Never Lose Money Investment Strategy

[cjam]

2006 - 2007 April run closed out at a 9.3% gain

[cjam]

The March 2006 run closed out with an overall gain of just over 10%.

[cjam]

Web pages updated for 1st March purchase.

The overall equity exposure indicator is still showing 100% despite the recent China/Greenspan issues pushing market prices downwards over the last few days.

Only a further decline of some 10% from current levels would we then start to see a reduction in holdings.

[cjam]

Web pages have been updated to reflect the the addition of the latest February run.

[cjam]

I've just spent the last couple of days working out the performance of the No Lose alone and No Lose combined with High Yield holdings with the 10% stop approach (No Lose borrows from the 5% high yields income, repaying back at convienient times).

Compared to the SPX which has effectively moved sideways over the 7 year period, producing a dividend income only benefit of some 1.5% to 2% p.a. average, the No Lose alone approach generated 11% p.a. whilst the blend produced 13% p.a.

Personally my alpha's (stock selectivity) has been rather productive, having added a further 3% p.a. average benefit - a combined 14% p.a. total based on No Lose alone.

Had I used the blend then that figure would have been around 16%.

Put into context, an SPX investment would have gained around 10% in total across the 7 years, whilst we're up around 150%.

The SPX has a considerable amount of catching up to do, but the nature of the strategy makes it extremely difficult to do so ;>)

[cjam]

An interesting option is available under the 50:50 based No Lose and High Yield blend.

Assuming the High Yield achieves a 5% income, then that income can be used to support the No Lose half allowing an increase of the No Lose's stop from 5% to 10%. In effect the No Lose half borrows 5% each year from the High Yield half.

For reference the figures are :-

Using intra-day values for the FT100 from its inception in April 1984 up to late 2006 :

5% stop : 5459 test days, 2479 hit days, 45.41% hit rate, 17.95% mean gain/hit, 56.79 mean time (days) to failure.

10% stop : 5459 test days, 3644 hit days, 66.75% hit rate, 16.14% mean gain/hit, 81.71 mean time (days) to failure.

17.95% + 5% = 22.95% or 1.2295 gain factor per hit (for the 5% based stop)
16.14% + 10% = 1.2614 gain factor per hit (for the 10% based stop)

5459th root of ( 1.2295 power 2479 ) = 9.84% (5% stop case)
5459th root of ( 1.2614 power 3644 ) = 16.767% (10% stop case)

Repaying the 5% borrowed from the High Yield side reduces that 16.767% down to 11.767%, but that is still nearly 2% more p.a. average than that of the 5% No Lose's 9.84% average.

The income from having used the high yield dividends to support No Lose stops of 10%s would be lost during years when the No Lose failed (zero income left), whilst in the 5% case at least 2.5% or so income would be available even in poor years. The 2% p.a. additional average benefit for the No Lose component might however justify this, especially when you further consider the benefit that with a higher hit rate trading would be less (more rolling monthly positions would have a higher proportion of roll-overs e.g. in 44.6% of cases positions would still not have been stopped after two years whilst for the 5% stop based approach that figure is only 20%).

More frequent benefit (hits), lower costs, more overall benefit (rewards), but some years with zero overall income - seems reasonable.

Considering that over the same period the FT's total benefit was around 13% p.a. with nearly a 12% benefit from No Lose when using the Index as the holding more likely that would be more when High Yield type stock holding were used for the No Lose constitute set instead, and as high yield stocks generally outpace the market average this modified blend would appear to have a reasonable chance of at least generally pacing the market average whilst having only half or less of the markets downside risk. Periodic bear periods therefore would generally result in the blend pulling ahead due to the lower downside motion of the blend and thereafter possibly maintaining the gap.

[cjam]

You will note that the web pages now include reference to the use of High Yielding stock holdings, bought on a buy and hold basis using 50% of available funds.

Whilst previously we solely utilised No Lose alone in some years that meant no income benefits at all.

As of 2002/3 I've moved to being entirely dependant upon investments as my sole source of income, having decided to drop out of the rat-race upon entered my two-score plus years.

Accordingly holding half of funds in a diverse range of long term high yielding stock holdings ensures that some income is available in each year.

Effectively we now run a blend of 50% in No-Lose and 50% in high yielding stocks. Combined we therefore we have half the downside risk of the market (often less due to the greater downside resilience that high yielders provide), the availability of substantial amounts of cash if/when market prices drop significantly through the protection that No Lose provides, whilst generally enjoying total investment benefits that compare (or are sometimes better) than that of the market average.

We personally view the High Yield holdings as an effective Bond holding, but generally with better overall longer term benefits.

The blend also offers some tax advantages for us UK based investors according to current capital gains and dividend income taxation liabilities and allowances.

