Replies to post #42642 on A.I.M. Users Bulletin Board (AIMUSERS)

[ls7550]

Hi Clifford

Mrs. Tomlinson,in her book Practical Formulas for Successful Investing by Lucile Tomlinson Talked about her Tomlinson compensation plan where at the top of the market you would want to be like 30% in stocks, and at the bottom of the market you would want to be like 70% in stocks.

Some time back I outlined a log stoch approach. For instance Buffett Valuation Indicator of Market Cap / GDP has peaked at around a 150 and bottomed at around a 30 level.

Log stoch is simply ( log(current) - log(bottom) ) / (log(top) - log(bottom) ) and provides a indicator of the amount of exposure to hold.

If however you use that as a % stock rather than a % cash measure then for instance at recent highs of 143 in the valuation measure, you'd be near 100% stock rather than 100% cash at the peaks, 0% stock 100% cash at the bottoms. A contrarian type choice. And historically, at least since the 1970's, that provided a better risk adjusted reward than what seems to be the more logical choice (100% cash at the top of valuations, 100% stock at the lows).

Generally it would seem that what is high today can become higher tomorrow and what has fallen to a low today can become even lower tomorrow. Being out in cash when prices are high, but continue to rise is a relative loss. Whilst sooner or later that rise might reverse and see sizable declines, often the gains made in the run up to that turn outweigh the losses from the turn.

That inverse log stoch productive choice (where you use the log stock to indicate the amount of stock % to hold) had you much more heavily in cash in the 1970's when stocks valuations were low, as cash also did well and earned relatively high levels of income/interest (double digits in some years (nearly 18% in 1981 for instance)). Adding relatively more stock exposure into the 1980's up run saw great gains as cash interest levels tended to decline, that collectively more than compensated for the dot com bubble bursting.

Just thought I'd mention the observation. Haven't looked at your spreadsheet yet but will do.

Regards.

Clive.