So much for bear market outperformance

52 responses so far ↓

• 1 A.J. // Nov 12, 2008 at 10:24 pm

  Mutual funds are very expensive and the performance of many funds leaves a great deal to be desired. Fund managers are often faced with a huge wave of redemptions when markets tank, thus forcing them to sell assets in a declining market to raise cash to meet them. They are thus forced to “sell low”, the exact opposite of what you should do. Your better off learning how to manage your own money. You will be much better off in the long run.

• 2 Four Pillars // Nov 12, 2008 at 10:30 pm

  I never get tired of this kind of stuff…

• 3 Dave // Nov 13, 2008 at 12:53 am

  Don’t all mutual funds have a little bit of cash in them? Wouldn’t that make them perform better than an investment with no cash component (like an ETF) in a bear market than if they had no cash at all?

• 4 Jordan Clark // Nov 13, 2008 at 6:39 am

  Are there any benchmarks of the performance of “financial advisors” who suggest stocks to buy and sell directly as apposed to fund managers performance?

• 5 CanadianInvestor // Nov 13, 2008 at 7:55 am

  Maybe the outperformance in the quarter is a reflection of forced selling and therefore much higher cash holdings as fund investors stampeded out with large net redemptions and not a reflection of fund manager smarts?

• 6 Dividend Growth Investor // Nov 13, 2008 at 10:46 am

  CdnInvestor,

  I think that what you are saying about the redemptions and forced selling is right on the money.

  Of course it’s interesting to see how many “active” managers outperformed the markets over the past 5 years. This year any “lazy” fund manager who just held a large portion in cash & equivalents would have outperformed the S&P 500.. But that would not have been a good strategy for the long term..

• 7 Canadian Capitalist // Nov 13, 2008 at 11:07 am

  A.J.: The vast majority of funds are just garbage because they hug the benchmark and charge high fees. Predictably, the results show that.

  Dave: Yes, mutual funds have some cash, which should help them in bear markets. I remember reading somewhere that cash levels tend to increase in bear markets but that doesn’t seem to have helped them much!

  Jordon: I think there are some studies that look at “best ideas” put out by sell-side analysts. It would be an interesting future topic.

  CI: I don’t see outperformance in these numbers. True, close to 60% of funds did better than the index but 40% didn’t. It would be interesting to see actual numbers — how much outperformance did active funds that beat the index deliver on average.

• 8 2op mike // Nov 13, 2008 at 11:37 am

  Saying that mutual funds cannot outperform a passive benchmark is like saying a swimmer is slower when they are dragging an anchor than when they are not. It is not much of a surprise and of course fees are the big anchor. But, to Jordan’s point, a review of the top pooled fund managers with lower fees shows a similar result. They generally appear to have less redemption issues but similar results. I believe the only way to beat the market is to overweight on a consistent basis and wait until your approach is “in favour” at some point in the business cycle. Then market like heck, bring all the suckers in on your recent performance and start preaching long term patience until the cycle comes back again!

• 9 Canadian Capitalist // Nov 13, 2008 at 11:56 am

  Mike: Fees are one reason. Another hidden reason is turnover. It is hard to estimate how much turnover costs investors, but it is also a significant contributor to underperformance.

• 10 2op mike // Nov 13, 2008 at 12:13 pm

  CC, you are correct again. In my work with private pooled managers we see costs of anywhere from 8bps to 25bps on trading costs. As markets pressures heat up the competition the lagging fund managers feel the need to perk up results and that causes them to suffer higher trade costs, higher risk profiles, and greater tax costs. Fund managers know they are in a beauty contest when it comes to marketing and that means stretching mandates and sometimes hyper trading before a significant period end.

• 11 EconStudent // Nov 13, 2008 at 1:09 pm

  This is my first post on CC.

  I know that indexing is the preferred way to invest on this website, but I am a fan of Professor Burton Malkiel and his rule of 50/50 in choosing an actively managed fund.

