Down goes the Dow

Igy and others on here with obvious knowledge in this area...

Do you mind telling me what sort of average long term rates of return you've seen on your investments? Do you do better than the market and/or better than average individual investors with your own portfolios?

The reason I ask is that in my own case, the more I "knew" about investing and markets, the worse I did with my investments. I think I saw a personal tendency to be overconfident in my fledgling knowledge and would over-"bet" based on over-valuing my "knowledge" in assessing the risk-reward.

Since you guys obviously know WAY, WAY more than me, I wonder if you suffer from the same tendency, or whether perhaps there comes a time when you know enough to exploit the knowledge and outperform the market. Or, maybe, it's not so much about HOW MUCH you know (or think you know), but rather about how much weight you give your "knowledge" in deciding how to bet.

And I could add, I've decided for my own sake that I don't know enough, and have been using the "2 minute portfolio" for the Canadian market for the lest couple of years. See Rob Carrick, Globe and Mail for a description. I mentioned this last year, it's a basket of 20 stocks, comprised of the 2 biggest (by market cap) wiithin each of ten indexes in the TSX. You buy at the start of the year (or some fixed date) and readjust the following year based on changes in market cap.

This so-called "2MP" has outperformed the TSX in almost every year of the last ~ 28 years, earing an average of ~ 11%/yr (but with a worst year of ~ -33% in 2008). In 2014 it earned about 25% to the market's ~ 14%. Last year my holdings lost 2.7%, but against a market drop of 9.6% (between when I readjusted 5 Jan and end-Dec... the overall market drop was > 11 % but a chunk of that happened in the first couple of days of the year).

Considering that this is a large proportion but not majority of my overall investments (includes the unmortgaged half of the house, company shares, and spouse's hefty defined benefits pension), and I don't intend to retire for 10-15 years, I'm actually esctatic with that loss, and am reinvesting today/tomorrow following the same system. The beauty of the system is it is very simple, and it is fairly diverse (but only with exposure to the Canadian market), and has great long term pperformance with no charges (except my own limited time to make the trades, and the cost of a few bucks a trade, so a couple hundred bucks a year).

The system apparently does not work or has not worked when applied to the DJIA.

long time,

Good point, I would say it is akin to coaching yourself. It is always difficult to put something on the shelf and be the observer. Additionally your comments about knowledge base are true as well. My background is formal education based, experienced based, and a constant thirst for more scientific based market information. With that said it is still difficult to remained unbiased throughout the process.

I have a valuation slant to my process where I outperform on the downside and underperform on the upside. It is my experience that limiting your downside is very important to long term portfolio performance.

In regards to your TSX strategy, it does not work for the DJIA because it is a dollar weight index versus the market capitalization TSX or S&P 500. There is a popular strategy using the DJIA called the Dogs of the Dow. In that strategy one purchases the ten highest yielding stocks of the DJIA are purchased at the start of the year and rebalanced annually.

Nassim Taleb author of Black Swan has what he calls the anti-fragile portfolio. In that portfolio 90% of the funds are invested in Treasury Bills and the remaining 10% in out of consensus bets.

Igy

Futures are way down this AM. Looks like we could have a buying opportunity.

dear $hitty investor:

I absolutely believe that the more you know the worse an investor you are. If you look at an indexed fund like the Vanguard Total Stock market, Vanguard total bond market or the Vanguard balanced index. (60% stocks/40% bonds) and you will beat almost all investors who try to use their brains.

A few will beat you, some because they actually are good investors and some just from luck. But you'll do better than 90% of investors.

I saw a study - it basically showed that the more you read about the market the worse your performance is.

I'm a softie for quant strategies like the one you describe. I have a little money in a couple of them. Some have beaten the market, some haven't.

the problem you will have with the 2 minute portfolio is that it will utterly fail for some period of time. Could be one year, could be five years. But it will underperform the market by a lot for an extended period of time. I guarantee it.

And then you will have to decide whether you believe over the long run the strategy will work again or if it is all busted up and doesn't work anymore.

right now, when it is working, it is easy to say you will stay with it in bad times. But that will erode over the inevitable period of underperformance it will encounter. 5 years is a long time.

James O'Shaughessy is the dean of simple quant strategies - you should check out his books. His funds have generally beaten the market since inception in the 1990s, but with rather incredible periods of losses. Check out the long term record of HFCGX, which is run on a simple quant strategy found by O'Shaughnessy. Since inception (1996) it has done 9.42% per year vs. 7.83% for the SP500, but it underperformed the SP500 for six consecutive years 2006-2011. ouch.

also

Igy, I don't know if I'd agree with your dow vs. TSX theory...I suspect it is because of the outsized influence of energy in Canada, or something like that. it shouldn't make too much difference over time which big cap index you are measuring.

Big Dog Investments wrote:

Agip wrote:

Virtually a shooting war betwixt Saudi and Iran and the futures are up.

It's not virtual, agip. They've been going at it in Yemen for awhile now.

well sort of - proxy wars aren't full on shooting wars.

if they were, the US and USSR were at hot war for 20 years.

Big Dog Investments wrote:

Futures are way down this AM. Looks like we could have a buying opportunity.

last year the US also fell sharply in the first days of trading - down 3% in the first three days of trading.

Big Dog Investments wrote:

Futures are way down this AM. Looks like we could have a buying opportunity.

I think you mean we had a selling opportunity but now it has passed.

No, I mean it looks like a buying opportunity. If VTI drops below $100, I'll pounce.

$hitty investor,

You raise interesting issues. I asked you a while back (6 mos-1 yr?) how your strategy was working but you never responded, I thought you had disappeared.

