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Old 01-30-2008, 04:08 PM   #41
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Thinking about this some more... wouldn't the strategy also underperform when there is a clear down trend?
Since it is a "relative" stategy it will still outperfom if the trend is strong. You will still lose money, but lose less than the market.
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Old 01-30-2008, 05:04 PM   #42
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Since it is a "relative" stategy it will still outperfom if the trend is strong. You will still lose money, but lose less than the market.
I think I understand, and you have had good luck with this method. But this situation occurs to me- the market is uptrending, you wind up in an outperforming fund, which is almost guaranteed by the nature of things to also have a higher than market beta.

Then the market turns. For while, before your method puts you into another fund, you are going down with a that higher beta, thus losing more than the market. Eventually you 'll be in a lower beta situation. Say the market reverses again- you are now going up with the lower beta fund, and therefore losing to the benchmark.

Isn't this just a a more complicated manifestation of the usual whipsaw problem with garden variety market timing in choppy, non-trending markets?

Also, a side question-do you ever wind up in funds that are negative beta? Like short, or ultra short funds?

Ha
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Old 01-30-2008, 07:28 PM   #43
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Well, that was my experience. If FUNDX is a reasonable proxy for this strategy, it seems to dip pretty steeply:

FUNDX: Basic Chart for FUND X UPGRADER FUND - Yahoo! Finance

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Old 01-30-2008, 07:28 PM   #44
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I think I understand, and you have had good luck with this method. But this situation occurs to me- the market is uptrending, you wind up in an outperforming fund, which is almost guaranteed by the tnature of things to also have a higher than market beta.
I believe this is true. Higher beta is a result of higher volatility than the tracked index. I want higher beta on the upside What is unclear is whether this higher beta is a result of higher risk or superior skill or luck, ie was Peter Lynch just lucky or really more skilled. The risk is not necessarily higher unless your paradigm requires that.

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Then the market turns. For while, before your method puts you into another fund, you are going down with a that higher beta, thus losing more than the market. Eventually you 'll be in a lower beta situation. Say the market reverses again- you are now going up with the lower beta fund, and therefore losing to the benchmark.
My experience is that this can be true. It is important to follow the mechanical rule and sell immediately when the momentum breaks. I have "saved" a $75 commission and lost $3,000 because a fund cratered when I held too long. Also, during market turning points you can get whipsawed until a new trend is established. Since the bias of the market trends up the gains tend to outpace the losses, but you will experience periods of underperformance.

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Isn't this just a a more complicated manifestation of the usual whipsaw problem with garden variety market timing in choppy, non-trending markets?
I don't believe so because I am always 100% invested in the market. As they say, time in the market is more important than timing the market. I am always fully invested, just trying to be in the best assets within each asset class.

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Also, a side question-do you ever wind up in funds that are negative beta? Like short, or ultra short funds?

Ha
No. I practice a long only strategy, which is another reason why it is different from traditional market timing. That is also why you will certainly experience losses in a bear market. The newsletter I follow was down by 14.2% in 2002. The Wilshire 5000 was down 20% so it was a relatively lower loss, but still a significant one. I believe that the upward bias in stock growth makes shorting a long term losers game and I do not attempt to time in that way.
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Old 01-30-2008, 07:47 PM   #45
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Well, that was my experience. If FUNDX is a reasonable proxy for this strategy, it seems to dip pretty steeply:

FUNDX: Basic Chart for FUND X UPGRADER FUND - Yahoo! Finance

-ERD50
Yes, I think this is relective of my own results:

YTD: -9.7%
1 year +15.10%
3 year +16.64%
5 year +19.05%
Beta 1.23
Standard Dev 11.99%

And remember this is after paying an additional 2.17% fee on top of the underlying mutual fund fees.

Traditional theory would say they should be underperforming by the fee, and yet they do not, and you can duplicate the strategy yourself without paying the fee. I do not understand it all, but I enjoy it.

Maybe their is some hidden risk, but I think being invested in multiple mutual funds across mulitple asset classes will lessen a blow out if it occurs.
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Old 01-30-2008, 08:07 PM   #46
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And remember this is after paying an additional 2.17% fee on top of the underlying mutual fund fees.

Traditional theory would say they should be underperforming by the fee, and yet they do not, and you can duplicate the strategy yourself without paying the fee. I do not understand it all, but I enjoy it.
Part of the 'traditional' argument is that if a strategy has to overcome that 2% fee, it therefore must be taking more risk. There is some basis for that (especially in fixed income funds), but if the strategy actually *is* providing superior results after fees, maybe that old 'traditional' view is just wrong in this case.

I'm not knocking the approach, it may have merit (which is why I did it for a while). But I am still on the skeptical side that it will provide much boost when you really match it to an index of similar volatility.

