06/23/2013 Mousetrap

Sector Model XLU & XLV 1.14%

Large Portfolio Date Return Days
CAJ 9/25/2012 -2.65% 270
BOKF 2/4/2013 12.99% 138
SWM 2/12/2013 39.21% 130
ABX 4/11/2013 -30.21% 72
TPX 4/22/2013 -10.28% 61
TTM 5/6/2013 -10.89% 47
DLB 5/13/2013 -2.97% 40
GMCR 5/24/2013 2.04% 29
MATW 6/6/2013 -0.51% 16
OKE 6/17/2013 -6.47% 5

S&P Annualized 8.53%
Sector Model Annualized 22.80%
Large Portfolio Annualized 28.17%


From: [url]http://market-mousetrap.blogspot.com/2013/06/06232013-you-are-not-mutant.html[/url]

Rotation: selling SWM; buying TSCO.

As I noted on the blog, the sector model has been adjusted to hold two sectors instead of one. The returns are more consistent, and if one sector is in free fall (such as XLK in the 2000-2001 dot com collapse), the second sector will serve as a control.

Now, there are two ways to do this. One could hold both sectors and trade all the whipsaws, or buy the first sector, hold when it moves into the second position, and only sell it when it hits the third position. A small cash account would be best served with this approach – and in fact that is what I’m doing with one account. This is a bit of a conveyor belt approach, and holds longer while avoiding all whipsaws.

The drawback with that conveyor belt approach is that it is not as stable as holding two sectors.

In any case, the first position is XLU, and the second is XLV. Both of these are defensive, bearish sectors (utilities and healthcare services). They fairly reflect the amount of fear in the market right now.

The full model is scrambled. These are the top industries:
AUTO
FUNL SVC
ENTTECH
GOLDSILV
FURNITUR
UTILWEST
BUILDSUP
ELECFGN
BANKMID
THRIFT


Auto, Bankmid, Elecfgn, and Thrift are bullish sectors typical for a market bottom (not a top, but a bottom).

Goldsilv, Furniture, and Building Supply are late bull inflation plays.

Enttech, Funeral Services, and Utilwest are more bearish.

So, two bullish sequences and one bearish one.

In other words, it’s ANYONE’S guess what the market will do.

So I want to talk about something different – namely, the different approaches to investing people have.

The vast majority of folks who actively trade are trying to time the market. They read the news and look at charts to try to determine where the markets will go next.

There’s a problem with that. Our brains are cross-wired so badly that we cannot be trusted to make sense of charts. There’s an entertaining Cracked article that I STRONGLY RECOMMEND:

[url]http://www.cracked.com/article_20432_5-illusions-that-prove-your-sense-reality-full-s232125.html[/url]

No, serious – stop reading what I write until you finish that article. It’s… eye opening.

Don’t cheat. I mean it.

Read the article yet?

Good.

Now back to me…

1) Don’t trade the news.

2) Don’t trade a price chart.

There, I just eliminated 90% of trading activity online.

That leaves the three profitable types of trading.

Buy and hold: buy a non-leveraged index ETF, and walk away. Have a life. Save regularly. Work hard. You might be able to even retire if you start early enough. People who’ve been adding a little each month to SPY have made money this past decade, and will most likely make money in the next, and the next, and the next.

Buy based on fundamentals: think Warren Buffet. You aren’t buying a stock. You’re buying stock in a company. So look at the freakin’ company instead of the stock. If you buy a company because you like a stock, you’ll lose money. If you buy a stock because you like a company, you’ll make money.

Be a mutant: think George Soros. This one takes a bit of explaining. Remember those first warnings – Don’t trade the news and Don’t trade a price chart? Those folks lose money to people like Soros. I don’t know what makes him tick or how he does it, but somehow that man is wired differently than the rest of us. He’s like a magician on stage pulling sleight of hand tricks and making money off of our confusion. He’s brilliant, but if you don’t have the gift you’ll lose and lose hard.

Here’s the long and the short of it. People who buy and hold stop losing money. People who buy based on fundamentals stop losing money and make money instead. Both profit off of the economy and earnings.

Soros doesn’t profit off of the economy and earnings. He profits off of people who trade the news and watch price charts.

Buy and hold folks are long and don’t time. Fundamental folks are long and don’t time. Soros is long and short and times – making money off of people who trade the news and trade price charts.

I can’t stress it enough.

The first goal of an investor is to stop losing money.

PERIOD.

Now, there are services out there that can give options. I’ve even recommended a few. But you have to STOP losing money first, and that means ignoring the news and price charts.

And don’t think you’re Soros. You’re not. If you were, you wouldn’t be looking at my little blog.

In any case, the news is scary right now. I don’t know if it’s a good time to buy or to sell.

And that depends on the way you think of time.

Remember when Buffett was screaming “BUY BUY BUY” in October 2008? Was he right or wrong on the timing? He was wrong by 5 months and right by 5 years.

The key is to get the years right and you won’t have to worry about the months so much.

Tim


Just to add a bit of full disclosure, I have personally been unable to create a good timing model, but Pascal has. That's why I pay him a subscription! I use the Robots in my margin, and my own model in cash. As far as I can tell, his is the only useful model out there for those who are trying to time.