  Professor Malkiel suggests a good performing managed fund can be chosen with his 50/50 rule. Management fees should be less than 50 basis point (.5%) and stock turn over should be less than 50% in any given year.

  In the US, there are quite a few funds that qualify under Malkiel’s Rule like Vanguard Wellington, Dodge & Cox, etc. According to my understanding, those funds do perform well for their category. Also Vanguard Wellington is balanced fund, too and it can represent an entire portfolio, albeit a less conservative one.

  However, in Canada, I have yet to be able to find a managed fund for less .5% management fees. It is sad that Malkiel’s Rule doesn’t work here in Canada.

  I think the best thing for Canadian investor would be an appearance of a non-profit investment firm like Vanguard. After I graduate, I hope that I would be able to make a difference by joining or starting a non-profit investment firm in Canada. Alright, I know it sounds over the top, but I think it is possible.

• 12 NN // Nov 13, 2008 at 3:08 pm

  EconStudent – When you say that the funds chosen using the 50/50 rule ‘perform well for their category’, do you mean relative to the actively managed funds or relative to a comparable market benchmark?

  It follows logically that a fund with lower management fees and a long term perspective will have a better chance to outperform its peers, but if it lags the market the point remains moot.

• 13 2op mike // Nov 13, 2008 at 3:20 pm

  Econ, as a graduate of economics myself I am heartened to see that there is still room for those who dream large! The terms ” not for profit ” and investment are only ever seen together when you are reading about tax incented charitable donations.
  In Canada a fund with an MER below 50bps is either an index fund or maybe a bond fund. (OK folks prove me wrong).

• 14 Canadian Capitalist // Nov 13, 2008 at 6:49 pm

  Econstudent: I’ve mentioned in an earlier post that Prof. Malkiel suggests picking active funds with low expenses and low turnover. I don’t recall how much weight he suggested for both these criteria but I do think that 50% turnover is still too high. I don’t think 0.5% MER is practical for a mutual fund in Canada — only a handful of index funds are below that threshold. Fortunately, there are plenty of mutual funds that charge fees that are much lower than average.

  NN: Malkiel’s point was if an investor isn’t convinced of the merits of passive investing, she should pick a manager who would give her a shot at outperformance by charging low fees and sporting low turnover. Even then, active management only offers a shot at outperformance — I’m not sure what the odds are, but I can accept that it would be much better than for an average index-hugging fund.

  2op mike: You’re right. It’s hard to find an index fund with MER below 50 bps. But there are some good guys who are frank about the impact of cost and have funds with MERs that are much lower than average — they are few and far between but they are out there.

• 15 EconStudent // Nov 13, 2008 at 9:01 pm

  NN- Vanguard Wellington did as well as the index according to Morningstar. Dodge & Cox made some major mistakes recently. We like to compare funds to index benchmarks, but we must remember that indexing is not free. I think a better method would be comparing funds with an index that indexing costs factored in. I think Malkiel’s Rule is an alternative indexing and rebalancing and simpler for many people. By using Malkiel’s Rule, people won’t be sold into those sales pitches by those “financial advisers.”

  In order for one to fully accept indexing, one has to accept the efficient market hypothesis. Believing in the efficient market hypothesis requires a leap of faith initially if one hasn’t observed the stock market for a long time. Recent events have strengthened my faith and understanding in the efficient market hypothesis. Right now, I think indexing and rebalancing is suitable for me.

  CC- I have not read one of your earlier post on Professor Malkiel.

  Is it possible for Vanguard to come to Canada? I do not see why not, since Fidelity was from the US originally. Also Vanguard Canada can distribute its Canadian fund through discount brokerages to avoid sales people fees. I would love to work for Vanguard if they come to Canada. I am a bit worried about my employment prospects, since I will be graduating in two years. If you have any suggestions, that would be great.