BTW, I agree with your earlier idea that we should just measure the negative side of volatility. I'm not aware of any measures like that in the financial world, but they probably exist. I seem to remember looking around for it, but that might have been pre-google days. Seems like just doing the math on the variances that are negative with respect to the target index would do it. You would need a lot of data points.

Maybe someone else is aware of some source of this data?

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Old 01-30-2008, 09:29 PM   #47
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The newsletter I follow was down by 14.2% in 2002.
Was the newsletter actually in operation in 2000-2002 or is that backtested using their methodology?
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Old 01-30-2008, 10:55 PM   #48
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Geez. I take a couple days off and some of you guys get so far away from the beaten path that we need tracker dogs.

You armchair quarterbacks & backseat drivers: if you read a book and a couple papers before deciding that an investing style is not for you, then that's great. If you conclude from your survey, however, that it doesn't work then you're not doing your research right. Take the positive assertion of the hypothesis, find someone who's made it work, and learn from them. If no such person exists then sure, that style probably doesn't work and your research is probably complete. However I suspect that you will find a person for whom that investing style works-- and you'll conclude that you'd never want to live in their manner.

As for momentum investing, it works at least as well as value investing. Of course it's a lot more effort, but here's some references to look at and draw your own conclusions.

BTW the "No Load FundX newsletter" is one of Hulbert's highest-ranked newsletters:
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In addition to his rankings of stock-oriented newsletters, Hulbert also ranks mutual fund letters, with his performance data going back a decade. At the top of the 10-year performance list in total return, and second in risk-adjusted performance, is Janet Brown, editor of No-Load FundX, which uses a momentum-based "upgrading" strategy, in which she moves into no-load funds that have shown the strongest performance over the preceding 1-, 3-, 6-, and 12-month periods.
So while MMND may not be inclined to demonstrate her ability to field-strip a portfolio's asset allocation & correlation while blindfolded, she at least chose to buy the advice of someone who's been able to do it for a while.

Anyway, back to momentum. You could start with Rono at FundAlarm.com who's been a momentum investor almost since he came back from his Marine tour in Vietnam. He's shown me a couple of others who have done well at it. One is Gary Smith, who wrote "How I Trade For A Living". Just reading the first chapter of Gary's recitation of his daily life, where's he's glued to CNBC and hypertrading his IRA mutual funds, will help you decide that the momentum investing routine is not for you. However sparse his life may have been at the time, Gary successfully traded his IRA through 2004. He built it up over a million and ER'd in his mid-50s. Gary is legendary for the clarity of his analysis of technical indicators by demonstrating that they work-- until they don't. Even Gary admits that he can't always tell when an indicator has stopped working. However when an indicator was working he'd frequently put over 90% of his portfolio in that fund and ride it until it trended out. In 2002-4 he made a pile in junk-fund mutual bonds, an achievement which accelerated his retirement.

Rono also recommends Pony Express Bob in this post from Google's cache (FundAlarm.com's board rolls its posts after two weeks). Bob essentially beat Bernstein's assets in the mid-90s, albeit with absolutely breathtaking volatility. Since Bob's board works best in a volatile market, it worked very well for those who had the guts to follow it through 2000-2003. But even I didn't have that level of guts.

Another good board for discussing momentum and technical indicators is FundVision.com. (Gary did a lot of his posting over there but may no longer be reading the board.) The admin, Salil, is a very active momentum trader and has a pretty busy discussion board. However he ruined his credibility by overemphasizing his successes and burying his failures. While I became disillusioned with his integrity, many of that board's members successfully rode his (paid subscription) indicators to beat their asset classes.

For an old-school look at momentum investing read Nicolas Darvas' "How I Made Two Million Dollars in the Stock Market". (This was published over 40 years ago when $2M was actually worth real money.) Darvas was literally dancing his way around the world in the 1950s and trading on momentum trends that he identified from reading stock tickers published in the International Herald Tribune, a method that he admits may not work for everyone.

I tried momentum for a couple stocks in 2001-2. One that worked gangbusters was 4KidsEntertainment (distributor of Pokémon videos & movies) over a four-day period. However much I read and tinkered, I was routinely whipsawed by technicals and sell-stop-losses because I kept insisting on walking away from the computer to go surfing live my life.

If you're willing to run a daytrader's account with Level II quotes, or if you happen to be able to afford a Bloomberg, then you can probably make momentum investing work for you.

Or, as Bernstein says, you could get a life.
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Old 01-31-2008, 04:12 AM   #49
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Nice summary Nords.