[cjam]

Thanks to those kind people who administer Investors Hub, we're getting the web pages and adminstrative controls back up and running correctly again.

The associated No Lose web pages are being reconstructed under a new account. Whilst far from 100% ready, the basic form is there, but it is being worked upon when time permits, so they're rather dynamic at present.

Please bear with us during this revamp of the investment warehouse period.


A belated best wishes for the New Year to all.

[cml55uk]

Thought I'd post an update as its been so quiet for so long on the board.

The original web pages are lost to the internet void as is the moderators account. But despite this the No Lose concept and practical aspect lives on.

I thought I'd post a summary of the more recent years performance - the last 4 years.

In summary the UK's FT100 is up from the Jan 2003 lows of 3464 to the current 6200 levels of November 2006, around 20% p.a. average when 4% or so dividends are included.

No Lose? Well not as good, but still a respectable 16% p.a. average gain.

Taking the Jan 2000 to Jan 2003 period, whilst the No Lose did as it said - didn't lose, ending effectively with £100 for every £100 invested in Jan 2003, a buy and hold approach over the same period saw a decline of £100 down to £64 including dividends. The subsequent 20% p.a. that buy and hold has achieved has therefore lifted that £64 back to a positive gain of 34%, £134 over the Jan 2000 to Nov 2006 period, or around 4.8% p.a.

The No Lose in contrast, is up at £181 levels, 81% up from Jan 2000, or 10.4% p.a.

So the buy and hold has to still catch up a surplus 35% to get to level pegging with No Lose, so even at the current 4% p.a. bettering of No Lose its going to take 8 years. And with prices generally starting to look a little on the high side, I'd doubt whether the buy and hold will sustain the level of gains seen over the last couple of years.

Should another correction or decline occur, well again the gap will widen in No Lose's favour.

Pushed as to whether by 2010 which will be the decades winner, and I'd bet on No Lose - but then again I don't gamble - as I don't like losing.

[lostcowboy]

Hi Cjam, got to thinking of you today, so I went and checked your web site. I see from the newsletter that the site was down for a while. Hope you did not lose any web pages. I also saw that you have moved to here for your message board. Well done. About this 'virtual' fund value that you are writing about. It seems a lot like, Value Averaging by Edleson from his book (Value Averaging). Only he doesn't use the 5% stop loss. Speaking of your no loss system how has it been doing of late? Have you thought of adding the 200 day MA to the system. I have been thinking of the 200 day MA of late. My sisters mutual fund has finally gone above the 200 day MA, not sure how well this would work with individual stocks though. You may want to try this. If the stock price is below the 200 day MA do not invest that month, once the stock price goes above the 200 day MA invest all the money of the months you did not invest. Example if the stock stayed below the 200 day MA for three months, when it went above you would invest all three months at what should be close to the low of the year. In a effort to get closer to the low have you tried long term Stochastic Oscillators? http://stockcharts.com/education/What/IndicatorAnalysis/indic_stochasticOscillator.html They have a article here. http://stockcharts.com/education/What/TradingStrategies/lastStochastic.html on the 39 day Oscillator. But I have been thinking of using the 52 week Hi and Low for a Oscillator. Here is a link to the chart. http://stockcharts.com/def/servlet/SC.web?c=PNOPX,uu[m,a]daclyyay[df][pb50!b200][vc60][iLh260,1]&....

Here is the chart.


Have you checked out Ken's board yet? http://www.investorshub.com/boards/board.asp?board_id=1616

[cjam]

I've tried to outline how much should be invested each month as a proportion of the total fund value at any time in the FAQ on the web site.

Perhaps a relatively simple explanation here to clarify.

Two funds both average 10% each year over three years with the first achieving this by 0%, 0% 30% and the second 10%, 10%, 10% in each of the years.

The first has an end gain of 30% whereas the latter has a end gain of 33.1%. The benefits of compounding have produced a 3.1% higher return over the three years.

If, as in the case of our strategy, returns tend to be along the lines of the former rather than being more consistent year after year, we can use a 'virtual' fund value.

Let's say we have 100 to invest and we anticipate a 10% gain average. After the first year we increase our virtual fund value to 110 even though a 0% gain was achieved. Again in year 2 we increase the virtual fund to 121 representing another 10% increase, even though the fund gained 0% in that year. In the third year a 30% gain arises - producing a profit over the three years of 30% on 121 = 36.3%. In contrast the regular 10% each year gain fund would stand at a profit of 33.1%. We've an additional 3.2% more than the more regular fund. However we would have leveraged (borrowed) a total of 31 over the three years. At a cost of say 7% to make such borrowings, that's a 2.17, bring that gap down from 3.2% to 1.03%. Despite less regular returns but comparable average returns, we've out-performed the regular less volatile returns across the three years.

