02/02/2013 Three Sites, Three Strategies

Sector Model	XLU	36.42%
Large Portfolio	Date	Return	Days
RIMM	7/16/2012	79.72%	201
SEAC	9/25/2012	36.84%	130
CAJ	9/25/2012	5.90%	130
DDAIF	9/25/2012	14.99%	130
CFI	10/31/2012	48.35%	94
RE	11/26/2012	12.24%	68
CGX	12/12/2012	7.38%	52
OKE	12/28/2012	13.10%	36
HTSI	1/14/2013	2.45%	19
NSC	1/28/2013	0.58%	5
S&P	Annualized	7.26%
Sector Model	Annualized	20.33%
Large Portfolio	Annualized	32.45%

 

Rotation: selling DDAIF; buying BOKF (again)

Note also: as I mentioned some weeks ago, I was planning to stop tracking gold and just stick with the sector model.  Nothing wrong with gold during a secular bear, but it’s not really part of my model, so it’s not appropriate to keep tracking it.  It has outperformed both the S&P and bonds during this time, and should continue to do well until at least 2017.

But no one really needs me for that, so I’ll stick with what I have to offer.

Now for the market.  The sector model is in XLU.  Historically XLU actually loses money for the sector model, but it loses less money than the broad market.  Last year it made money, but it’s fair to point out that last year was unusual.

We normally have a pullback during an XLU selection, but picking a top or a bottom is a matter of timing, and since I don’t time the market, all I can do is make a general comment.

There are four approaches to investing:

1) Buy and hold

2) Market timing

3) Fundamental investing

4) Sector rotation

For most folks, buy and hold is just fine.  It has the added benefit of not being taxed while you’re holding it, so a buy and hold on SPY, RSP, or IWM is every bit as good as an IRA account (perhaps better, since IRAs normally force you to use a mutual fund, and mutual funds are notorious for underperforming the market).

Market timing is that Holy Grail everyone searches for and never quite finds.  There are a FEW who can pull it off, and the folks at www.effectivevolume.com have the best model that’s commercially available.  But MOST folks lose money trying to time the market because the market works contrary to human emotion.  Basically, we’re social animals, and we tend to act like a herd.  If you don’t believe this, pay close attention the next few times you go to the grocery store.  When you’re halfway through the shopping list, look at the cash registers.  There will likely be a very small line.  Then when you’re ready to check out, there’s a larger line.

That’s no illusion.  I used to work cash registers and watched the crowd act like a big swirling herd that stampeded all at once.

The problem with the market is that you only make a profit when you have someone to sell to who is more interested than you are in your stock.  But if everyone is buying or selling at the same time, the price tends to swing against you and you lose money.  We end up on the tail end of a stampede and WE’RE the ones who get trampled.

Fundamental investing is a third way to invest.  It’s always long, all the time.  But the key is to only hold stocks that have certain fundamental characteristics.  There are two ways to get your feet wet doing fundamental investing.  The simplest is to buy and hold IWN (a value oriented alternative to IWM).  You don’t have to do anything, you don’t have to pay attention, and you don’t have to pay any taxes (until you eventually sell one day).  The more difficult way to get your feet wet is a site called www.validea.com.  They have a number of fundamental models, with a book available to explain the differences.  You pick the model you want (I’d suggest their Benjamin Graham based “Value Investor” model), pick how often you want to look at your portfolio (1 month, 1 quarter, or 1 year), and then follow the model.  Either way you’ll outperform the S&P.

Finally, there’s sector rotation.  The idea behind this is to find a sector that’s beaten down and ready to mean revert.  The typical way to do this is through good old fashioned Point and Figure charting with a contrarian Bullish Percent Index strategy.  The best site I’ve seen for this is www.DorseyWright.com.

I’ve used each of these sites profitably, and they each have a book that explains the strategy and a good support staff.

My own model is something of a blend of Fundamental investing and Sector rotation, with some money-flow measures thrown into the mix.  But the ONE thing I would caution against is MIXING two strategies together.  That normally does NOT work, and it took me a number of years to figure out elements that didn’t cancel each other out.  So, if you DO check out those sites, I’d suggest you figure out which one is more to your temperament and stick with that ONE site.

www.EffectiveVolume.com is extremely sophisticated and very aggressive.  If you use it, be prepared for daily attention to the market.  If you have good nerves you can do very well there, and their daily analysis of the market is exceptionally brilliant.

www.DorseyWright.com is more for a person who can only look at the market on the weekends or a few times a month.  They do have daily updates, but it’s a less aggressive strategy.  It’s an old strategy that still works – and works well.

www.Validea.com is in three different flavors: monthly, quarterly, or yearly.  If you want to have SOME attention to the market but want to “set it and forget it” for a while, it has the slowest pace of the three.  The advantage of this site is that it gets you thinking in terms of company valuation, rather than just stock valuation.  If a stock goes down you might buy more of it, rather than sell at a stop loss.

In general, stop losses are for market timing.  You’ll LIKELY use them with www.EffectiveVolume.com and MIGHT use them at www.DorseyWright.com but will probably NOT use them at www.Validea.com.

 And I would especially stress to NOT use them with a fundamental strategy such as Validea!

You’ll note that I don’t use stop losses here, because I have a strong use of fundamentals in my model.

Tim

Here are the books associated with each site’s strategy.  I’ve read them with great interest and would recommend them to anyone wanting to know more about the different WAYS people can profitably approach investing:

Validea:

The Guru Investor

DorseyWright:

Point and Figure Charting

Effective Volume:

Value in Time