I recently had an email exchange with a reporter about frontier markets (emerging, emerging markets).  He was writing a story about what markets investors should invest in.  My answer to him was none.  Not because there are not huge opportunities in frontier markets, but because of what could go wrong.  If you time it right (big if) you can make a lot of money buying the right frontier market at the right time. If you time it wrong you need to explain to clients why you lost a ton of money investing in some obscure country nobody has hear of.

I just read an interesting study done by CXO Advisory (link below but available to subscribers only)

They add a frontier market ETF (FRN) to a diversified portfolio.  What they found was that FRN slightly decreased returns over time and increased risk.  There are of course caveats here, the main one being that FRN hasn't been around for a very long time.   However, the point is that investors need to always make sure they look at the risks of whatever they are investing in before getting wowed by the potential returns.

Monday, May 20, 2013

7 TTM Investment Strategies Win Top Gun Award with PSN

Period Ending 3/31/13

Momentum Income (formerly Inst'l Income) 1 Stars Global Fixed Income Universe

Trend Aggregation Income (formerly Tactical Income) 1 Stars Global Fixed Income Universe

Trend Aggregation Absolute Return (formerly Balanced) 1 Stars Global / Intl Balanced Universe

Trend Aggregation Core (formerly Endowment) 1 Stars ETF Global Balanced Universe

Trend Aggregation Core (formerly Endowment) 1 Stars Global / Intl Balanced Universe

Momentum Core (formerly Multi-Strategy) 1 Stars ETF Global Balanced Universe

Momentum Core (formerly Multi-Strategy) 1 Stars Global / Intl Balanced Universe

Momentum Growth (formerly Capital) 1 Stars ETF Global Balanced Universe

Momentum Growth (formerly Capital) 1 Stars Global / Intl Balanced Universe

Momentum Absolute Return (formerly Institutional Balanced) 1 Stars ETF Global Balanced Universe

Momentum Absolute Return (formerly Institutional Balanced) 1 Stars Global / Intl Balanced Universe 

Friday, May 17, 2013

Gold's Allure is Starting to Fade

Just read an article in the WSJ this morning about Gold:


Up until recently the most frequent question I got from investors was what I thought about Gold.  The answer was the same then as it is now, if it is in an uptrend I like it, if it is in a downtrend I don't.

Gold's recent drop reinforces a number of key lessons for investors:

1. Assets that undergo parabolic moves (Gold, Apple, etc) almost always retrace most, if not all, of that move.  Therefore, having a herd mentality and buying into something like this once it has rallied a lot rarely makes sense.

2. Once everyone starts to accept that something is going to go up that is the top.  Gold's fall started when the consensus was that nothing would stop it from $2,000/oz.  Same thing with Oil a couple of years ago and Apple.

3. Investors believe that their most recent experience will continue.  I was told last year by someone in her 80's that gold ALWAYS goes up and has never lost money.  Same thing with people who are convinced bonds are conservative (30 year bull market about to end), normal stock returns are 30%/yr in 1999, etc.

4. Instead of trying to predict tops and bottoms and figure out why it is better to stay in harmony with the trend.  When gold was going up I liked it, now I don't.

Wednesday, May 1, 2013

Is The Economy Really Improving

Below is the replay from my appearance on Fox Business News yesterday about whether the economy is improving or not.

Is the Economy Really Improving