12/28/2015 Rabbit Trade

The Rabbit sold ED and bought SPG.

The Turtle continues to hold ED.

12/21/2015 Second Whipsaw

The Mouse sold XLE and returned to XLU before the close.

12/21/2015 Mouse Whipsaw

The Mouse sold XLU and bought XLE with a favorable gap.

I'll ignore the favorable gap on the record and just mark it as if it were holding XLE over the weekend.

12/20/2015 The True Endgame

Mouse	XLE	-12.84%
Rabbit	Date	Return	Days
BT	8/11/2015	-5.88%	131
TM	8/12/2015	-3.58%	130
ED	9/17/2015	0.65%	94
DY	10/30/2015	0.31%	51
CVS	11/6/2015	-4.70%	44
TMK	11/23/2015	-8.54%	27
WM	11/25/2015	-1.61%	25
UPL	12/1/2015	-40.40%	19
APD	12/9/2015	-3.85%	11
NVR	12/16/2015	-0.13%	4
Turtle	Date	Return	Days
BT	8/11/2015	-5.88%	131
TM	8/12/2015	-3.58%	130
MMP	9/4/2015	-9.82%	107
ED	9/17/2015	0.65%	94
DY	10/30/2015	0.31%	51
CVS	11/6/2015	-4.70%	44
TMK	11/23/2015	-8.54%	27
WM	11/25/2015	-1.61%	25
CLF	11/30/2015	-32.33%	20
UPL	12/1/2015	-40.40%	19
	Since 5/31/2011	Annualized
S&P	49.09%	9.16%
Mouse	73.06%	12.79%
Rabbit	56.15%	10.28%
Turtle	56.34%	10.31%

The Mouse whipsawed into and out of XLU before the close, leaving me personally in XLU and Steve’s STAR Fund in XLE.

If there is a favorable gap tomorrow I’ll trade back to XLE. Otherwise I’ll recalculate before the close. As always, the weekly updated graph and returns will reflect the actual returns.

Looking back at the last two years, or even the last four years, 2015’s collapse in both models leaves my gut with the question of what the point is.

But that “gut” feeling is exactly the point of this – my gut is wrong. Planned trading based on logical rules at least gives me something to work with. And, as bad as this past year has been, my gut trades of previous years were infinitely worse.

The gut looks at the now, and logarithmically discounts time, both in the past and the future.

What matters is NOT where I am versus last year, but instead where I am in relation to where I need to be when I retire. To calculate that, I don’t just measure the daily line. Instead, I have to measure today’s price against the exponential regression line – projected forward to 4/5/2034, the last day that I want to be ready to retire. If I enjoy working after that, I’ll work doing whatever I enjoy. If I enjoy something better than work before that date, then my target retirement fund will dictate whether I should consider it. Ultimately money determines whether we can retire, and time gives us the opportunity to plan accordingly.

Today’s value of the Mouse (which is the benchmark for all of my models) is -.2696 standard deviations below its current regression line. The total expected return is that of the regression projection for 4/5/2034 divided by today’s value, minus 100%. That is a 2507.45% projected return, which translates to 19.52% per year.

The Mouse has LOST -28.84% so far this year. It’s been a bad year – the worst on record, and even worse than the returns for the 2008 backtest. If I were to listen to my gut I’d throw up my hands at the hopelessness of it all. But if I run the calculations I find that the model is behaving normally and I’m in great shape.

I’m using about three spreadsheets to run the calculations, and they tell me how much to save each month based on my age, what I have in my accounts, how much I need to retire, when I need to retire, and what the current value’s expected return will be.

Once I get all of that into a single spreadsheet I plan to post it for expected returns in SPY. But for now, this is a glimpse of what I personally work with to plan for retirement.

However you do plan, the key is to make the plan and to stick with it. It’s worth the time to consult with a registered financial advisor and to get him to show you his calculations. I’ll be posting my own spreadsheet for reference to help folks ask those questions.

But DO ask, and DO find someone qualified to give answers. And do it as early in your career as you can. The financial markets are kindest to those with modest goals, and cruelest to those who are greedy. It’s tragically ironic, but too often true.

Tim

12/18/2015 Sector Change

The Mouse (aka the Sector Model) sold XLE and bought XLU.

12/16/2015 Rabbit Trade

The Rabbit sold CLF and bought NVR with a 1.5% favorable gap.

The Turtle continues to hold CLF.

12/13/2015 Constructive Panic

Mouse	XLE	-10.36%
Rabbit	Date	Return	Days
BT	8/11/2015	-3.48%	123
TM	8/12/2015	-4.14%	122
ED	9/17/2015	-3.30%	86
DY	10/30/2015	1.23%	43
CVS	11/6/2015	-6.33%	36
TMK	11/23/2015	-3.39%	19
WM	11/25/2015	-4.21%	17
CLF	11/30/2015	-9.91%	12
UPL	12/1/2015	-31.67%	11
APD	12/9/2015	-1.87%	3
Turtle	Date	Return	Days
BT	8/11/2015	-3.48%	123
TM	8/12/2015	-4.14%	122
MMP	9/4/2015	-13.48%	99
ED	9/17/2015	-3.30%	86
DY	10/30/2015	1.23%	43
CVS	11/6/2015	-6.33%	36
TMK	11/23/2015	-3.39%	19
WM	11/25/2015	-4.21%	17
CLF	11/30/2015	-9.91%	12
UPL	12/1/2015	-31.67%	11
	Since 5/31/2011	Annualized
S&P	49.60%	9.29%
Mouse	77.97%	13.56%
Rabbit	61.03%	11.08%
Turtle	60.81%	11.05%

CLF and UPL were purchased using the long term formula.