I'll admit that since I don't understand the underlying logic behind momentum investing I'm not anxious to try it. I guess humans are herd animals and we are spooked easily to change course

It appears that all of your examples were for investing in individual stocks. I can understand how that would work for individual stocks. Any studies other than Hulbert's why it works for mutual funds. It seems to me that momentum investing is helped by the financial press porn saying looked at Google, RIM go!. But there isn't a Cramer out there saying these mutual funds are hot hot hot buy more!
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Old 01-31-2008, 06:36 AM   #50
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Was the newsletter actually in operation in 2000-2002 or is that backtested using their methodology?
The newsletter was operational in 1999, so those are their actual results before taxes. They also do not include brokerage fees, so the realized return would be lower by however much you have to pay to execute the trades.

They now offer an institutional brokerage account with TD Ameritrade where you can trade all of the recommended funds for $99 per year per account with no minimum holding period.
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Old 01-31-2008, 06:40 AM   #51
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If you're willing to run a daytrader's account with Level II quotes, or if you happen to be able to afford a Bloomberg, then you can probably make momentum investing work for you.

Or, as Bernstein says, you could get a life.
Or you could pay $10 a month for one of the top rated mutual fund newsletters, spend an hour a month reading it and making the trades, and enjoy the best of both worlds.

The obsessive portfolio checking, CNBC watching, WSJ reading, ER board reading is not required it is just because I like it Yeah that's it
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Old 01-31-2008, 07:51 AM   #52
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BTW the "No Load FundX newsletter" is one of Hulbert's highest-ranked newsletters:
Nords, I'm not getting something (not unusual). There's that ref to Hulburt, and there's this performance summary, showing FUNDX to mostly underperform the index that yahoo chose (I don't know their index comparison methodology):

FUNDX: Basic Chart for FUND X UPGRADER FUND - Yahoo! Finance

click 'performance' on the sidebar and scroll down:

5, 3, 1 year, 3 month and last Bear AND Bull markets underperformed the index.

Hopefully, that doesn't mean that Hulberts best underperform the indexes! It think it means that their actual mutual fund does not match the performance of their newsletter? Hmmm, if so, why not?

And of course, individuals having some success with individual stocks could always be due to survivorship bias, or maybe they really are just good at it. But that makes it hard to tell if it is reproducible by a group like us. But if their fund looks good, my interest is piqued.

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Old 01-31-2008, 07:11 PM   #53
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Nords, I'm not getting something (not unusual). There's that ref to Hulburt, and there's this performance summary, showing FUNDX to mostly underperform the index that yahoo chose (I don't know their index comparison methodology):

FUNDX: Basic Chart for FUND X UPGRADER FUND - Yahoo! Finance

click 'performance' on the sidebar and scroll down:

5, 3, 1 year, 3 month and last Bear AND Bull markets underperformed the index.

Hopefully, that doesn't mean that Hulberts best underperform the indexes! It think it means that their actual mutual fund does not match the performance of their newsletter? Hmmm, if so, why not?

-ERD50

I think the real question is Why do they choose to compare this fund to the MSCI EFA which doesn't even have any US stocks. I would guess a US based fund holding positions in dozens of mutual funds would have a fairly large % of US stocks and since international has done better recently they would underperform.

I find that the ratings people have a hard time with these types of funds. For the one I follow, Morningstar lists it as a Mid Cap Growth fund and it is mediocre in the category. Lipper lists it as a Multi Cap Core and it is in the top 6% of that category.

I imagine that Morningstar puts the underlying funds in an xray and since it tilts toward Mid Cap that is how they categorize it. This is not really fair since there is a large slug of international, small cap and large cap. It is not accurate to say "on average" it is midcap

Lipper has the multi cap category, which is more accurate but not necessarily more useful.

I guess the only truly accurate way to do it would be to take the actual weighted allocations and multiply by the relevant index and sum the total. This would be the unique comparison index for this fund. Then you could see if it was truly outperforming in its investment choices or just a different form of asset allocation.

Or you could be like me and not worry too much about it. It has certainly outperformed the index mix of 80% S&P and 20% EFA that I probably would have been in anyhow.
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Old 01-31-2008, 08:16 PM   #54
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I think the real question is Why do they choose to compare this fund to the MSCI EFA which doesn't even have any US stocks.

...

I find that the ratings people have a hard time with these types of funds. For the one I follow, Morningstar lists it as a Mid Cap Growth fund and it is mediocre in the category.

Or you could be like me and not worry too much about it. It has certainly outperformed the index mix of 80% S&P and 20% EFA that I probably would have been in anyhow.
I agree that just looking at holdings, MSCI EFA doesn't make much sense as a comparison. I'm guessing their computers did a match to volatility. Looking at dips and peaks, MCSI EFA and FUNDX look like twins separated at birth:

Quotes for FUNDX - Yahoo! Finance

In every time period I chose, FUNDX underperformed both EFA and IWR (Russell Mid Cap). And remember that those charts don't include dividends, which are currently 2.53% for EFA, 1.37% for IWR, and 1.25% for FUNDX.