• 16 Dale Rathgeber // Nov 13, 2008 at 9:59 pm

  Rather than trying to glean “The one True answer” to the passive vs active debate, why not acknowlege that both styles have their moments in the sun in different parts of the market cycle; moreover, there are some international and other narrow, but profitable market niches that are not well seved by index funds or ETFs. Why not use as many good but different arrows in your quiver, as you can find without a stubborn fixation on just one type of arrow?

• 17 Doug // Nov 14, 2008 at 12:10 am

  EconStudent, you are young and idealistic; I hope that idealism stays. If I remember correctly, Vanguard took a look at Canada, and decided against it. Interestingly enough, it came to the opposite conclusion regarding Australia. Anyway, with Vanguard ETFs, it’s much less of an issue than it used to be.

  On the Financial Webring Forum, I once made the statement that indexing was based on the efficient markets hypothesis. “Shakespeare” pointed out to me that I was wrong. He quoted a paper by William Sharpe, and I provide the link: http://www.stanford.edu/~wfsharpe/art/active/active.htm

• 18 A Lap Of The Blogs : WhereDoesAllMyMoneyGo.com // Nov 14, 2008 at 1:14 am

  [...] Capitalist examines the latest SPIVA scorecard (Standard and Poor’s Index Versus Active Scorecard) which found that 60% of actively managed Canadian equity mutual funds outperformed the index in Q3. [...]

• 19 NN // Nov 14, 2008 at 11:31 am

  EconStudent – 100% agreed, a comparison with the costs of indexing factored in is only fair, and logical. I do not have suggestions as to which career path you should follow, but would suggest what to avoid – anything involving predicting the oil price (or prediction of any kind)

  Doug – The article you site in fact confirms the efficient hypothesis with very simple arithmetic. It has also been shown elsewhere (by Taleb etc.) that the number of active managers who outperform the market is exactly the number you would probabilistically expect to do so, as is the number who outperform consistently such as Mr. Buffett. Attributing Warren Buffett’s success to chance may upset a lot of people, except perhaps Mr. Buffett himself, I suspect. Still, is outperforming the market by a systematic and consistent investment approach not disprove of the efficiency hypothesis? Indeed, in my humble opinion. But finding the Buffetts of this world before the fact remains the average investor’s problem, which makes indexing a very sensible consideration.

• 20 The Term Guy // Nov 14, 2008 at 12:29 pm

  Dale said:
  why not acknowlege that both styles have their moments in the sun in different parts of the market cycle;

  Because most of us aren’t looking for what works ‘at this point’. We’re looking for what has the greatest chance of high returns with the lowest downside….*over the long haul*. And that’s been shown time and time again to be index funds.

  In any event, calling something ‘different parts of the market cycle’ smells like market timing to me. I believe that strategy has about a 50% success rate .

  I’ve got a buddy in the US who moved about 30 million of his client’s money last year into cash. He looks like a genius now, he’s getting referrals out the wazoo. His problem now though is to pick the time to move back in. There’s your 50% .

  And I know someone that was talking about how he moved all his money into cash, gosh, 5-7 years ago? He’s been waiting a long time for the crash.

• 21 2op mike // Nov 14, 2008 at 3:59 pm

  Term Guy, I would say that timing the markets is a suckers game for most of us, however I am not sure how tough it was to time the significant drop we have seen in 2008. Stepping out of the way of an onrushing train just seems smart.I know of several managers who “time” the market based upon a disciplined analytical approach. They consistently under-perform the up side but they significantly over perform the down side. So for those of us who want low volatility and preservation of capital it is worth taking a shave in the good times.
  Beats losing your purchasing power to taxes, inflation and MER’s.
  Dale you sound like the perfect fit for a core & explore strategy!

