10/21/2018 When Nothing Works, Do Nothing

Sector Model	XLE	-1.80%
Full Model	Date	Return	Days
BT	8/11/2015	-47.53%	1167
TMK	11/23/2015	45.95%	1063
NVR	12/16/2015	30.83%	1040
CMP	2/19/2016	9.59%	975
NVR	2/22/2016	36.34%	972
AMWD	3/17/2016	-7.94%	948
CASY	5/12/2016	13.23%	892
AEM	6/7/2016	-24.75%	866
ESRX	6/13/2016	25.54%	860
AMED	6/16/2016	114.83%	857
FRO	6/27/2016	-6.71%	846
ASTE	7/12/2016	-18.93%	831
MFC	9/1/2016	26.84%	780
SFM	9/8/2016	39.53%	773
CFFN	9/12/2016	-1.72%	769
FOSL	5/11/2017	29.22%	528
HIBB	7/25/2017	32.44%	453
FOSL	7/27/2017	69.02%	451
HZO	8/1/2017	32.86%	446
BCE	5/31/2018	-17.12%	143
(Since 5/31/2011)
S&P	Annualized	10.22%
Sector Model	Annualized	12.66%
Full Model	Annualized	12.89%
S&P	Total	105.36%
Sector Model	Total	141.30%
Full Model	Total	145.11%
Sector Model	Advantage	2.43%
Full Model	Advantage	2.67%
	Previous	2018
S&P	98.38%	3.52%
Sector Model	172.95%	-5.05%
Full Model	145.63%	-0.21%

The Full Model is still outperforming the Sector Model – but just barely.  The recent shake up in the market is taking its toll on individual stocks, of which I have 20 positions each shaking in the wind.

The rule of thumb is to maintain at least 7 unrelated positions, in order to avoid individual stock and industry risk.  But broad market risk cannot be avoided, and those who try only hurt themselves long term.  We’ve all heard of timers who called the last major downturn.  The problem is that they call too many downturns and end up losing out on gains they would have had if they merely did nothing.

Then there is the practice of hedging, which merely locks in a perpetual drain on the simple fact that the market will tend to grow in dollars over time (even if those dollars themselves are worth less).

And gold?  Silver?  Inflation hedges?

Let’s say that the dollar loses half of its value and gold rides the tide.  100k in gold is now worth 200k in devalued dollars.  But when you cash it in you have to pay taxes on the monopoly money you “gained” by trying to merely stop the bleeding.

No, in the long run stocks win out.  Not always in the extreme short run, but in the long run they win.

So, what do I do when nothing works?

Why, if nothing works, then I should do nothing.

Or, perhaps, as little as possible.

The Full Model is nominally due for a trade, but the current setup of [ASTE-sell / DFS-buy] is predicated on a 3% favorable gap or better.  That is, ASTE would have to go up 3% more than DFS does, or DFS would have to go down 3% more than ASTE does.  That could happen this week.  But with a holding period of 5 years per position I’m in no rush.

Tim