Market Timing: Should You Attempt It?

Top 30. Jun 17, 2000 8:19 AM

» Kirk - Exogenous Events

wcwiii - What protects these portfolios from "Exogenous Events"?

It seems history is littered with these schemes and they work fine until some exogenous event triggers a collapse.

Perhaps we ONLY hear of the losers as the winners are too smart to share their secret? Sharing the fact that they have a secret formula is not a good idea as once it were known in a large scale, all would use it and the trick would cease to be meaningfull.

How large is your friend's fund and has it only been running for 30 months?

-- posted by Kirk

Top 31. Jun 17, 2000 8:47 AM

» Will_L - "A system"

Why is it everytime I see someone justify timing models and "sure" investment schemes I think of gambling and all those large buildings that they build in Vegas off of those with a "model" or a "system". As Rande and Kirk point out it is only a matter of time until those systems fall flat. This latest one reminds me of "bridge jumpers" in horse racing. When the person describes it as a way of investing with low risk and small upside per trade, it reminds me of those who bet huge amounts of money on a favored horse to "show" (come in third) in a race. At most tracks the law is that the track has to pay at least 2.10 for each two dollar bet--some 2.20. So if you place a 50,000 dollar wager to show on the favorite--the parimutual odds go out the window but if the horse does indeed come in the top three finishers you collect a 5 or 10% return for your two minutes of work. By carefully picking prohibitive favorites, sometimes this works out well for a good period of time. And then of course there is that "exogenous" event, kirk talks about --your horse stumbles, bleeds, or simply didn't like what he had for breakfast and finishes out of the money and there goes the whole 50 grand.--hence the term "bridge jumper" derrived from the guy with the system's next most likely act.

Anytime it is too good to be true--it is. Its as true today as ever. There is little difference in "futures trading systems" and "timing models"--they are basically the same--promising upside and avoiding downside risk. They do not to this point exist. Pointing out the fallacy of the plan as the person is collecting the 55,000 on a winner falls on deaf ears and until this timing thing bites some bigtime, those doubting will be looked upon as ignorant by those doing. My bet is the groups will merge--and they won't be doing the timing thing when they do. But it does create some interes.

-- posted by Will_L

Top 32. Jun 17, 2000 8:57 AM

» wcwiii - Exogenous Events

Hi Kirk --

The real point that I was trying to make is that what is done professionally to market time is so far away from what individual investors have at their disposal, that a huge red flag should be seen by anyone who thinks that they can compete with these firms. However, these firms are successful.

You asked about how these firms can avoid negatives due to exogenous events...for the firm I referenced, it is due to the extremely short time scale with which computer decisions can be made. In a short enough of a time scale, the market is not efficient and firms can take advantage of this with a statistical advantage. Risk from some outside event simultaneous with their trade must is small. In fact, it is these firms (including arbitrage firms) that help make the market efficient. Even with a trading strategy, the firm also reduces transaction and tax costs with their own brokers and by being located off-shore.

I will see whether I can get specific performance numbers of the firm I'm speaking of before I give their name to quantify their past performance. The 29 of 30 months of positive returns was a couple of years ago when I visited that firm. They were featured in a set of books I recommend for the reading list: Market Wizards and New Market Wizards by Jack Schwager.

-- posted by wcwiii

Top 33. Jun 17, 2000 8:58 AM

» Rande - Phase I

Phase I

-- posted by Rande

Top 34. Jun 17, 2000 9:57 AM

» Will_L - WC

I am nearly sure of one thing while not knowing the company or the specifics of how the 'system' works and that is it does not perform as described for the age old reason--if it works as described and there is no risk--just by parlaying a small amount of their own money it will soon be a large sum--and why on earth would they be hawking their services to others? The same would be said for a newsletter that you sell for 15 bucks a month--if you had a "system" that was truly valuable-you would use it yourself and keep your mouth shut. It sounds like what you describe is pretty much a basic hedge fund and I would imagine that they charge the 20 percent of gains, like many hedge funds do. I can't believe anyone with 1m to invest would stand for a 20 percent upfront load for the privelege to try their system.

