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2006 - 2007 April run closed out at a 9.3% gain
The March 2006 run closed out with an overall gain of just over 10%.
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.
Web pages have been updated to reflect the the addition of the latest February run.
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 ;>)
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.
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.
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.
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.
Take profit approach considered.
New web page added to http://www.cjam.pwp.blueyonder.co.uk
Pre-warning of likely May's purchase.
Newsletter updated :-
http://www.cjam.pwp.blueyonder.co.uk
LLOY up 30%, but SARS? - BOOT or switch?
Newsletter updated at http://www.cjam.pwp.blueyonder.co.uk
Site content update
http://www.cjam.pwp.blueyonder.co.uk
Latest Newsletter update at http://www.cjam.pwp.blueyonder.co.uk
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
The latest newsletter is now available
http://www.cjam.pwp.blueyonder.co.uk
Expanding on the concept of using AIM with stop's/limit orders.
Consider that instead of purchasing or selling when AIM indicates, you use that as a virtual purchase or sell indicator only and actually only buy or sell when the price moves by an additional factor.
For example, consider that we only purchase following AIM indicating a buy and the stock having fallen another 5% or risen by 5% from the AIM indicated purchase price. Similarly only sell when AIM indicates a sell and the stock moves up by a further 5% or down by 5% from the AIM indicated sell price. I've arbitarily selected 5% here for demonstrative purposes.
As we buy stocks with the intent that they will rise in value, let's consider a test case where the stock price rises from a purchase price of 100 to a 200 level. With standard AIM that might have produced a buy flag at 100 and a sell at 200 representing a 2.00 gain factor.
Using the modified version, at the 100 level the stock might either fall to 95 or rise to 105 before we actually purchase. Similarly at the 200 level the stock might either fall to 195 or rise to 205 before a sell is raised.
If we assume a 50:50 chance of either cases occuring, then we have four possible outcomes :-
205/95; 195/95; 205/105; 195/105
With a 25% chance of each of these occuring, then that equates to a 2.005 overall outcome, which is better than the 2.00 outcome identified for the standard AIM (above).
In practice, AIM is good at identifying high and low's, but not the exact turning points. Generally therefore we might expect that some of the Relative Weakness (RW) apparent around an AIM purchase indicator might continue to exhibit further RW before a turning point occurs. Similarly when AIM flags a sell the Relative Strength (RS) apparent around that point might produce a further stock price rise before the stock price turns downwards. Overall I would anticipate that the RW and RS might favourably bias the actual figures away from the 50:50 possible outcome potential considered above.
Consider 26% of cases produce a 205/95 outcome
24% of cases produce a 195/105 outcome
25% produce a 195/95 outcome
25% produce a 205/105 outcome
In combination that equates to an overall factor or 2.008
That's approaching an additional 1% overall gain (0.8%) for a modest Relative Strength/Weakness bias allowance. In practice the actual bias may be higher and produce even better additional gain benefit. For example at around a 60:40 split we might have :-
205/195 * 30% of cases
195/95 * 30%
205/105 * 20%
195/105 * 20%
producing an outcome of a 2.5% additional benefit.
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.
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
Thanks Rien. Limit Orders had slipped my mind - a very good point.
Regards.
Thanks for the comprehensive reply Tom.
I suggested 5% based on personal preference within my no-lose strategy. Which simply puts up 5% of capital at risk before a stop prevents further loss, on the basis that that 5% loss can be recovered from income (dividend and cash interest earned) over the course of the year (year end break-even at worst or benefit of unlimited upside at best). For timing purposes I've opted to split the principle fund into 12 equal parts and invest 1/12th each month, either holding that position open for a full year if the stop is not encountered or switch that out into risk-free investments for the remainder of the year if the stop is encountered. In effect having 12 rolling yearly sets running in each 12 month period. In so doing that automatically times the market to within +/- 2 weeks of the years lows.
I'd agree that using a 5% stop-loss approach with AIM for individual stocks might not be a sufficiently wide enough gap. Perhaps if someone were considering this approach further they might identify a historical optimum for the Index and then use the individual stocks beta (volatility) factor as a multiplier of that optimum value. So for example if the stock beta was twice that of the Index, then a stop loss of 10% would apply (assuming 5% were deemed to be the Index optimum).
Thanks for Mark and Don's technical indicator pointers, I'll have a scan around for these.
Regards.
As I've written here before some time back, I run a no-lose strategy that I evolved from the basic Mr L's AIM concept (http://www.cjam.pwp.blueyonder.co.uk).
I limit my downside risks to known fixed maximum levels in any one year according to my risk tolerance levels, yet at the same time manage to achieve Index outperforming results over the longer term.
Recently I've been measuring whether using AIM as an indicator of how much risk I should accept at any one time would be a useful addition to the strategy. Whilst the end conclusion was that it would not, it did raise some observations that AIM users might be interested in.
Historically, relative strength (RS) has been observed to be a reasonable strategy in itself. However AIM tends to discount RS. This can lead to some potential gains being missed when AIM indicates a SELL, but then the stock goes on to achieve higher highs (RS). Similarly when a stock is showing relative weakness (RW), AIM can indicate a purchase only to later see that stock price fall significantly further.
My observations and measurements are (using the Dow over a 72 year period (1930's to present date)) that if when a month (assuming monthly portfolio management periods) is indicated by AIM as a SELL, if instead of actually selling that stock a stop-loss at 5% (arbitarily selected based on what I use in my no-lose strategy) below the current stock price is raised instead of making the indicated disposal, then the metrics are that often the stock price rise is sustained further (I assumed the stop was fixed at that original indicated level (not a trailing stop).
Simililarly when AIM indicates a BUY, then a 5% stop should be applied below that current stock price. This provides a degree of protection as the stock in being indicated as a purchase is exhibiting some relative weakness that could continue further downwards.
When AIM is neutral, all outstanding stop-loss triggers should be void (open-ended).
The monthly (or whatever period) management therefore becomes :-
If AIM indicates a SELL, set a stop-loss trigger at 5% below the current stock price, selling the amount of stock indicated by AIM only if that stop-loss trigger level is actually encountered.
If AIM indicates a BUY, then buy the indicated amount, but set a stop-loss at 5% below that entry price to the amount of stock purchased (number of shares).
If AIM indicates NEUTRAL (neither a BUY nor SELL indicator flagged), then cancel any stop-loss triggers that may be currently outstanding.
For reference I used a split safe of 0%/10% Buy/Sell factor.
In closure I'd like to point out that potentially this approach could benefit in strong Bull up-run periods over that of the conventional AIM in that the RS is less likely to be closed out.
Obviously this concept would need further work to be practically applied, such as how to update the AIM records to account for the modification, which personally I haven't considered. For example perhaps when a current position had a stop-loss trigger still in place without having been encountered and a subsequent month indicated yet another stop-loss should be added, then that later stop-loss trigger level should replace the original stop.
Regards.
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
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.
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.
Newsletter updated at http://www.cjam.pwp.blueyonder.co.uk/html/newsletter.html
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.
Long Term Buy and Hold ????
Newsletter updated at http://www.cjam.pwp.blueyonder.co.uk
Regards.
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.
.
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.
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.
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.
.
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.
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.
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.
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.
Tom, I get broken links to some of the images on your web page located at http://www.aim-users.com/vlis.htm.
Regards.
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.
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!
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)