Providing our virtual fund growth rate is set at around the longer term actual growth rates achieved, then even though we have less regularity of returns on a year by year basis we can still achieve around comparable actual gains overall.

Typical of me, so clear in my own mind yet find it so difficult to simply describe to others. Perhaps a volunteer to re-write the web site content would be of benefit - any takers?

Regards.

[cjam]

Take profit approach considered.

New web page added to http://www.cjam.pwp.blueyonder.co.uk

[cjam]

Pre-warning of likely May's purchase.

Newsletter updated :-

http://www.cjam.pwp.blueyonder.co.uk

[cjam]

LLOY up 30%, but SARS? - BOOT or switch?

Newsletter updated at http://www.cjam.pwp.blueyonder.co.uk

[cjam]

Site content update

http://www.cjam.pwp.blueyonder.co.uk

[cjam]

Latest Newsletter update at http://www.cjam.pwp.blueyonder.co.uk

[cjam]

Seriously enhancing gains -

might be achieved with the latest extension to the strategy.

For relatively minor modification, significant additonal benefit could easily arise.

See the new 'Enhancements' web page at

http://www.cjam.pwp.blueyonder.co.uk

[cjam]

The latest newsletter is now available

http://www.cjam.pwp.blueyonder.co.uk

[cjam]

Latest purchase

For this month we've gone for LLOY even though its lacking the usual relative strength we like to see. Just seems so attractive with greater upside potential than downside risk.

In at 323 with stop loss at 307 in keeping with the usual no-lose investment strategy.

[cjam]

Human psychology is to lose at investing.

You have to go against your natural instincts to win in equities. Buy low, sell high, buy from the scared, sell to the greedy.

Read more in our updated newsletter at http://www.cjam.pwp.blueyonder.co.uk

[cjam]

You can't emulate Warren Buffett.

It's just not possible to fully do so. Only in part.

See the latest updated newsletter at http://www.cjam.pwp.blueyonder.co.uk

[cjam]

12.5% outperformance so far this calendar year.

That's what we're on target for given the FT100 falling from year start levels of 4000 down to the current 3500 levels.

But as the latest copy of the newsletter (http://www.cjam.pwp.blueyonder.co.uk/html/newsletter.html) indicates, not something to feel too boastful about.

Onwards and (hopefully sooner rather than later) upwards.

[cjam]

Disposal

HBOS closed out this morning for a slightly more than 5% loss due to a rather rapid 4% decline.

Leaves us with just one open play.

The Index is down some 15% since the start of the year and our downside risk prevention continues to ensure that we'll at least end the year with what we started the year. So this sustained no-gains run is at least outperforming the Index.

It would be nice to have a few runs lasting longer than just a month, but this is only to be expected in a sustained Bear phase. Conversely when a Bull phase re-occurs, we'll more than likely have an above average number of winning runs. It's just the nature of the beast.

[cjam]

Newsletter updated at http://www.cjam.pwp.blueyonder.co.uk/html/newsletter.html

[cjam]

I've added details of a concentrated approach for use with the CJAM strategy that may be of interest.

The 'Current' web page has also been updated to actually identify the current holdings and watchlist selections.

[cjam]

Long Term Buy and Hold ????

Newsletter updated at http://www.cjam.pwp.blueyonder.co.uk

Regards.

[cjam]

Web site changes.

I've changed the web site content so as to strip out the Standard and Index Tracker+ coverage. Judging by the number of Emails, having several strategies based on the Core stratagy only confused matters. The presentation of just the Core should reduce the confusion.

In practice, the CJAM strategy is a risk-free (year on year) cash beating strategy (over longer term). In beating cash then many other forms of investment strategy can adopt that to leverage returns.

As an example, if it typically costs base-interest-rate (cash rate) in time-value to invest in an Index/Stock, then if the main fund is invested in the CJAM core strategy and derivatives are used to buy whatever actual investment you target, then generally there is a surplus above cash-base-rate to compliment that alternative investment. So I might go long on the UK FT100 Index by borrowing to do so, perhaps via a spread-bet. For that Long position generally the cost is equivalent to cash rate for the period of that effective loan of the Index Stock. If the same amount of funds that are exposed in that Index stock are deposited into the CJAM strategy and that in turn earns say 3% above cash rates, then that 3% compliments any gains (or losses) that the Index Stock make. Beating the Index is achieved not through stock selection, but by simply beating cash (which generally is alot simpler and more consistent than attempting to identify outperforming stock candidates).

Fundamentally the Core CJAM strategy is key and underlined both the Standard and Index Tracker+ strategies, leaving just detailing of the Core strategy on the web pages should reduce the complexity of learning and free the mind to apply its principle to other investment opportunities if so desired.

.

[cjam]

Newsletter updated at http://www.cjam.pwp.blueyonder.co.uk

Also, some modifications to the existing content plus addition of a new quick-start web page.