If you go to yahoo's 'historic prices' they adjust for dividends. Going for max common time frame (JUN 19,2002 to today): EFA up 2.13x; IWR up 1.84x, and third is FUNDX at 1.59x.

FUNDX does outperform S&P500, but with considerably more volatility. An 80% S&P and 20% EFA comparison really isn't 'fair/useful' either.

Also, for taxable accounts, Turnover for EFA is just 5%, IWR 19% and FUNDX is 112%.

Just by eye, that IWR looks considerably *less* volatile than FUNDX, even while outperforming it. So while this momentum strategy doesn't look bad or crazy (like so many 'strategies'), I'm having trouble seeing why one would not just go with an index of comparable historic volatility, or blend a few of them to tailor the risk/reward, and maybe even get a touch of non-correlation to boot? I guess it just goes back to my earlier point - on a 'risk adjusted' basis, is momentum really so great?

I'm just not seeing the attraction? -ERD50
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Old 01-31-2008, 08:23 PM   #55
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I guess it just goes back to my earlier point - on a 'risk adjusted' basis, is momentum really so great?
Did you read the paper I linked to earlier? The answer is a qualified "yes."

Momentum strategies had excess returns even after accounting for the traditional three factors of risk: beta, size, and value.
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Old 01-31-2008, 08:43 PM   #56
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Did you read the paper I linked to earlier? The answer is a qualified "yes."

Momentum strategies had excess returns even after accounting for the traditional three factors of risk: beta, size, and value.
This paper?

SSRN-Are Momentum Profits Robust to Trading Costs? by Robert Korajczyk, Ronnie Sadka

Skimmed it - for me the proof of the pudding is in the tasting. If the answer is a qualified "yes.", then why doesn't FUNDX achieve excess returns on a risk adjusted basis?

Should be a cake-walk.

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Old 01-31-2008, 08:49 PM   #57
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Let me put that another way - I would not be surprised that a momentum strategy could provide superior returns. But as a practical matter, how can I profit from this?

If I trade individual stocks, my choices and timing can wipe out or amplify any real benefit. A fund manager should be able to this on a large sample-size scale. So maybe FUNDX isn't doing it well. Somebody must? Who?

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Old 01-31-2008, 10:30 PM   #58
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When I first got started with managing my investments, I used the Doug Fabian plan. Basically you buy when the equity crosses above it's 40 week moving average, and sell when the price goes below the 40WAR. The claim was that it gave a little better results than buy and hold with less downside risk. Over most periods in history it looks great when you backtest it.

The devil is in the details though... if you end up getting a sideways market you'll get "whipsawed" in and out repeatedly, and the transaction costs will eat you alive (if the human costs of staying glued to the ticker don't get you).

The other issue is that if you don't buy or sell at exactly the right points because you are out living your life instead of glued to the trading system, it always works out against you. I suppose these days it wouldn't be too hard to set up automated trading systems to burn through your money make the trades for you, but where's the fun in that?
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Old 01-31-2008, 10:43 PM   #59
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Let me put that another way - I would not be surprised that a momentum strategy could provide superior returns. But as a practical matter, how can I profit from this?

If I trade individual stocks, my choices and timing can wipe out or amplify any real benefit. A fund manager should be able to this on a large sample-size scale. So maybe FUNDX isn't doing it well. Somebody must? Who?
Well, I think there are several different questions here.

1) Is FUNDX an "uneducated" choice? Is it for "high-schoolers", while the dominant approaches espoused here are for "MIT'ers?" I think the answer is obviously "no."

2) Do momentum strategies work? I think the academic answer is clearly "yes."

3) Do all momentum strategies work all the time? I doubt it.

Try reading at least part of the paper I ref'd. It gives both a nice overview and a nice summary. For example, most of the excess returns from momentum apparently come from shorting. So a fund that only goes long isn't going to exploit the full effect.
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Old 02-01-2008, 06:39 AM   #60
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1) Nobody made any grade level claims for any particular approaches.

Help me out here: what is the dominant approach espoused here again? You never did answer that question. There is probably nearly zero overlap between the investing strategies and holdings of myself, Nords, Rich, Martha, Brewer, Unclemick, Haha and others. So how do we all get together to formulate this dominant approach and espouse it when none of us are marching to the same tune?

I think what we're collectively in disagreement with are "get rich quick" schemes, approaches that offer far more risk than they let on to, and the people trying to push those schemes.

2) I think the academic answer is "sometimes, under some conditions, with a level of risk easily equaling the reward, since this is still a 'no free lunch' world".

3) No.

Addendum: so basically it is only by taking on a much higher risk strategy involving shorting (where you can lose more than everything and end up owing money) that there is a benefit created? Obviously a risk level some people might choose to adopt, but seems tough to see why a well financed early retiree would find this a good plan.
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