Sector Model
|
XLU
|
38.96%
|
|
Large Portfolio
|
Date
|
Return
|
Days
|
BBRY
|
7/16/2012
|
81.79%
|
223
|
SEAC
|
9/25/2012
|
41.86%
|
152
|
CAJ
|
9/25/2012
|
4.36%
|
152
|
CFI
|
10/31/2012
|
35.67%
|
116
|
RE
|
11/26/2012
|
18.46%
|
90
|
CGX
|
12/12/2012
|
8.14%
|
74
|
NSC
|
1/28/2013
|
5.65%
|
27
|
BOKF
|
2/4/2013
|
6.28%
|
20
|
SWM
|
2/12/2013
|
3.14%
|
12
|
GMCR
|
2/19/2013
|
2.57%
|
5
|
S&P
|
Annualized
|
6.95%
|
|
Sector Model
|
Annualized
|
20.83%
|
|
Large Portfolio
|
Annualized
|
32.41%
|
Rotation: selling CGX; buying OKE (again).
I’ve been making some improvements to the model that will
not appear on the blog selections, but they are worth discussing.
First, after years of persistent nudging from a friend, I’ve
finally worked out how the model can be used on the short side as a hedge. The results of a fifteen year back-test
confirmed the procedure, and I’m planning to pursue these improvements – but
not on this blog. The blog itself is
designed for folks with cash accounts that they don’t need to spend a lot of
time managing.
And that brings me to the second part of this week’s missive:
time. Or more specifically, holding
periods.
Those of you who’ve endured a few weeks of my tax posts will
be aware of the problem with the change in capital gains taxes. They used to be 35% short term and 15% long
term. Now they are 43.8% short term and
23.8% long term.
That change shifts the realized gain calculations of the
model enough to trip the holding periods for a taxable trading account into a
long term rotation pattern. Instead of
rotating once a week, a taxable account would rotate 1 of the 10 stocks once
every two months.
The net effect for the government is that instead of getting
the 35% they used to get every year, they’ll get 23.8% every two or three years
(i.e. about 10% per year). By raising
rates they’ll cut their revenue to about a third
of what they got before.
The capital gains rates had already been optimized for
maximum government revenue at the 35% and 15% levels. ANY change, whether down or up, would get
less revenue. For those concerned with
paying off the national debt, BOTH Romney’s proposed cuts and Obama’s proposed
raises would bring in less money.
For the investing public this will be an unconscious process
– those who trade less often will be left with most of the money.
For my model, it’s a deliberate formula to maximize realized
after-tax gains.
The details of the calculations include which portion of
gains are dividends and which is from the sale of price appreciation. Also included is the size of the account (for
the impact of trading costs). Right now
it’s set for my own account (for obvious reasons).
The question for the blog is – which do I report? For now I’ll continue the weekly rotation,
but a person with a taxable account could do better by only trading once every
two months and ignoring 7 out of 8 of those weekly stock picks. The only problem with that idea is the second
crucial aspect of a trade: WHEN TO GET OUT.
The blog will calculate when to get out of a weekly rotation. I don’t plan to do so for a slower one (not
here).
So that leaves me with far too many variables to take full
advantage of in a little blog. The blog
is set for a long only IRA account – no margin, no taxes, and no shorting.
What is possible (beyond the blog) is a self-adaptive long/short
hedged portfolio calculated for maximum total returns after taxes and trading
costs, specifically balanced for both the size of the account and the tax
exposure of the client base.
It would not just be targeting OKE on the long side, for
instance – but also targeting CHTR on the short side.
But that’s more than will fit here.
The model has grown far more robust than I had imagined when
I launched it on 5/31/2011.
I feel like giving it a graduation prize.
I would add that the enhancements will give me a bit more
insight than I’ve had before. A hedged
model, for instance, would be about 40% short and 60% long at the moment. That’s more “bullish” than is currently in the
news with the sequestration scares and panic over Walmart’s February
sales. And, while the model could be
wrong, it’s usually better than the scare tactics and bullish fantasies that we
find on the front page.
Tim
Very interesting. Presumably, the market participants as a whole will gravitate towards longer holding periods (or less frequent trading). Wouldn't that cause an even more pronounced shift towards high-dividend stocks?
ReplyDeleteI agree complete! -- and I've been seeing this in my adaptive fundamental filter too. The so-called "great rotation" out of bonds (if it even exists yet) will lead to more dividend investment as well. Dividend stocks were threatened last year with the possibility of being taxed at short term gains, but that was resolved in their favor. Dividend stocks should continue to stay strong this decade.
ReplyDelete