Live Test - Performance Summary #2

Here's another look at how the model portfolio has performed compared to the benchmark index. The blue bars show the returns over the past 52 weeks, and the gold bars show the returns over the full 87 weeks of the live test.

You can see from this chart that the S&P 500 index lost an increasing amount of money as the live test progressed, while the model portfolio gained an increasing amount over the same period. This dynamic results in a very rewarding "excess return."

In financial circles, excess return is often referred to as "alpha." The chart shows that the system is generating a lot of alpha. This is good because alpha is the best measure of the "value added" by an active portfolio management system, above the returns generated by a standard buy-and-hold approach.

These results show that the trading system is "durable" because it maintained and actually exceeded its expected performance during the 2o month live test period. The system is also "robust" because its performance held up well under market conditions that were far more adverse than the prevailing conditions during the system development period.

These live test results are consistent with the test results obtained during system development. This is good.

Live Test - Performance Summary #1

Over the past 87 weeks of the live test, for the period ending 9/4/09, the model portfolio has returned +39.4% while the benchmark S&P 500 Index has lost -30.2%.

Therefore the model portfolio has generated an excess return (relative to the benchmark) of +69.6%, equal to +0.80% per week.

This works out to an annualized excess return of +51.3%, which remarkably exceeds the system's excess return for the 4 year period preceding the live test.

Friend of Steve, allow me to introduce you to...

our new blog.

This is the first post to our new "private" blog, intended just for friends and family. If you are receiving this email, it's because I count you as one of my trusted friends or family! BTW, I imported all the old posts from the public blog to the new private blog, so everything is in one place for your easy reference.

Over the next few days I will be winding down the public blog as I wrap up the live test and post my analysis of the system's performance. I will also post the analysis here so that you don't miss anything. The public blog will then remain up as a track record for the system's performance, but no new trades will be posted there. This is to minimize the possibility that somebody might reverse engineer the system, which could degrade its future performance.

Each weekend I will post the next week's holdings here on the new private blog. Please bookmark the new website, FOSteve.blogspot.com. Out of consideration for our small group of investors, please do not re-distribute the new private blog's URL.

Some of you have asked me to supervise the management of various portfolios. I believe it is important to first become licensed as an investment adviser before taking on the management of other people's hard earned money. You may be aware that I recently passed the Unified Investment Adviser Law Exam, FINRA Series 65. I have been told that this exam has the lowest passing rate of any the FINRA law exams. Believe me, it was no cake-walk! Passing the law exam is a major step towards my goal of gaining a license, which I expect to be complete within a few weeks.

I will then be licensed as a "boutique" Registered Investment Advisor, with the aim of helping a small number of people who are close to me and share common goals. For the next few years this will continue to be a weekend endeavor as my full-time career in the software industry remains most important to me. Fortunately, the system I developed accommodates my work schedule since 1) all trades can be entered over the weekend, 2) it is hedged to minimize systemic market risk and 3) does not require close supervision during the week. I guess you could say it is designed to be a stress free approach to profitable investing. Works for me!

This is a pursuit born out of my passion for investing and trading the markets. I am fortunate that my software and systems background has equipped me to develop a unique approach to growing our portfolios while minimizing time and stress. So far, the performance of the system that I developed in 2003-06 has held up very well in 2007-present, as shown in the live test. It is gratifying that the performance over this period also compares extremely well with the top tier of professionally managed hedge funds.

While past performance is no guarantee of future returns (disclaimer!), it is my hope and desire that whatever skills and experience I have gained will also help my friends and family to achieve their financial goals. Thanks so much for your counsel and suggestions as we continue on this journey.

Best Regards,
Steve

Returns for week ending 9/4/09

Model portfolio, hypothetical returns for past…
1 week: +0.3%
52 weeks: +20.1%

Value of $10,000 invested at inception in 2003: $55,660

S&P 500 Index, returns for past…
52 weeks: -18.5%

Returns for week ending 8/28/09

Model portfolio, hypothetical returns for past…
1 week: +1.3%
52 weeks: +11.1%

Value of $10,000 invested at inception in 2003: $55,481

S&P 500 Index, returns for past…
52 weeks: -20.1%

Returns for week ending 8/21/09

Model portfolio, hypothetical returns for past…
1 week: -3.7%
52 weeks: +10.8%

Value of $10,000 invested at inception in 2003: $54,737

S&P 500 Index, returns for past…
52 weeks: -21.0%

Returns for week ending 8/14/09

Model portfolio, hypothetical returns for past…
1 week: +1.3%
26 weeks: +6.7%
52 weeks: +17.9%

Value of $10,000 invested at inception in 2003: $56,841

Returns for week ending 8/7/09

Model portfolio, hypothetical returns for past…
1 week: +2.7%
26 weeks: +8.4%
52 weeks: +16.1%

Value of $10,000 invested at inception in 2003: $56,129

S&P 500 Index, returns for past…
52 weeks: % -22.2%

Returns for week ending 7/31/09

Model portfolio, hypothetical returns for past…
1 week: -0.1%
Year-to-date: +1.75%
52 weeks: +11.6%

Value of $10,000 invested at inception in 2003: $54,623

S&P 500 Index, returns for past…
52 weeks: % -22.2%

History Doesn't Repeat... (Part 2)

As the popular American humorist, Mark Twain said, "History doesn't repeat, but it often rhymes."

Last week's chart showed a stunning resemblence between the Dow from 1924-38 and the Nasdaq index from 1994-present.

This chart rolls the clock forward 6 years on the Dow Index, from the end of 1938 to the end of 1944. As you can see, while the stock market rallied at several points along the way, the overall action was mostly a slow decline. The final low was eventually reached in April of 1942, 40% below its level at the end of 1938.

So what does this possibly mean for the Nasdaq going forward? Well, as we know, history doesn't repeat! But if history "rhymes" the Nasdaq will bottom out around October of 2012 at a level more than 40% below today’s price level. Regardless of our expectations, we must at least be prepared for this possibility as we make our investment decisions.

Waiting three more years for the stock market to “get going again” is not something that most investors are prepared to do. Any investor who came of age during the bull market of the 1990s is still scratching their head, wondering what went wrong on the path of untold wealth. They may be waiting impatiently for things to “get back to the way they were.”

Of course “what went wrong” is that the stock market moves in unending cycles. Investors have become conditioned over the course of the past several decades to think that the stock market “always moves higher." "Buy and Hold" and "Buy the Dips" were profitable strategies.

You may recall from an earlier post (November 2008) that after the Dow topped out in 1929 it did not make a new all-time high until 1954. That's 26 years, a looong time to be patient! Likewise, the Dow gained no new ground from 1966 to 1982, a patient holding period of 16 years! So if this bear market does not ultimately bottom out until 2012, we will actually be getting off easy compared to other secular bear markets.

None of this should be viewed as a prediction. There is no crystal ball. While the Dow/Nasdaq comparison has been stunningly accurate over the last 15 years, it would be foolish to base our investment decisions on a belief that history will rhyme.

Rather than base our investments on predictions, the Strategic Growth Model will continue to align its capital with the current market conditions, profiting from the statistical edge it provides over the intermediate timeframe. For now, the market trend is UP.