• 22 Dale Rathgeber // Nov 14, 2008 at 5:48 pm

  I don’t believe in tryimg to “Time” the market in the sense of trying to pick tops and bottoms. But I do believe in seasonal investing; that is, staying out of the market in a money market fund each and every SEPT/OCT which is a good strategy 80% of the time, and which also avoids most of the really spectacular crashes. Otherwise I’m fully invested in both index and Actively managed equityfunds, for 3 month periods using a momentum strategy. From 2001-2008 my yearly return was 17%. This year it is minus 7. My webste is http://www.Octoberstrategy.com

• 23 Dale Rathgeber // Nov 14, 2008 at 6:07 pm

  Over all I believe in probability investing. I do not believe in market “timing” such as trying to pick tops and bottoms. I do believe in seasonal investing — staying out of the market eachand every Sep/Oct which works 80% of the time. Otherwise I believe in momentum and frequent re-balancing . From 2001 till 2008 my Rate of return has been17% per year. (This year -7%). My website is ww.octoberstrategy.com

• 24 Bill // Nov 14, 2008 at 9:07 pm

  Dale Rathgeber’s web site seems to make a lot of sense. Is anyone out there a subscriber?

• 25 A.J. // Nov 16, 2008 at 3:16 pm

  I still think your much better off in the long run to manage your own money then invest in mutual funds with their high costs and mediocre performance.

• 26 Four Pillars Investing // Nov 17, 2008 at 6:04 am

  [...] Canadian Capitalist says that recent numbers indicate that managed funds don’t do well in bear markets either. [...]

• 27 Canadian Capitalist // Nov 17, 2008 at 2:49 pm

  Dale: “why not acknowlege that both styles have their moments in the sun in different parts of the market cycle”

  I’m waiting for active management’s moment in the sun and even in a bear market, the record is hardly encouraging.

  What’s the historical performance of your strategy? What are the numbers after commissions and taxes (if held in a taxable account)? What is the effect of frequent rebalancing (presumably you are advising rebalancing into a different mutual fund). Your website says that this method was developed in the 1990s but you have numbers only since 2002. Without a long-term record, any claim of out performance is meaningless — it could simply be luck.

  Even if I accept that premise of a superior strategy, why should it work in the future? To me this is key because markets have a tendency to arbitrage away any strategy with a record of out performance. So, why should the October strategy avoid the fate of the January effect?

• 28 2op mike // Nov 17, 2008 at 3:09 pm

  Sometimes the focus on “beating the benchmark” is a distraction. Having a portfolio that is a beta of “1″ is too high for many people. I agree with Dale that there are merits in some active management, however I think it is predominantly a bear market strategy.
  If you check out the results at Venable Park (Juggling Dynamite) you can see that the performance is geared to bear markets. I like to look at what per cent I can get of the “up side” and then look at the same on the bear side. I haven’t seen a strategy that wins in both directions yet. I also look at the Sortino Ratio when I am assessing a manager’s performance.
  (http://en.wikipedia.org/wiki/Sortino_ratio)

• 29 Dale Rathgeber // Nov 18, 2008 at 10:22 pm

  Cdn Capitalist: We only have verified performance #s since we began publishing in 2002. 2002 -2007 = 17% per year .(2008 YTD = -7%). These #s assume no capital gains taxes –ie inside an RRSP. We don’t pay any trading costs by using deep discount brokers Such as TD Waterhouse, BMO Investorline, etc., and holding our equity funds for just over 90 days. There is no guarantee that any strategy will work in the future, but quite a bit of literature exists on the merits of both seasonal investing and momentum investing. Our strategy combines both.

• 30 Jordan Clark // Nov 18, 2008 at 10:40 pm

  @Dale Rathgeber

  Why don’t you back test the performance of your strategy further? 5 years is a pretty short period, statistically the odds are pretty high that it was simply random luck.

  If this is a successful strategy why don’t professional mutual fund managers do the same thing themselves?

  What research did you use to come up with this strategy in 2002?

• 31 Dale Rathgeber // Nov 19, 2008 at 2:09 am

  The October Strategy can’t be back tested because I can’t truthfully say which funds I would have chosen in the past using the disciplined aproach which I started using in 2001/2002. Prior to that, I was developing the strategy, in part through trial and error, and it was not as disciplined as it became in late 2001.