[cjam]

For reference, I've added a table of all of the returns on the Dow since 1931 to 2002 (available via the link off the top of the Reference web page) http://www.cjam.pwp.blueyonder.co.uk/assets/images/dow31.htm

It's not 100% up to-date, but does show each months percentage gain (or stop) on a month by month basis.

At 300KB in size, it may take a while to download if you access the internet via a modem.

[cjam]

Stock analysis?

It has often crossed my mind, especially when reading through the many postings on the likes of the TMF message boards discussing stock A or stock B, just how much faith the smaller private investors tend to have in their own stock selection ability.

Let's face it, where money's concerned, there are many out there who are probably prepared to cross the boundary. Football matches, horse racing or any other form of gambling have regular bribes or fixes associated with them. If there's a way to potentially make some quick bucks, there will be someone out there trying to do so.

The stock market possibly offers one of the best grounds for such rigging or pre-knowledge of announcements. Thousands of companies with many in each who are in potentially priviledged positions. Yes insider trading is illegal, but can we seriously expect that it is not widely practiced with so much potential money in it?

There are tens of thousands employed in the financial sector, billions of pounds worth of resources to hand, as an individual you're potentially at the bottom of the stack competing against the big-guns who in turn all compete against each other in their attempts to get a bigger slice of the pie.

On that assumption, surely most if not all stocks are priced at a fair value according to all known and anticipated influencing events. If therefore a winner is selected, perhaps it is more a result of luck arising out of unknown future events than that of any particular analysis skill. We've all heard of how throwing darts at the financial pages can be as, if not more rewarding than that of professional stock picking, so why would any small investor spend hour upon hour analysing in trying to out-wit the big-money. The time and effort just wouldn't seem justifiable. Someone who spends perhaps 20 hours per week to possibly boost their funds performance by a couple of percentage points over the year on a $100,000 fund might achieve a $2000 benefit for 1000 hours of effort. $2/hour - no thanks, living life is alot more dear.

Having said that, I do believe that stock trading is addictive. You can get a buzz out of the process, more-so when you're on a winner. At times it can race even the hardest of hearts in an often dull restricted life without even having to leave a chair. For many it is a hobby, comparable to supporting your local football team, the joy of winning, the sorrow of loss, a talking point. Primary however should be to not let that hobby cost you too much. Yes enjoy it, but protect yourself from the potential financial downside risks so that your hobby doesn't become a financial strain that impacts upon the rest of your life.

.

[cjam]

Hi Ken.

Sorry, had a rushed day today so a somewhat haste reply.

I'm of the opinion that either dividing your fund by 12 and running with that over the next 12 monthly plays, or calculating 1/12th of the total fund value each month and using that will over time have comparable returns. In my opinion therefore whichever is simplest for you personally therefore is the better choice to go with.

The figures I used in the graphs are percentage based (product), so that is comparable to using the current value at that point in time divided by 12 each month.

For my probability calculations, yes it is like coin-flip counting.

I haven't tried to find the best-fit, so 10%, 15% etc type levels might provide better returns or a better indicator.

For the calculation you mention, I based it upon :-

If 38% of cases are win runs, then if we assume they win 5% (being conservative and matching the level to the same as the losing run), then of those 38%, we might expect 38% of those to go on to win by 10%, and in turn 38% of those go on to win by 15% ... etc This, as you indicate, is probably not the best approach, but should give a reasonably conservative estimate of potentials. The inaccuracy probably shows in that the 5% gain and 10% gain figures both being 15% is unrealistic as you say. Probably best to just forget the content of that posting if I were you.

The easiest way is to use back-testing as an indicator of possible future profits. If you take the Dow over the last 71 odd years, then there were :-

855 total monthly start dates for which I have daily high, low, open data.

310 (36.25% of all plays) went the full year from that start date without ever falling 5% below the starting value (based on using intra-day Index values (lowest lows), so the figures should be reasonably accurate). Reasonably close to our 38% mathematical estimate (325 expected), I suspect that the recent two or three years of poor index performance accounts for that deviation from the expected (15 winning months adrift).

The average of all winning plays was a 20.5% gain.

The losers each lost 5%, but those losses could be assumed to be offset by the combination of both cash and dividend benefits earnt over the year as described in the web pages.

So if you had $12,000 and put $1000 per month in, then on average, as the Dow had 36.25% winning runs (4.35 win months in each of 12 month periods), each win would increase on average by 20.5% to $1205.

For the losing runs, each lost 5% of that $1000 (fell to $950), but the dividend or cash benefits received whilst holding the stocks or in cash for the remainder of the year would cover that loss, in effect restoring it back to the $1000 level.

