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I Hope You Can Apply This Investing Lesson Faster Than I Did

By Dr. Steve Sjuggerud
Monday, September 12, 2011

I don't know why I've been so hard-headed. I don't know why I've wanted to fight the truth.
 
Maybe it's because the truth seems too simple – too good to be true.
 
Maybe it's because I enjoy the challenge of trying to predict when the wind will change direction. But that's a fool's game, particularly after you learn what I'll share with you today.
 
Here's the truth: The stock market trends... It goes up. It goes down. And history shows you'd have beaten the market – with dramatically less risk – simply by sticking with the existing trend.
 
Sounds crazy, I know. I didn't want to believe it myself at first. It's not what I learned in school. But it's true. And it works. I'll show you how today.
 
Simply own stocks when they're going up. Get out when they're going down. Doing that has beaten the market... with less risk.
 
It's hard to believe this incredibly "dumb" strategy could perform so well, especially when just about any other strategy sounds more intelligent.
 
But take a look at this chart... It follows a simple system that I'll explain in a minute. In short, you want to own stocks when it's green. And you want to stand aside when it's red. 
 
When You Want to Own Stocks
 
And it's not just limited to the past 15 years...
 
Here are the results of this same system from 1973 through 2008, from an academic paper by my friend Mebane Faber. This simple system (called "Timing" in Meb's table below) has delivered higher returns and, more importantly, much lower volatility. That's the Holy Grail for investors:
 
 
S&P 500
Timing
Annualized Return
9.26%
10.60%
Volatility
15.55%
11.90%
Sharpe (6%)
0.21
0.39
Maximum Drawdown
-44.73%
-23.26%
 
So Meb's paper shows it's worked since the early 1970s... But what if we go further back?
 
The results are roughly the same, going all the way back to 1900... higher returns... with dramatically less volatility. Here are the system's returns from 1900 to 2008 (again from Meb's paper):
 
 
S&P 500
Timing
Annualized Return
9.21%
10.45%
Volatility
17.87%
12.01%
Sharpe (4%)
0.29
0.54
Maximum Drawdown
-83.66%
-50.31%
 
The system is so "dumb," you won't believe it.
 
You own stocks when the S&P 500 index is above its 10-month moving average. You sell when it's below it... and move to cash (short-term Treasurys). There's nothing magic about the 10-month average, by the way. You can use the eight-month, nine-month, 11-month... whatever. You're just looking for the trend.
 
(It's easy to calculate any of these, too. To get the 10-month average, add up the last 10 monthly closing prices of the S&P 500 and divide by 10.)
 
Academics want to find more complicated relationships than this one.
 
Me? I just want what works for you – my reader. For our True Wealth Systems service, we have tested just about every academic system under the sun, from the super-simple to the extremely complicated.
 
It's hard to believe, but this "dumb" system actually beats most systems. It beats the markets over most long-term time frames, with much less risk. And that makes it a Holy Grail system... simple or not.
 
I admit it. I'm guilty of trying to outsmart this little system... I'm guilty of jumping the gun, and jumping in before this system says to buy. Most of the time, this dumb system has been right... and my more brilliant reason for fighting it was brilliantly wrong.
 
I hope you can learn this investing lesson quicker than I did. It's taken me years to get this simple idea through my thick skull. I've tried to outsmart it for years, and it's done me no good...
 
Right now, this dumb system says stand aside. I promise I will let you know here in DailyWealth when it changes its tune...
 
But for now, the trend is down. Don't fight it.
 
Good investing,
 
Steve




Further Reading:

Get the details on more simple strategies inspired by Meb here:
 
Meb recently crunched the numbers on dividends and other cash payouts and found something amazing...
 
This system of Meb's has delivered the investment Holy Grail: higher returns, lower volatility, and much lower "drawdowns."

Market Notes


NEW HIGHS OF NOTE LAST WEEK
 
Gold... and thus,
Goldcorp (GG)... gold stock
Barrick Gold (ABX)... gold stock
Royal Gold (RGLD)... gold stock
New Gold (NGD)... gold stock
Yamana Gold (AUY)... gold stock
Eldorado Gold (EGO)... gold stock
Richmont Mines (RIC)... gold stock
Newmont Mining (NEM)... gold stock
Westport Innovations (WPRT)... natural gas engines
Coca-Cola (KO)... profiting with the "basics"

NEW LOWS OF NOTE LAST WEEK
 
First Solar (FSLR)... solar stocks stink, we warned you here
JA Solar Holdings (JASO)... and here
JinkoSolar Holding (JKS)... and here
Yingli Green Energy Holding (YGE)... solar energy
Trina Solar (TSL)... solar energy
Suntech Power Holdings (STP)... solar energy
Arcelor Mittal (MT)... world's largest steel company
Banco Santander (STD)... European bank
Deutsche Bank (DB)... European bank
Credit Suisse (CS)... European bank
Barclays (BCS)... European bank
Deutsche Bank (DB)... European bank
General Motors (GM)... another government success

premium teaser

Meb's simple timing system... now in a one-click fund...
 
One of Meb's safest, most powerful systems is also his simplest. And now there's an even easier way to put it to work...
 

In The Daily Crux



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