  Industry “professionals”/ advisors will never advocate for the October Strategy. Why? Because it creates an administrative paper nightmare for them, with our 100 day holding periods between bying and selling. (Your question about “mutual fund managers” was probably better directed to advisors.)

  Lastly, you asked about research. In 1998 Cemil Otar wrote an article in Canadian Money Saver back testing a Sept/Oct fallout strategy for mutual funds for 15 years which I quote on my website. ( I had previosly been falling out only in Oct). In 2000 Brooke Thackery wrote a Book called Time In; Time Out which caused me to refine my Fallout date to Sept 4-5, and my back-in date to Oct 27-28. Throughout the 90s and early 2000s many of the investment periodicals and the web touted the advantages of momentum investing, provided that the holding period was sufficiently short to take advantage of the continuation of the economic trends that led to the success of the candidate fund(s).

  Although the evidence prior to 2002 is anecdotal, I had a lot of success with various combinations of “falling out” and momentum going back to the Crash of Oct 87, which I missed. Our nearly 7 years of verified stats may be too short to be statistically convincing — ( I am not a statistician, and cannot knowlegably comment) — but my experience of using forerunners of the present strategy has convinced me to keep using it until it stops working. That day may well come within the next 10 years when good equity fund returns become harder to achieve with the Baby Boomers cashing out, and lessening the overall demand for equities — which may, in turn, mean that paying MERs can then, no longer be further justified. (In my view, they are now still tolerable as the price for diversificaton, and zero trading costs). When double digit returns are no longer readily available, 2% MERs and mutual funds may no longer be a sensible way to invest.

• 32 Bill // Nov 19, 2008 at 11:32 am

  I am going to subscribe to the Octoberstrategy, for a small percentage of my registered portfoio. Dale Rathgeber seems to be one smart guy.

• 33 Canadian Capitalist // Nov 19, 2008 at 12:14 pm

  Dale: If you or someone using your computer is going to be pretend to be “Bill” or someone else, here is a free tip — use a different computer! You lose all credibility when you lurk on a blog and praise yourself as “one smart guy”.

  What you are claiming is here is superiority of your strategy based on little more than “anecdotal evidence” of the superiority of seasonal effects and your fund-picking abilities (based on “momentum” factors) to sell subscriptions to a newsletter.

• 34 NN // Nov 19, 2008 at 1:26 pm

  Ouch, that last one must have hurt!

• 35 Jordan Clark // Nov 19, 2008 at 2:54 pm

  @CC

  HA! Were Dale & Bill on the same IP address??

• 36 2op mike // Nov 19, 2008 at 3:11 pm

  As I often state on my blog…..the issue with the industry is integrity, and there is no surprise when it comes up short!
  Good work CC, its no fun if opinions are not real!

• 37 Canadian Capitalist // Nov 19, 2008 at 4:23 pm

  Jordon: Yes, the IP address was the same. As a matter of policy, I don’t look at comment IP addresses but Dale and “Bill” commented one after the other and the WordPress comments page lists the IP address.

• 38 Jordan Clark // Nov 19, 2008 at 4:38 pm

  @CC

  Well his website does say he’s a lawyer, that explains his lack of ethics!

• 39 NN // Nov 19, 2008 at 5:30 pm

  C’mon guys, give Dale a break – its only wrong if you get caught…

  I would have liked to hear more from him, but I guess he might be scred away now. I would have to agree with CC that any ‘market beating’ formula gets arbitraged away pretty quick, but still, a different view is interesting.

• 40 Dale Rathgeber // Nov 19, 2008 at 6:33 pm

  Sorry CC. I have now learned that”Bill” is actually my wife who typed most of my comments– (I am a slow typist)– and was just “trying to help”. I’ll withdraw from the debate if you would like.

• 41 Canadian Capitalist // Nov 19, 2008 at 6:54 pm

  Dale: The anonymity afforded by the internet sometimes makes us do silly things. I’m no saint either and usually I quietly delete comments. I guess I got miffed because “Bill” suggested he was subscribing to your newsletter. I certainly wouldn’t blame your wife for thinking you are a smart guy!