So with 4.35 average winning months each year = 4.35 * $1200 = $5242 and 7.65 losing months at $950 each = $7267 plus 12 months of cash/dividends totalling 5% of $12000 = $600. In total makes a year end pot of $5242 + $7267 + $600 = $13109 which is a 9.24% average p.a. gain on the original $12000 year start amount.

Remember that this is the core strategy. So in the above, whilst we earnt $600 in cash interest or dividends, only 7.65 * $50 (losses) was required to cover the losing plays ($382). We could therefore scale up by $600 divided by $382 = 1.57 factor and still have had enough cash interest and dividend benefit to cover the losing plays (in the Standard strategy we actually use a 1.6 leverage factor).

Hope this helps.

I'd agree with you that trying to time the market is pure speculation and as you say often the time you spend in attempting such just doesn't cost in.

I believe this strategy is simple (to operate at least), logical and long term and should provide average returns from an average selection of stocks if the standard strategy is adopted (possibly some small losses), less for the core strategy (but generally no losses).

It evolved from my dislike of downside losses. My mental attitude was (and still is) to count paper profits as being my own cash after sustained periods of time and when the paper profits evaporated I tended to take it too much to heart as though I'd actually lost cash value. I much more prefer to go from step up to step up, even if it does mean that for several years at a time it may involve the fund value not increasing. Those dry years can get somewhat frustrating and testing, but then suddenly a good healthy jump usually occurs and re-invogorates you. That's part of the parcel, for the longer term benefits you have to tolerate the sour in order to taste the sweet. As is evident from the likes of the Nikkei's bad run over the last 10 years+ which still generated one or more good years during the period. Sustained sideways or downward moving markets over a number of years usually have such one or two up years during that Bear phase, enabling you to step up a level or two (see the Nikkei graph towards the bottom of page http://www.cjam.pwp.blueyonder.co.uk/html/historical.html).

I too had considered AIM for many years having purchased the book in the 1980's, but could never actually come to utilise it as a real holding. This strategy did in part however evolve from the basic AIM concepts and after many years of evaluation of those concepts.

In having an indicator of how much exposure you should have at any one time, in effect automated buy and sell indications, leaves you free to concentrate on which actual stocks to hold. If so inclined, you can take the easy option of selecting a diverse set of stocks, even randomly chosen, and probably fair as well as the market over the longer term without having that downside risk fear. Investing is a matter of when to buy, what to buy and when to sell. This strategy clears two of those and if you opt for a spread of stocks then the whole matter becomes simplistic. You automatically avoid the common tendency of many small investors to buy high and sell low or that of spending too much time analysing stocks in total disregard of the competition such as the likes of investment houses that have seriously more data and resources readily to hand.

This reply has grown much larger to that which I anticipated at the offset, so I'll sign off with best wishes.

Regards.

[Ken M]

cjam

In looking through my previous posts it seems that all I have done is ask questions, which might perhaps be taken to imply that I am questioning the validity of your methods. In fact, what I am trying to define for myself is a simple system that has a reasonable probability of giving at least average returns, that suits my investment temperament and has rules that I know I have the discipline to follow.

For many years I previously used market timing systems that became increasingly complex and tried to catch every upswing of individual stocks however, with more good luck than good judgement, I got out of the market in mid 2000 and haven't been back in since. Having reviewed my past performance it has become very clear to me that the amount of time and effort spent on managing my complex timing systems has been of no benefit in producing substantially increased returns. Hence my decision to implement a simple, logical, long term system which will produce returns reasonably close to the average.

Philosophically, I like the idea of Modern Portfolio Theory and holding a very diversified, balanced portfolio for the long term and re-balancing annually. However I doubt that I have the temperament to hold during a bear market or a very long sideways market. Also, over the years, I have kept looking at Lichello's AIM strategy and recently almost got up the courage to start, however I think probably I would not be able to bring myself to carry out the substantial averaging down that is necessary during bear markets.

Which, in a long-winded way, brings me to my interest in your Never-Lose strategy. (I think I have come across similar systems in the past but have not kept details.) I like it as a concept and it suits my temperament because it allows profits to run but cuts losses quickly. However reducing risks in this way usually results in reduced returns and what I am now trying to decide in my own mind (and why I am asking so many questions) is whether operating such a system might have the potential to result in substantial reductions. I know I could do my own back-testing but I am basically lazy and hope to take as much advantage as possible of the hard work that you have already put in to your project!

Regards
Ken

[Ken M]

cjam

I find it really difficult to understand how you arrive at the basic figures used in this assessment of percentage returns. I was never very good at working out probabilities and I have got worse over the years but I can't see how you have arrived at the calculation that out of 38 wins:-
15 rise 5%
15 rise 10%
5 rise 15%
2 rise 20%
1 rises 25%

First of all, I would be interested in understanding how you have arrived at the distribution of probabilities. For example, in terms that I can understand, are you perhaps equating stock price rises to coin flipping?

