09/21/2014 Clontz's Law of Timing

Style Model	Large Value
Sector Model	XLF	2.38%
Large Portfolio	Date	Return	Days
SHOO	4/28/2014	-3.52%	146
SR	6/2/2014	4.77%	111
CFI	6/9/2014	-2.18%	104
RRD	7/21/2014	5.76%	62
ESI	8/4/2014	-65.41%	48
BSET	8/11/2014	-2.02%	41
STRA	8/18/2014	2.07%	34
PBI	8/25/2014	-3.59%	27
CLF	9/2/2014	-7.10%	19
AFL	9/15/2014	-2.32%	6
(Since 5/31/2011)
S&P	Annualized	12.91%
Sector Model	Annualized	25.85%
Large Portfolio	Annualized	21.22%

 

No rotation.

The Full Model keeps getting pummeled, while the Sector Model ticks along rather quietly:

ESI has suffered a devastating series of declines.

This is when folks typically say, “I’m a long term investor.”  Normally those “long term” holds turn into even more catastrophic losses, but I’m not sure how much worse it could do.  A 100% loss isn’t all that far away at this point.

The WORST investment I had was International Paper during the early 2009 vortex.  I held it for about four months, was down more than 75% at one point, and then ended up selling it for a 15% profit.  But that’s not the kind of ride one ever wants to experience outside of an amusement park.

And this brings to mind the question of “risk” versus “volatility.”

In the most simplistic terms, Fama sees stocks that have higher volatility to be more risky, and even Haugen had to agree in his “Beast of Wall Street” study.  The difference between Fama and Haugen is that Fama sees “risk” and “reward” to be positively correlated, while Haugen does not.  That is, to Fama the more risk, the more reward.  Haugen broke that down by market capitalization and found that WITHIN the same market cap, the more risk, the less reward.  So, if you had a basket of large cap stocks, those with the highest beta would have the lowest returns.  The only reason higher beta stocks did better overall was because small caps tend to outperform large caps, and small caps also tend to have higher beta.

Haugen also noted that “risk” is only truly measured by Fama in terms of investor behavior.  That is, to a robot programmed to ignore beta, there is no risk involved because that robot will not be scared into selling at the wrong time.

A human, on the other hand, will almost always buy and sell at the wrong time.  A friend of mine calls this “Clontz’s Law of Timing” because I always tell him that any time he picks will be the worst possible time – just expect it and move on.

Clontz’s law was certainly true in the case of ESI.  It lost 45% on the day I bought it, and is down 65% now.

Fortunately, it is only one in a basket of stocks.  It’s annoying, but not the end of the world.

Tim