  I still firmly believe that any seasonal effects will get arbitraged away and while there is some evidence that momentum persists in the short term, I’m not convinced that it can be exploited profitably.

• 42 Dale Rathgeber // Nov 19, 2008 at 7:34 pm

  Whay exactly do you mean by “arbitraged away”?

  And was the Statistics guy correct when he said that 6 years of good performance wasn’t statistically meaningful? Isuspect that he is wrong, but I’m not a statistician.

  You are corect that momentum only works for a short time — that is, the economic forces resposible for a fund’s recent out- performance can only be relied upon to continue for a short time. For that reason we hold our equity funds for 90 – 100 days — (this is the minimum holding period to avoid short-term fees). Also, our funds typically sparkle brightly in the first few weeks, and then slowly tarnish continuallyuntill the end of our holding period. let me also acknowlege that the October Strategy is not perfect. Of the 6 or 7 funds we choose, at least one typically turns out to be a dog. We also had one year –2004– when we underperformed at 5%. But overall, our 6 year average to the end of 2007 is 17% per year, and we missed this year’s crash!

• 43 2op mike // Nov 20, 2008 at 11:09 am

  I try to limit my gambling to casinos. To quote Warren Buffet “if you do not want to own it for 10 years then don’t own it for 10 minutes”.

  Bill…..back testing on market timing schemes always looks good. In fact it is a high cost, high trade volume, high maintenance strategy that works in every year except those years it does not work. Here is my suggestion, keep it to less than 10% of your investment portfolio and have fun with it. That way when it flops you are educated but not broke!

• 44 Dale Rathgeber // Nov 20, 2008 at 11:46 am

  We don’t try to “time the market”; that is, jump in when we think it will be hot, and jump out when we think it might fall. We are fully invested except for Sept/Oct. Our system is not “high fee”. If we use a discount broker like TD waterhouse or BMO online and hold our funds for 90 days, we pay ZERO in fees/comsiions.

• 45 2op mike // Nov 20, 2008 at 12:02 pm

  Dale, last time I checked MF’s have MER’s. Also a strategy of 100% equity investing creates a risk level that is completely unacceptable to anybody but either a billionnaire (so Warren can do it if he likes) or a gambler in my opinion.
  As to not market timing, you recommend people stay with “hot funds” for 100+ days then rebalance. Sounds like timing to me.

• 46 Canadian Capitalist // Nov 20, 2008 at 12:30 pm

  Dale: Like mike points out, some of the funds in your sample newsletter posted on your website have high MERs. You’ll have to first overcome the MER simply to break-even with a benchmark. Just because the MERs are hidden and an investor does not directly pay it, doesn’t mean the fees aren’t there.

  Also like mike points out, by holding some “hot” funds but not others, you are shifting asset allocations around in addition to your seasonal strategy. That’s text book market timing. This doesn’t mean that there will be periods when out performance is possible simply due to luck but I’ll be very surprised if your strategy turns out to be a winning one over the long term.

• 47 2op mike // Nov 20, 2008 at 12:41 pm

  Dale, a last comment. I think its great that people try different methods of investing. I believe most people need a core and explore to provide a stable base strategy that reflects the best economic thought. The Modern Portfolio Theory has several Nobel winners behind the approach so seems the best suited to the core strategy. As to the explore part, well I think that’s needed to give people the challenge/interest/thrill they often seek from hunting for alpha. Who knows, your approach might pay off for a small higher risk bet on the “explore” side. Suggesting that it be a core holding is a show of your confidence but not suitable for most in my view. Best of luck with it!

• 48 Dale Rathgeber // Nov 20, 2008 at 2:00 pm

  It seems to me that based on CC and Zop’s defintion of “market timing”, every investor who ever sells anything would be a “market timer”.

  Zop was of the view that a 100% equiy strategy is dangerous. I agree. I don’t recommend that anyone use the October Strategy (or equities) for 100% of their nest egg, especially as they near, or achieve retirement. See” The Risk of Losses; Get Some Ultra Safe investments” on my web-site.

