Has Anyone Tried NoLoadFundX?

[samclem]

We always have some "gurus" who say "that doesn't work!" But they never bother to define exactly what doesn't work.

Here it is: Active management doesn't work (unless you own and run the underlying companies, ala Buffett). So, you can't say "they never" define it anymore.

And for some reason, very few people here seem to be interested in what does work, to what extent it seems to work, and how or why it might possibly work.

The press, the internet, the TV advertising--there are plenty of voices screaming that their approach to market timing, or momentum investing, or "technical" analysis does work. So you want this place to be like that, too? But I have to confess that the claims always interest me, just as the claims of the 200 MPG carburetor (suppressed by GM, don'tcha know!) or perpetual motion machines interest be. Except, unlike these devices, I can't close out hope entirely of a way to beat the market, so I'm even more interested in finding the hidden glitch.

So far, there's always been one--or more.

 

[TickTock]

I'm certainly interested. After all, if index investing a la Bogle puts you at the 80th percentile, there's still 20% above that left to be exploited.

And I frame it in the opposite direction: Given a strategy that will almost certainly land you in the 80% percentile, what evidence do you have that a particular strategy will do better than that?

Now, I am willing to be convinced of a different method, and I do think that indexers often tend to overstate their case (i.e, "No one can beat the market". Obviously, some do. However, the outperformers tend not to repeat, and those that do over long periods of time are less than would be predicted by chance. Therefore, prediciting in advance the next Buffet or Lynch is a slim proposition.)

So, the FUNDX newsletter is the best tracked by Hulbert over the past 30 years. Some fund has to be. What is the evidence that it will continue to do well, why haven't the mutual funds outperformed, and why can't we identify many other outperforming momentum funds?

 

[twaddle]

Here it is: Active management doesn't work (unless you own and run the underlying companies, ala Buffett). So, you can't say "they never" define it anymore.

That could be an interesting topic to explore. For passive investing to work, it must rely on active managers to make the market efficient.

And when you say "doesn't work" what you really mean is that most returns can be explained by four factors: beta, size, value, and ...

MOMENTUM

(FWIW, some managers do show evidence of alpha outside of these factors, but this is a thread about momentum, so I'll try to restrain myself. )

 

[cute fuzzy bunny]

Yep, god bless all those folks who think they can time the market or employ some sort of strategy to create superior returns.

Those are the folks who leave all the money on the table that I keep picking up. Its a zero sum game after all...

 

[twaddle]

Investing in stocks is a zero-sum game? Dude, you could become famous if you were to publish a proof of that one.

Zero-Sum Game

 

[cute fuzzy bunny]

Havent you already shot your wad, Twad? Constantly championing something you have very little money in and admit you are just experimenting with?

There are an awful lot of young investors that cant afford the same experiment.

Oh, thats right, its all about the big bad whateveritis that prevents open discussion of things that you really dont even think are important. You know, the stuff thats been beaten to death and shown to be relevant or not? But then the jury is still out on global warming for some people.

Zero sum game? Well, maybe not exactly...but money goes in and money comes out. As far as I know the feds are the only ones who can make money appear from thin air.

Patrick, if you're really interested...there is some rare air over that 80% mark that you can pick up by dialing in a little bit of this and that. Reits, emerging markets, energy, a little extra international, commodities, rare metals...all sorts of things. Just not too much of the red hot stuff, eh?

As someone who made their money preying on the emotional swings of people, let me tell you thats not somewhere you want to put a fair share of your money.

Short story. I played the nasdaq for an awful lot of years. Watched it, bet on it, bought cubes, calls and puts. Looked at all the charts and graphs and read all the expert material on a regular basis.

In late 99 I wanted to dump everything I had when it hit 4000. Stupid level. Made no sense. But I decided to wait until after the first of the year to defer the humongous capital gains hit. I had no idea, no expectation, no reasonable line of thinking whatsoever that it'd jump another 1000 points, another 25%. When I did dump it a few days into 2000, I similarly had no idea it'd drop 80% in just a few short months.

Momentum goes a lot higher, a lot faster, than any newsletter or formula will advise. And it drops a lot lower, even faster. With no notice, no warning, and it doesnt feel bad when you're broke at the end.

I retired at 39 and enjoy a very comfortable financial situation that will last through the end of my life and probably assure my son is also financially independent. A whole bunch of guys I worked with are bankrupt, divorced and probably will have to learn to enjoy working until they're in their 70's.

Different sides of the momentum curve.

Thing is, when I was working and had millions a year coming to me...I never learned to do what my peers did and just duck and cover. I still took all the risks, did things the best I could, and stuck my neck out regularly if I thought it'd matter. So I try to make sure everyone gets the benefit of what I've learned.

On the other hand, some folks have a bunch of money and just want to stir the pot to make their boring life a little more interesting. Whether you make a lot of money or not isnt that important to them.

 

[twaddle]

Constantly championing something you have very little money in and admit you are just experimenting with?

...

Oh, thats right, its all about the big bad whateveritis that prevents open discussion of things that you really dont even think are important.