In any case the only reason you would sell or allow another to use a system is if it didn't work as described--if it did, you'd just get rich and not fool with other folks.

How much would you charge for a money machine or the advice to build your own? smile

-- posted by Will_L

Top 35. Jun 17, 2000 12:05 PM

» mathguy - Will_L - re. 4% rule

Will, I'm in agreement with your 6/13 post regarding the arbitrariness of the 4% rule (everyone knows this BB rule). I believe that BB bases this rule on a study (Statman, '87) that found that a portfolio with about 25 stocks you can reduce the systematic (nondiversifiable) risk to as low as you can get it. So, 25 stocks --> no more than 4% in any one stock. If you've read the study, you will find that it was based on looking at the average standard deviation of equally weighted portfolios that were made up of randomly selected stocks from the NYSE. Now, what rational investor builds a portfolio by randomly selecting stocks from just NYSE listed stocks?! I certainly don't. On this, BB hangs his hat for his 4% rule! I do admit, however, to a more casual investor, someone not willing to do the requisite due diligence work, the 4% rule is a nice conservative way to avoid undue risk (and possibly above-market returns). But then, I'd recommend such investors just stick with a total market index fund.

I seldom post, but your msg on the 4% rule struck a chord. Thanks for your informative posts here and formerly at the censored site.

-- posted by mathguy

Top 36. Jun 17, 2000 12:13 PM

» Kirk - The 4% rule.

The 4% rule....

is a good way to avoid getting blamed for a bad stock pick

AND

A good way to punish your portfolio return for having the skill to pick companies that are better than average.

Presently, I have 5 individual stocks that are over the 4% of equities level and 4 of them are over the 6% level. They are in similar industries so they also have a high correlation. I am well aware of the risk... but also I am enjoying the rewards as my original investment has been pulled out and then some of most of these.

Can you imagine if Gates sold off his MSFT stock every time it reached 10% of his portfolio? Unless he bought ORCL, INTEL or something, he'd probably have far less net worth. Of course, you have to live with the volitility... that is why it is recommended that most buy index funds... you get a decent "average" return and don't have to worry about getting shaken out when one of your stocks drops 40 or 50% (or even more, LRCX went from $12 to $33 before it fell to $3 and I bought more)

-- posted by Kirk

Top 37. Jun 17, 2000 7:11 PM

» Will_L - Mathguy

Enjoyed your post. I knew Bob had pulled a switch on that 4% thing--he used to use on a "cost basis" and a year or two ago he seemed to switch--must have read the stats you quoted. It truly does not make sense owning individual stocks if you are going to do it that way.

I myself have too many individual stocks and would have been better buying some more of the "winners" but with rare exception (MSFT recently), I never buy a stock I've already taken a position in and never at more than 1-2 % of my portfolio when I buy. On the other hand I seldom--with one exception that was a big mistake (AOL) sell a stock just because it went up much faster than I thought it should. If I bought "Tothemoon.com" tomorrow at 1% of my portfolio and it ran to 8% in a month, I think the last thing I would do is sell half of it and buy "alsorandot.com" with the proceeds, if the story remained the same.

Another thing in the favor of this strategy is Janus 20--a large cap fund with an awfully good long term record--there has got to be stocks in there over 4 %--and they seem to manage. smile Thanks for pointing out the research--when I start throwin darts I'll use it (and probably do better LOL)

-- posted by Will_L

Top 38. Jun 17, 2000 7:16 PM

» Mark_J - Will, I think that the Janus 20 fund may be closed to new invest

Will, I think that the Janus 20 fund may be closed to new investers; but, Tom Marsico, the former fund manager of the Janus 20, has his own fund family now. The Marsico Focus Fund is another fund that owns 20-30 stocks.

I believe Montgomery also has a Select Fund of some sort...

-- posted by Mark_J