You are beating the TSX, but still down. And is it correct to assume that your holdings are denominated in CAD? This to me is a failed strategy. The reason I asked you previously how you were doing was because I have some relatives invested up there, solely in Canadian equities and instruments, and they refused to diversify even when the writing was on the wall.

Nor would I ever invest in just US-based, USD-denominated entities and instruments.

As for me personally, I have a great deal of knowledge and experience, and I use essentially NONE of it in deciding in-market investment strategies. The only thing I use it for as far as the markets are concerned is to decide whether to be in, or out.

One of my backgrounds is in physics, the "hardest" of the "hard sciences". My stomach turns when I hear financial people describing some things as "scientific". Yes I learned that there are mellower "scientific" investigations as well, when I was doing medical research, but the financial stuff is beyond the pale. I KNOW that they are all full of absolute carp, from a "scientific" perspective.

I have tried to be a student of psychology, sociology, culture, and human behavior, both at the individual, group, and aggregate levels, and of how those factors can be, and are, managed by institutions, business, and governments. This led me to a career in law, and let me tell you, after real science, that was an incredible eye-opener.

I had worked for the gov't previously and studied organizational behavior, but seeing stuff from a legal perspective is a whole new ballgame, especially if you worm yourself into an insider position on an issue that is getting a lot of public and political attention. To see things from the inside is a revelation. It is equally frustrating because I can never communicate most of it without breaking privilege, and therefore have become part of a small group of castaways on a small island.

These various experiences have led me to the conclusion that of critical importance to "investing" is the idea of CONTROL. People who really make money have it, the rest of us don't. I pick my investments and activities with a huge eye toward control, both physical, and decision-making, and it has worked out very well, but requires work.

For the little guy, control over market investments seems to me to be eroding--getting the right price for things is difficult, and there are large forces at work that can swamp you--that is why little guys tend to throw any idea of control out the window, like Flagpole, and just go along for the ride. And NO, selecting what is in your basket and periodically shuffling it is NOT any significant degree of control.

Fair enough, but be realistic, and understand what you are getting into. Remember that maxim that you shouldn't put money into the market that you can't afford to lose, it has some truth.

So I don't use my knowledge or experience to play the markets, I use it to stay out when the BS meter goes off the charts. IMO the 30+% year was super-high on the BS meter, and I got out. Public unfunded liabilities in the US are off the charts on the BS meter, and I'm not in any associated bonds. The facts that an average POS Canadian house in nowheresville costs half a million bucks and that most people in Canada are on the dole via either old age, UI, disability, or direct government employment, and that vertical integration disappeared a long time ago in Canada, are ultra-high on the BS meter--early in 2014 I divested of all Canadian holdings.

etc.

I have since invested in what I know, and what I can control somewhat--building projects, art, private money lending, antiquities, and other things. Things for re-sale are very, very targeted, with committed buyers before I even make a move. Information and access are key points of control. Money lending control is achieved at low cost through careful selection of clients and intimate knowledge of systems of legal recourse. Building projects have defined end-dates, and are sold, not held.

Good luck, to all. Yes, I would like to get back in the market, but I don't see it on the horizon. Yes, I have beaten the markets, but it has taken a great deal more work than merely staying in the markets would have taken. Just being in the equity and bond markets is NOT significant diversification, no matter what anyone tells you. No matter what you know, know that you know nothing about the markets. Even those in the markets who make a killing do so in a very narrow range, because of something narrow that they know about and develop a mechanism to control to some extent.

IMO

Big,

Yes, and there may be many other buying opportunities as the year progresses.

The FANG stocks are all down more than the market. So much for valuation doesn't matter.

FB -3.37%

AMZN -3.83%

NFLX -6.50%

GOOGL -2.69%

Igy

BTW, what a start to the year. China halts trading, how's that for a free market? Think the same interventions don't happen here? IMO they can actually be beneficial, people can be too unrestrained for their own good.

Big Dog Investments wrote:

No, I mean it looks like a buying opportunity. If VTI drops below $100, I'll pounce.

It may prove to be a buying opportunity. Or not. Depends on what happens next.

We do know that when the Dow was well over 18,000, that was in fact, not theory, a great time to sell.

Maserati wrote:

BTW, what a start to the year. China halts trading, how's that for a free market? Think the same interventions don't happen here? IMO they can actually be beneficial, people can be too unrestrained for their own good.

the US has the same type of "circuit breakers" - it has for decades.

I think they start kicking in at 7% down

I'm ok with it - with computer trading the market could just get buried by millions of sell orders.

Yes...plus, China went down that 7% in something like only 5 minutes.

HALT!

WE could wrote:

Big Dog Investments wrote:

No, I mean it looks like a buying opportunity. If VTI drops below $100, I'll pounce.

It may prove to be a buying opportunity. Or not. Depends on what happens next.

We do know that when the Dow was well over 18,000, that was in fact, not theory, a great time to sell.

Hindsight is 20/20.

After that vast piece of writing, yes I still watch the markets, and yes, I would still get back in, at the right level.

I will know that level only when I see it, because its value will be informed by prevailing conditions at the time. 18k or 17k under today's conditions does not for me represent sufficient value.

Big Dog Investments wrote:

WE could wrote:

It may prove to be a buying opportunity. Or not. Depends on what happens next.

We do know that when the Dow was well over 18,000, that was in fact, not theory, a great time to sell.

Hindsight is 20/20.

Yes it is.

Future vision is not. Which means you have no clue as to whether or not this drop is a buying opportunity (a temporary decline that will soon reverse) or the start of a more prolonged decrease (in which case buying instead of selling now would be a huge mistake).

A market decline is not always a "buying opportunity". Is the point.

WE,

And when valuations are stretched, as they are today, it is likely not a "buying opportunity."

Igy