A little hyperbole, but some truth there. I'm not constantly championing momentum strategies, but I would like to see them discussed rather than either having people chased off or having their ideas dismissed as "non-Bernstein" or whatever your appeal-to-authority argument is.

As I've said, I think there are several compelling investment ideas floating around. And I expect they will change with time.

Bogle says the market is efficient, so just buy the entire market. The basic bet is that half of the market participants get it right, and the other half get it wrong, so go with the average and you won't have to worry about being too wrong (except in 1929, 1968, 2000, Japan-1990, etc).

Bernstein basically parrots Fama & French. Choose your risks from their three factors, and use MPT to reduce volatility.

Then there's fundamental analysis, which can be boiled down to "predicting the future." And dividend investing, which is predicting the future based on dividends rather than earnings.

And then we have momentum, related to behavioral finance. I agree it's not where Joe Investor should start, but dammit, it seems too interesting to dismiss as "non-Bernstein."

 

[cute fuzzy bunny]

I could give a giant flaming hoot about bernstein. I've read plenty of materials from plenty of people on dozens of topic areas...many of them not at all related to investing. You cant predict mass behavioral ANYTHING with any sort of reliability. So I dismiss it because it cant and doesnt work.

Momentum investing adds a huge profile of risk to an investors portfolio. In some cases that investor is well rewarded, the newsletter works, or the fund performs. Those folks put up blogs, write marketing materials, and spam the world about their successes. The people on the other end of the spectrum who failed miserably and lost their shirts? We dont hear much about them.

Survivorship bias is strong in this area. But its simple gambling backed up with a bunch of not particularly well done study and analysis using a lot of backtesting that frankly wont repeat in the future in most cases.

We're in a prime period right now where the market indexes have had a roller coaster ride of ups and downs. For someone who wants to make $2000 a head selling a newsletter, or a fund company that wants to make 2% a year on their investors backs...one merely needs to float a hundred products, keep them internal, regularly shoot the stragglers, and then 7-8 years later crow about the handful that survived and sign up suckers with big eyes and open wallets.

Show me a newsletter that employs momentum strategies that investors have been able to buy for 20-25 years that beat the wilshire 5000 (including fees and taxes) to the extent that investors were well rewarded for accepting the extra risk and volatility.

Pretty sure there arent any. Even if you found 5 of each, that'd be survivorship bias that falls well below coin flipping odds.

Heres another tidbit. Most of the history being mined to show the relative success of momentum investing was during a period before the internet when individual and retail investing was largely done through professionals and old fashioned B&M brokerages with news and transactions being done in relatively slow motion compared to the way info and transactions flow today. One would think the behavior of seasoned and experienced pros would be far easier to predict and make money on than millions of joe sixpacks watching their bloomberg feeds and then either following or rejecting the BUY! SELL! impulses that can be executed by simply clicking a button. I would argue that this behavior would create faster, higher shifts of momentum, but decrease the predictability.

And gosh, look what we've had over the last 12 years since the advent of more and faster access to information and the ability of the average person to buy their own investments, get access to real estate, and even participate directly in formerly esoteric areas like commodities?

A market boom and crash. A real estate boom and crash. Commodities boom and crash. Financial services companies in disarray. Erratic economy. Erratic inflation.

Speed kills, especially when the drivers have a lot of access but little experience.

What you have in the momentum space are a handful of survivors, some of them with the money or influence to force momentum (ex: Soros) and the rest that were just lucky.

Lastly, nobody with good ideas or different ways of looking at things that come equipped with factual data and good opinions ever gets dismissed around here. There is almost no commonality in investing, style, holdings or strategies among the top 30 or so contributors here, and I'm quite sure a poll would show that this "bernstein belief" is rather moderate around here.

In fact I'm going to start one right now!

 

[twaddle]

Thanks for the thoughtful post, CFB.

I don't have any opinion on the FundX newsletter or any other newsletter that I haven't read.

It looks like anybody who is interested can sign up for two free copies, though. Good way to evaluate it, IMHO.

But I don't think the research of Dimson, Asness, and others can be dismissed as data mining any more than Fama & French can be dismissed as data mining.

You can argue that "it's different now" for just about anything, but the sanity checks that I use to differentiate between data mining and Real Evidence(TM) are:

1) Did it work across markets?
2) Did it work across timeframes?
3) Does it make "sense" within some sort of logical framework?

The answers to all three questions appear to be "yes" for both momentum and for Fama & French's three factors.

 

[cute fuzzy bunny]

If it makes you feel better, I dont follow anything Fama and French said either. I think all of that material is drawn from a different era of investing and may or may not apply to current or future results.

I'm afraid I came to different conclusions regarding my read of the momentum studies. That it worked sporadically and then only in particular instances. I saw nothing to say that there was any long term predictability or fair return offered for the risk entailed.

Meanwhile in other news, the early results of my poll seem to indicate that Bernstein has somewhere between no and medium influence on the users of this board. So you can rest easy that the Bernstein torch and pitchfork crowd dont seem to actually hold sway here.