11/28/2013 You don't need to know the future; you just need to know yourself

Sector Model	XLB	0.67%
Large Portfolio	Date	Return	Days
ABX	4/11/2013	-32.03%	231
QCOM	9/3/2013	10.98%	86
NEM	9/30/2013	-12.01%	59
BCR	10/4/2013	21.35%	55
ED	10/18/2013	-1.71%	41
ISRG	10/21/2013	0.40%	38
EW	10/28/2013	-15.26%	31
ARLP	11/11/2013	-2.46%	17
JOY	11/18/2013	-1.90%	10
OXY	11/27/2013	-2.49%	1
(Since 5/31/2011)
S&P	Annualized	12.55%
Sector Model	Annualized	23.70%
Large Portfolio	Annualized	29.55%

 

Yesterday, before the close, I noted that the sector model would be selling its position in XLK and buying XLB.

The full model has had a rough month, falling behind even as the S&P made new highs.  This is a natural consequence of the pre-rally pullback in small value stocks.  Since they typically outperform in December-January, they also typically underperform in November.

Value Investors, then, tend to have a boring November.  In crashes they fare well, and in booms they lag behind.  Momentum investors have had an easy time lately.

Technical traders are more concerned to know when they will outperform.

Fundamental investors never quite know when, but they do have confidence that they will outperform at some point in time.

The difference between the two kinds of investors is in the valuation metric.  Technicians judge returns against the dollar, and fundamentalists judge returns against earnings and debt.  Is the price movement making sense to you?  Then you are a technician.  Is the price making sense to the business?  Then you are a fundamentalist.

If the price moves against you, a technician will sell and a fundamentalist will buy more.

The presence of both kinds of investors makes the market work.  Neither is “better” or “worse” than the other, per se.  A good technician can do better than a bad fundamentalist.  A good fundamentalist can do better than a bad technician.  The important thing is to know what you are and trade accordingly.

Buffett made his billions by compounding 20% returns over decades.  20% is doable.  60% isn’t – at least not for a human being.  You might do that for a year or even five out of sheer luck, but beyond that you’ll fall back to the mean.

Know your goal.  Know your style.  Stick with it.

And enjoy the time with your family.

Happy Thanksgiving.

Tim