At some point the Rabbit will sell them and the Turtle will continue to hold. I’m taking turns on the short and long term purchases until the two models are completely separated from each other sometime in the next few quarters.

In the meantime, I’ll have some uneven performance on the short term Rabbit model that can’t be helped. These purchases should average out on that model to be both excessively good and bad, but annoyingly volatile in ways that the long term model is designed to ignore.

But the excessive volatility and general panic creeping into the market brings to mind the question of just what to do when panic strikes.

It all depends on what you are trying to accomplish with your investing. I’d like to retire without eating dog food. That’s my own goal.  I’m not trying to get rich quick or get poor slow.  I’m trying to use my work years to save for retirement in a strategic way.

The position of my own returns of based on a logarithmic forecast of my combined back-tested and live-tested return rates on the Sector Model (aka the “Mouse”):

The fact that it is slightly below the long term mean, translates into a slightly higher forward projection over the target period I’ve set for retirement. The day to day and month to month position of my account is measured relative to the long term regression projected forward.

I use that with another calculation to determine how much I want to have when I retire, how much I’m projected to have with my current balances and expected return rate, and how much of a difference that is from my target amount.

That difference tells me how much to put into my IRA each month.

This can be done with broad indexes and ETFs as well.  Calculate the long term regression, project it forward to the year you want to retire, and calculate the gap that you need to add each month to your IRA.

It will NOT be perfect, or exact, but it’s about as good as someone can do, and in times of bizarre market contraction and hidden volatility in specific sectors that isn’t reflected in the broad market averages, it’s a way to stay sane.

This week I suffered astonishing losses in my own personal accounts, and when I calculated how much I needed to save each month – it was LESS than the calculation last month. Based on long term regressions I was in better shape than I was before I had this bad week.

Psychologically I was in panic.

Mathematically I was peachy.

So what are my favorite Sector and Styles?  Energy and Global Small Caps. Scary as heck and even more profitable long term.

And what’s the best time? Now, always now. And the scarier “now” gets the better it is long term.

Demographically, 2018 should be the secular bottom – not as good (or terrifying) as 1982, but as good as we’ll ever see again.

“Great opportunities” come at times of panic. I expect the next few years to get scary. And if you are planning to retire one day, these are the best times to look in the worst places to invest.

What if you are planning to retire soon?  That’s an entirely different matter. Small Caps and Energy could destroy you.

That’s why you don’t make investment decisions from a blog. Blogs bring to light ideas that might be useful to your own goals, but the exact calculations are too great for any blog to deal with.

If you have a lot of money and plan to retire soon, volatility in scary sectors is the last thing you need.

If you don’t have a lot of money and / or you don’t plan to retire for a few decades, then volatility in scary sectors might be a great opportunity.

But only you can make that call, and once made, you have to see it through. Don’t double down on scary sectors and then change your mind by trying to time or use stop losses. Get squirrely and you’ll get run over.

Goals dictate target amounts and target dates.

Those targets dictate what kinds of investments to use and how much to save each month.

Since those goals won’t change quickly, neither should your strategy. And if you do make a lot of changes, then maybe you need to pull out a pen and paper and start writing down just what you are trying to do.

Either that, or start a blog to keep yourself honest…

Tim

12/9/2015 The Turtle and the Rabbit part ways...

Mouse	XLE	-7.47%
Rabbit	Date	Return	Days
BT	8/11/2015	-2.65%	120
TM	8/12/2015	-3.96%	119
ED	9/17/2015	0.22%	83
DY	10/30/2015	7.04%	40
CVS	11/6/2015	-4.58%	33
TMK	11/23/2015	-1.65%	16
WM	11/25/2015	-3.18%	14
CLF	11/30/2015	-7.33%	9
UPL	12/1/2015	-22.69%	8
APD	12/9/2015	0.66%	0
Turtle	Date	Return	Days
BT	8/11/2015	-2.65%	120
TM	8/12/2015	-3.96%	119
MMP	9/4/2015	-7.86%	96
ED	9/17/2015	0.22%	83
DY	10/30/2015	7.04%	40
CVS	11/6/2015	-4.58%	33
TMK	11/23/2015	-1.65%	16
WM	11/25/2015	-3.18%	14
CLF	11/30/2015	-7.33%	9
UPL	12/1/2015	-22.69%	8
	Since 5/31/2011	Annualized
S&P	52.22%	9.73%
Mouse	83.71%	14.38%
Rabbit	65.91%	11.84%
Turtle	66.20%	11.88%

Today the Rabbit and the Turtle parted company, with the Turtle slightly ahead for the day.

The Turtle is designed to hold each selected stock for an average of a full business cycle, but will trade some of the shorter term holds that are more appropriate for the Rabbit, and keep the longer term holds. Once that transition is complete, the Turtle will average only about two trades per year.

Tim