  It is true that my strategy pays MERs as a necessary evil for diversification, and no trading costs. We do, however, try to pick lower cost funds and index funds whenever possible. ETFs are a possible new alternative for us.

  As to my 7 year lucky streak, would anyone accept the challenge of publically comparing returns on a go- forward basis? (I would have to be careful to comply with the Securities Commissions’ newsleter rules, but I am sure that I can find a way to do so).

  p.s. my secretary is now my typist.

• 49 EconStudent // Nov 20, 2008 at 3:17 pm

  Dale: I will take your challenge. I am going to start my financial blog in January 2009. I need to set up my TSFA account and do more research to formulate an “actively” rebalanced portfolio to compete with yours. I will contact you through The October Strategy website, once I have everything set up.

• 50 NN // Nov 20, 2008 at 3:53 pm

  EconStudent – I remeber a time when I had very similar philosophies to yours, believing that with enough knowledge I could somehow outsmart the market. I even started studying statistics to get the necessary exposure to time series analysis. Luckily, I stumbled on the empyrical evidence that such systems just doesn’t work in the long term, and that a consistently holding the market will get you ahead of 90% of investors. The statistics came in handy though, like being able to assure Dale that a 7-year outperformance is nothing special, and that the number of people who outperform the market is exactly the number probabilistically expected to do so. Value stocks outperform Growth stocks, except for 10-15 year periods where the trend is reversed etc. etc.

  Regarding your trading system though – I have had a look at the Shiller data mentioned previously on CC, and found that an allocation to (US) equities decreasing linearly from 100% at a PE of ~17.5 to 0% at a PE of ~35 would have beaten the market for the period from 1871 to present. I believe the observation to be borderline interesting, you might feel different.

• 51 Dale Rathgeber // Nov 20, 2008 at 6:06 pm

  Econ Student. Great! Can you leave your phone #on my email attched to my website and some convenient times to discuss by telephone a system to ensure that I don’t run afoul of the Securities Commissions’ Newsletter-Advisory rules. In fact, if your new blog could be interpreted as “advice” , you too will probably want to be careful. But I have some ideas about delayed reporting to the outside world–(but immediate confidential reporting to eachother)– which should keep us both onside.

• 52 Dale Rathgeber // Nov 22, 2008 at 1:43 pm

  CC and other indexers. One of the reasons for my recent interest in the blog world is to attempt to ascertain the objections of good-thinking investors to my momentum strategy. As far as I can tell, you and your frequent commentators are some of the best around. (You are also providing a valuable service to Do-it-yourselfers, and indeed all investors).

  I understand your statistical objection that my 7 years of good performance could merely be good luck. I’ll just have to live with that objection until more years pass.

  However, I would appreciate your further comments regarding your objection that my momentum philosophy is a form of “market timing”, and all the negativity that such a label connotes. Does it help clarify the debate by acknowledging that there is no one definition of “market timing”, and that we should really focuss on the extent/and or degree to which almost all investors engage in “market timing” — buying, and then selling. That is, the issue is really one of frequency — when we turn-over our account too often we are thought to be gambling, especially if we incurr trading costs/commissions. But if we don’t “excessively” turn-over our account — and don’t incurr excessive commissions — we are not “market timers” in the most extreme connotation, but are more likely to be thouhgt of as prudent investors. Indexers are at one end of the market-timing continuum –(most will sell something eventually)– and day traders are at the other end of the continuum.

  To use an everyday analogy — “market timing” could be considered akin to alcohol consumption. — Too much, and too frequent, can become a problem, but controlled “socially responsible” drinking is acceptable to most reasonable people, whether or not they partake. Indexers arre near tea-totallers; many day traders have problem; and October Strategists are somewhere in between. Thus, we are not just throwing labels around — “You’re a market timer / No I am not” –but are really debating the more meaningul concepts — frequency, costs, and probability.

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