Changes in Investment Content

September 16, 2013

        The last time I attempted to set up "paper portfolios" and track them was last March (2013). Over the six-month period since last March, one of these portfolios has risen 21.6%, and another is up 30%. A third portfolio, for which I tried to select the best of the best, is up 43.7% in six months. These portfolios were never intended to be "set and forget". I had planned to update them weekly or monthly, so these results are much better than I would have expected.
    I decided not to pursue updating these "paper portfolios" last March because the State of the Markets Daily Decision Portfolio was doing so well. It has a proven track record, and is so much easier to use than trying to create my own portfolios.
    But...
    There's a fundamental "gotcha" in following any stock investing strategy that significantly beats the market indices. Word will leak out, and then enough investors will jump on the bandwagon that the strategy will no longer work. A classic example of this is "The Dogs of the Dow". The Dogs-of-the-Dow strategy rests upon the observation many years ago that if you invested on the first of January in the five Dow stocks that had done the worst over the preceding year, your portfolio would do better than the overall Dow index during the coming year. It wasn't long before investors began to buy the "Dogs of the Dow" late in December to beat other investors who were counting on waiting until the first of January to invest. Pretty soon, other investors began investing early in December to get the jump on the late-December speculators. And it wasn't long after that before investors began saying, "What's special about the first of January? Why not buy the five worst-performing Dow stocks at any time and hold them until they outperform the other 25 Dow stocks?" Along the line, the "Dogs-of-the-Dow" strategy quit working, a victim of its own success.
    That's one potential problem that I see with the "State of the Markets" investing service. And sure enough, its track record for its Main Model in 2012, and so far in 2013, is lagging the S&P 500. Its performance record for its Hybrid Model is slightly ahead of the S&P 500 over this period, and the performance of its Aggressive Model is well ahead of the S&P 500 over this 1-year period (69% for the SoM Aggressive Portfolio vs. 34% for the S&P 500). In the meantime, David Moenning, the originator of the SoM program, is being invited to speak at various stock market trading conventions. I could certainly be wrong, but I would expect recognition for his, and his colleagues' SoM success to compromise his future performance.
    Another idea I had entertained for beating the market averages was to implement the American Association of Individual Investors' Stock Screen model portfolios. My principal reservation about the phenomenal results their stock screens were yielding was that it seemed to me that if their screens could do so well, why isn't everyone using them? Today, I read estimates by AAII investors that a top-flight individual investor might achieve a rate of return of 8%-12% a year.... a far cry from the 24% and 28% returns that their best stock screens deliver.
    In any case, stock market investing for retirement and wealth building should, I think, be a different ballgame from making money in a hurry. If these fast-money schemes can be made to work, they should grow a 10% or 20% allocation of one's overall retirement account sufficiently faster than investment of the other 80% or 90% in overall market index funds that it will soon grow larger than the more conservative "core" retirement investment without taking undue risk. (The tail will wag the dog.)
    The only scheme I can devise for implementing an experimental investment strategy is to try to keep the criteria for choice a secret. If the investment experiment is carried out on a small scale, it might not attract enough attention to draw in enough money to swamp the boat.

    Tomorrow, my wife will undergo knee replacement surgery, so I'm not sure how quickly able I'll be to follow up on these ideas in the next few days. But I'll try.