04/06/2014 Nothing, on purpose

Style Model	Mid Value
Sector Model	XLU	3.13%
Large Portfolio	Date	Return	Days
ABX	4/11/2013	-23.03%	360
NEM	9/30/2013	-12.55%	188
JOY	11/18/2013	5.83%	139
TM	2/3/2014	-3.05%	62
RS	2/10/2014	3.51%	55
CSCO	2/12/2014	0.84%	53
CBI	2/20/2014	7.72%	45
BHP	3/3/2014	3.23%	34
DUK	3/10/2014	0.61%	27
HFC	3/17/2014	-3.64%	20
(Since 5/31/2011)
S&P	Annualized	12.15%
Sector Model	Annualized	26.31%
Large Portfolio	Annualized	26.40%

 

No changes.

As I’ve mentioned a few times before, the goal for the full model is to create a long term holding process that could produce after-tax returns greater than most folks get in their IRA account.  The way to do this is to track stocks even after I close my positions, to see how they perform in longer holding periods:

 

The blue line is the annualized return rate in an IRA account and the green line is a taxable account.  The two lines get closer together over time because the annualized tax burden shrinks.  At less than a year, the tax burden is 43.8%.  After one year, it is 23.8%.  But after three years that 23.8% tax rate is annualized to 7.80%.

 

On this graph we can see the effective tax rate for different holding periods, stretching from 43.8% in one year, to a little more than 1% after several decades.

The key is to find the optimal point of after-tax returns.

This should be a basic concept, but in our high speed digital age we think that faster is always better.

It isn’t.

I once spoke with a hedge fund manager who insisted there was no such thing as fundamentals that could outperform as long as three years. 

Meanwhile Warren Buffett picks stocks that he can hold for decades.  He is the master of after-tax returns.

On these two charts, it is clear that a taxable account would have a better performance with a three year holding period than a three month holding period.  That time frame may become even longer, but for now it’s clear that I can begin to trade less often and still maintain acceptable levels of outperformance.

The sector model will continue to trade in short term, but that’s why I have two models instead of one.

Not all of my current selections are strong candidates for a long term hold, but that’s okay.  I’ll unwind those when they reach a good sell point and move on.

I’m saying all of this now, because I’ve been doing some research that is a bit more bearish than the sunny forecast I’ve been expecting into 2018.  But that’s another post…  For now I want to explain that as time frames expand, market timing becomes less and less of an issue.  For stock pickers, even a correct call on market timing can have negative tax consequences that can be greater than any benefit the market call could have provided.  And while one giant market call like 2007 (top) and 2009 (bottom) could by themselves be significant, their effects are diluted in all the false signals that lead into them.

Even if you succeed in avoiding market losses on the front end, the tax man will create losses on the back end.

Tim