Secondly, I would have thought that logically there should be many more 5% rises than 10% rises.

Thirdly, what happens if the calculation is carried out using 10% steps, i.e. 10%, 20%, 30%, 40%, 50%?

regards
Ken

[Ken M]

cjam

Unfortunately I don't have a fresh mind, I just tend to get confused by written descriptions of mathematical concepts and things such as Pascal's Triangle and I need to translate the concepts into typical examples so that I can get it straight in my head.

I fully appreciate that you might only intend that your strategies would be used in a money management role however, in order to assess whether they might be applicable to a person's own investment temperament, it is useful to have a proper understanding of the results obtained by back-testing. So, just to demonstrate how dense I am, could I ask you to further explain what you mean by:-

"The backtest results use percentage based calculations and therefore assume that the current value of the entire holding at each time-point is used as the base."

For example, for the Standard strategy, if starting with funds of $12,000 the first months investment would be $12,000x13.33%=$1,600. Are your back-testing results then based on assuming that, if this $1,600 increased in value to $2,000, the next months investment would be $12,400x13.33%=$1,653 etc etc i.e. compounding the monthly profits throughout the period tested?

Ken

[cjam]

Continuing Ken's questions on to new levels, if 38% of cases on average run full term, then generally 38% of those will go on to run up by 5% from the start point. Of those 38% (14.4) will go on to run up by 10% from the start; Of those 38% (5.5) will go on to run up by 15% etc.

From this we can estimate approximate likely average gains

38 are wins of which

15 rise 10%
5.5 rise 15%
2 rise 20%
0.8 rise 25%

leaving 15 which we can assume just rose the 5%

Tallying that up comes out at 367 points from 38 wins, or an average of 9.65% per win.

Assuing our 1.6 leverage factor, that increases the average win to 15.45%.

So for 38% of the time we win an average 15.45%, whilst in the remaining 62% of times a 5% loss occurs, but that loss is offset by dividends/cash interest.

Overall that equates to 5.872% average return expenctancy p.a. across the whole fund. HOWEVER, this assumes neutral bias. When you add in the markets general upwards motion, then that upwards bias complements the 5.872% return. The 1.6 leverage factor also boost such bias returns to even higher levels.

In effect, the average case is that whilst cash might be averaging 5% p.a. the Standard strategy will average 5.872% if overall the Index hasn't moved anywhere over time (up down yo-yo effect). On top of that, we further benefit by an average of 1.6 * 0.38 = 61% of any upside gains in the Index. So if the Index rises by an average 10%, we might in turn expect 6.1% + 5.872% = 11.872%. Similarly if the Index rises only 5% we benefit by 8.922%. If the Index roar's ahead at an average 15% p.a. then our return expectancy would be 15.022%. Above an average 15% p.a. return from the Index, then being fully invested in that Index would provide better returns than that of using the Standard Strategy. For example at 17.5% Index our returns would be 16.5% and at 20% Index average, our returns would be only 18%.

On the downside, if the Index falls say 20%, then our losses might be (as indicated in previous messages) 3% (possibly less). So for downside risk protection, the cost appears to be a reduced gain potential should the Index average more than 15% p.a.

If therefore for over your anticipated investment period (number of years), you anticipate that the Index might average at levels ABOVE 15% p.a. then if you are confident enough that that will be the case then you would do better being fully invested in an Index Fund. If on the other hand you are less hopefull that returns will average more than 15% p.a. over that same time-frame, then the Standard Strategy would appear to be the better choice. Even if you anticipate higher average returns than 15% p.a., say 17.5%, then you might still consider that the Strategy in providing a comparable 16.5% return with downside risk protection is a better bet than accepting the full downside risk potential of the Index Fund.

[cjam]

Hi Ken M.

The backtest results use percentage based calculations and therefore assume that the current value of the entire holding at each time-point is used as the base.

In practice however I'd expect that starting each year at a set point (perhaps Jan 1st or financial year start) and dividing into 12 equal sized pots would have comparable overall end results as a consequence of averaging (some years would do better than the former approach whilst others would do less well).

I try to highlight that you shouldn't take the figures too literally, they are an asset management guide intended to indicate an approximation of how much exposure you should have at any one time. In a similar way to how a calculation of owning perhaps 12.5 shares cannot be practically implemented (unless there are methods of owning sub one whole units of shares that I am unaware of).

Thanks for querying Ken. Sizing my portrayal/presentation of the strategy against a fresh mind is extremely useful.

Regards.

[cjam]

Hi Ken.

Over the longer term, around 38% of cases will, on average, be winning plays, running the full 12 month term. This has been calculated both via mathematical means (Pascal Triangle) and is consistent with that measured over various Indicies over considerable length time periods.

