11/02/2012 We survived!

Small Portfolio	XLF & IAU	17.80%
Position	Date	Return	Days
DECK	6/15/2012	-38.03%	139
RIMM	7/16/2012	20.00%	108
OKE	9/25/2012	-2.18%	37
SEAC	9/25/2012	9.79%	37
CAJ	9/25/2012	-5.38%	37
DDAIF	9/25/2012	-8.61%	37
SSD	9/25/2012	3.11%	37
NSC	10/8/2012	-6.93%	24
WMK	10/22/2012	0.02%	10
CFI	10/31/2012	1.38%	1
S&P	Annualized	4.30%
Small Portfolio	Annualized	12.50%
Large Portfolio	Annualized	16.52%

 

Enter the super-storm.

We were a direct hit and were down for the count until tonight.  Before the storm I had entered a conditional market order to buy CFI if the AM sell price was hit.  As a result, the trade occurred without any need for me to be online.

Thankfully, our house was spared, and after the mandatory evacuation we came back to a place that was without power or cell service, but was not permanently harmed from the wall of water that decimated the south shore and buried fancy homes just a few miles from us.  Even buildings two blocks from us were flooded, but we didn’t get a drop.

I hear another nor’easter is set to hit on election day.

I’ll be happy when it’s over.  After two years of political wrangling I feel like I’ve been watching back to back marathons of the voice, the x-factor, American Idol, and so you think you can dance. 

In any case, no trades tonight, but I did want to comment on the model itself.  I mentioned recently that I had created a self-adaptive fundamental selection filter.  There was a reason for that.  The dirty little secret inside the Small Portfolio is the fact that IAU (gold) is just a secular toss-off to keep all those eggs from being in the same basket.  Gold isn’t really a trade, as such.  It’s, if anything, a kind of hedge to balance the model in case something screwy happens inside the guts of the sector ETF.  While unleveraged ETFs are pretty reliable, I don’t like to put all my assets in ANY single vehicle.  Accordingly, I plan to update the Small Portfolio to rotate through another group of ETFs that the model can analyze, but which are asymmetric to the sector ETFs (currently in XLF).  That will LIKELY be a regional rotation (Europe, Asia, the U.S., Emerging Markets, etc.), but I have some more research to do.

In any case, if you look at the guts of the Small Portfolio from 5/31/2011 to today, IAU has gained 11.13% and the nine sector ETFs have rotated into a 24.47% total gain (the average of those two is the 17.80% listed on the Small Portfolio line at the top of the page).

The Large Portfolio, on the other hand, has a total gain of only 23.52% since 5/31/2011.

While those are both far better than the 6.12% total gain of the S&P 500, it’s not exactly how the model was designed to work.  The Large Portfolio is supposed to work BETTER than the simple sector ETFs.  The fact that it has not outperformed is because its gains have been in SPITE of the fundamental selection filter, rather than partially BECAUSE of it.

I therefore now have two self-adapting features of the model.  I have a self-adapting holding period feature and a self-adapting fundamental feature.  Having started with Greenblatt’s simple formula (which didn’t work), I tried a Graham filter – much more complex – which helped, but not enough.  Greenblatt’s approach is a GARP formula (i.e. Growth At Reasonable Price).  It’s kind of a hybrid Growth-Value process.  Graham is a pure value investment process.

But the big question is… what the heck works best with my model?  What am I supposed to do, trial and error?

Well, no.  Took me a while, but I worked out a way to track what fundamentals actually work WITH the holding periods and technical environments selected by the model.

The first selections will not be perfect, and it will take a while for the model to fine tune.  As the fundamentals adapt, that may shift the holding periods.  As the holding periods adapt, that may shift the fundamentals.

And as the High Frequency Trading algorithms out there mutate, so will my own home made Slow Frequency Trading algorithm.

Kind of sick to think of quarter trades as “Slow Frequency”, when that phrase should properly apply to two year holding periods.

But times change, and so will we.

There will be a new trade on Sunday.  Until then, I hope everyone is safe.  Have a splendid weekend.

Tim