On the basis that the 5% cover is sufficient to cover all 12 months runs, then obviously if 38% of those were winning runs, then their proportion of that 5% cover is surplus.

We could therefore run with 38% more plays (or as in our case a higher per run stake level) and anticipate that the 5% cover would still be sufficient. But of those 38% of plays, 38% of them will also on average be winners (14.4%). So we can increase the level by that 14.4% and still expect the 5% cover to be sufficient. Of those 14.4 extra, 38% will be winners (5.472)... and so on.

38 + 14.4 + 5.5 + 2 + 0.8 = 60.7 So we can run with a 1.6 leverage factor (60% higher amount) and still anticipate on average that the 5% cover will cover the overall position.

So with a $12K pot, instead of $1K per month we could go to $1.6K per month. Making an effective leverage p.a. play of 12 * $1600 = $19200.

Of the 12 month runs, I would expect on average 38% to run full term and the remaining 62% to be stopped out with a 5% loss. $19200 * 0.62 = $11,904 (which is covered by 5% on $12,000)

In practice, the figures rarely come out in such a balanced way. Typically one year may have all losing runs and end 3% down as a result whilst others may have 50% or more winning runs. Over time however the effect should balance out. So whilst the Core strategy is more or less guaranteed not to lose any in any one year, the Standard strategy does have an element of downside risk (3%), but in return the average gains rise to around that of a comparable level to the long term Index Tracker/Fund. Often, with selection of good quality stock, that 3% risk can be offset through better dividend yields or stock performance. Even by itself, having Index Fund comparable longer term returns with maximum draw down of 3% in any one year is a lot better than full Index downside risk exposure.

Regards.

[Ken M]

cjam

In the back-testing figures that you quote in this post and on your web site, it would be interesting to know whether you have assumed that the value of stock purchased each month is the same throughout the whole period tested or whether each monthly value has been increased on a compound basis as and when profits have arisen from previous monthly investments.

Ken.

[Ken M]

cjam

Thanks for your explanation. I am still a bit hazy about your Standard leveraged concept. My understanding of applying your strategy is that:-

For the Core non-leveraged concept, if available total investment funds are $12,000, then each monthly investment would be $1,000.

However, as a long-term average, it is probable that the monthly investment will be terminated by the stoploss mechanism only 4.5 times out of 12. Or, to put it another way, it is expected that 7.5 monthly investments out of each 12 month period will be profitable or neutral.

Therefore a simple application of the Standard leveraged concept would be that, with a similar total of $12,000 to invest, each monthly investment would be $12,000/7.5 = $1,600.

Is this correct?

Ken

[cjam]

I've rearranged the main web pages (http://www.cjam.pwp.blueyonder.co.uk) and added in a new Newsletter.

This months Newsletter outlines one possible outlook for the UK markets shorter term prospects.

[cjam]

30% p.a.

If you apply the Core strategy over the last 18 years to the Nasdaq, you arrive at 10.5%; For the standard 17.25% and for the Index+ 29.5% p.a. average. Compared to around 10% p.a. for the Nasdaq Index (excluding dividends) buy and hold approach.

The additional volatility in that index appears, as I expected, to provide enhanced overall returns.

Way-2-go!

[cjam]

Ken,

The percentage historical US 10 year bond rates I've looked up are (starting 12/31/1984 through 12/31/2001 respectively) :-

11.55%
9
7.23
8.83
9.14
7.93
8.08
6.71
6.7
5.83
7.84
5.58
6.43
5.75
4.65
6.45
5.12
5.07

The current rate is I believe around the 3.95% level (Jan 2003)

[nightstocker]

Great board cjam. I'll check out the link are read up on your strategy.

[cjam]

Don't Get Fleeced

The Chinese Year of the Horse ends this Friday moving on into the Year of the Sheep.

Perhaps a wise omen to review your money management strategy!

[cjam]

Reduced/Low risk is key.

One of the key principles of this strategy is that average levels of returns can be achieved whilst running with relatively lower risk.

Over recent years (at least in the UK), we've seen markets fall by 50% in value. To restore that 50% loss requires a 100% gain.

By limiting potential downside risks to single digits, recovery is so much simpler and more rapid.

For those who have experienced 50% declines, it may take a decade or two to recover to their original starting level investment, let alone catch up with anyone who just starting off at that higher level.

I can assure you that with good money management, reduced risks and potential gains comparable or exceeding the average you can certainly sleep alot better than many others at present.

[cjam]

Reply in haste,
make spelling mistake

3rd from last line should have been you're (or 'you are') and not 'your'

[cjam]

Hi Ken.

Yes $12,000 would be invested at $1000 per month.

A moving (trailing) stop loss would likely prevent some up-runs being benefited from to the full extent (but in others perhaps gain more than would otherwise have been achieved).

Consider that initially the chances of a 5% rise or 5% fall is 50:50. Once a play has moved up 5%, then there's 10% allowance before the stop would trigger, so from that point the odds that another additional 5% gain might be achieved from that point are 5 : 10

At 10% above the next 5% gain odds are 5 : 15 ... and so on.

In practice you'll find that this approach achieves more plays running to year end completion than would occur if a trailing 5% stop loss was used. Over the year, one or more of the plays are likely to be started at or near the years low value whilst other plays are likely to be closed out at or near the years high level. On average, its like having one or more plays running from the year low to the year high.

It's an average of averages type strategy that over the longer term we can expect to come out at or around the average expected level. As such at times we will be deviating from that average level, but by limiting our downside levels, generally we should not drift down too much.

If the odds are a 38% chance that any one position will not be stopped, then conversely that's 38% of plays will be stopped, leaving 24% that stay within the +/- 5% range, then we can assume that 38 + 24 = 62% of cases wont (on average) need to call upon the recovery part (5%) (for the 24% set, generally 12% will be above and 12% below the +/-0 line and in combination probably balance out). So we can leverage the position accordingly and expect that (on average) we will have sufficient cash generated from cash and dividends to cover those positions that were stopped out.

The 5% cash or dividend level is all very subjective. Over the longer term that is the typical average level (at least it is for the UK). Some periods, such as at present, the actuals may be below that, whilst at others they may be above.

For US investors, perhaps a UK cash deposit account could be used. I believe we have greater protection over here for cash deposits (typically 95% of the funds being guaranteed to be paid back even if the Bank goes bust (up to around a maximum of about $40,000 in any one account (people depositing more than that tend to spread them across several banks to maintain that protection across the total cash amount being deposited)). Of course that would induce some currency (exchange rate) risk (or benefit depending upon your view of the pound/dollar exchange rate). Alternatively a currency derivative could be used to cover that currency risk. We have a number of good quality shares (large well established companies) trading over here with present dividend levels in excess of 5%, and our bank rates (cash) are currently 4%. The UK is in many respects just another state of the US and our market tends to mirror the Dow/S&P over time (generally growing less than the Dow as we pay more dividends over here (tax benefits), but on an income re-invested basis, returns come out pretty comparable). In effect therefore, whilst US stocks may not be paying 5% dividend levels, they retain more (again because of tax incentives to do so).

Try not be too regimental with the actual figures. Use them instead as a money management type indicator as to how much you should have on risk at any one time. No need to be exact as we're dealing with averages, so over time you might expect to slighly underperform the average and at others outperform the average. Over the longer term however you could expect the end results to be more or less at or around that average level.

If your OK with Excel/spreadsheets, why not try some backtesting for yourself and the potentials will become clearer.

Sorry, this reply drew out longer than I anticipated. Hope it helps.

Regards.

[Ken M]

I like the basic concept of your Never Lose strategy but I tend to get lost in some of your explanations.

Am I correct in assuming for the simple case that, if I have a total of $12,000 to invest, I would buy $1,000 of stock at the start of every month. If the value of the stock fell to $950 at any time in the 12 month period following each particular purchase, then I would sell. If the value remained above $950 then I would sell 12 months after the purchase and take whatever profit accrued (in practice presumably I would only sell stock to realise the profit and would keep the $1,000 invested as the investment for the next month). As I say, I like the concept, but in practical terms I am not able to get 5% interest on cash and it is difficult to achieve 5% dividends. Therefore there is the potential for, say, a 3% loss in a year which would impact upon overall returns over a 5 or 10 year period. I am unclear on how you would handle profits. Perhaps profit for any particular month would be divided by 12 and subsequent monthly investments increased accordingly?

I am not sure I understand how you work out the probabilities for the leveraged case, however I assume that with a similar total of $12,000, I would invest $1133 each month and then proceed in a similar manner.

I would be interested to hear whether my understanding of your strategy is correct. I would also be interested to know whether you had considered using a moving stoploss for each monthly investment so that profits would be locked-in at any time that each investment suffered a reversal instead of waiting to the end of the 12 month period. For example, using a monthly $1,000, if after 3 months the stock had risen to $1,200 it would be sold if it then fell to $1,150. I appreciate that this may not allow the profit to run to its full extent but, on the other hand, it is probable that there would be fewer positions closed out without a profit.

Ken

[cjam]

A warm welcome goes out to one and all.

This message area is an extension to the original No Lose Strategy message board area located at http://www.cjam.pwp.blueyonder.co.uk/html/message_board.html

Thank-you for taking the time to browse this message area and we hope you both enjoy your visit as well as gain some useful information towards evolving into a better investor.

Regards.

CJAM