What You Can Do To Safeguard Against Misleading Market Performance Claims
You have all seen the many websites that offer stock and market timing advice come and go over the last several years. While many were weeded out due to the challenging market environment, a few still remain that contain misleading or outright false claims on performance which could end up costing you money.
Some tactics used:
1) Gains are often derived by taking the peak of where a stock trades. In the chart below, the price of NFLX gets ahead of itself. We have suggested repeatedly over the past few years that it is often better to sell into such strength given the market environment. That said, waiting to sell on weakness such as in the example below where NFLX violates its 10-day moving average is not wrong, but simply a different approach.
It is unrealistic to assume anyone would sell at the peak price of 129.29. If one used our approach of selling into strength, one may achieve a price of just under 125.62, or -2.8% under peak, if one set their sell stop just under the opening price. Or if one waited until the close, a closing price of 123.71, or -4.3% under peak, would be achieved.
If one waited until a violation of the 10-day moving average, they would be selling at the open on 8–20–15 at a price of 119.8, or -7.3% under peak.
2) Gains are often cherry-picked to specific dates while suppressing the times the strategy underperformed. This includes announcing big profits without discussing the drawdowns within that period as well as leaving out any difficult periods.
All periods of a strategy should be fully transparent. If a change to the strategy is made, say so.
I have sent out a number of reports over time on the VIX Volatility Model (VVM) (see time-stamped report archives here: http://www.virtueofselfishinvesting.com/reports). It has gone through a series of evolutions or “growing pains” similar to software that updates, making improvements and removing old bugs.
While 2016 was the most challenging market year yet for the VVM, challenging markets are a gift as they uncover any weaknesses.
Some improvements made to VVM:
Fail-safes (implemented late 2015)- Dramatically reduced risk
Profit-taking strategies on buy signals (implemented 2016)- Enhanced profits WHILE reducing risk
VIX volatility spike buy signals (implemented 2016)- Enhanced profits WHILE reducing risk
Rebuy rule after going to cash on a sell signal- Avoids being left behind should market continue to trend higher (implemented late 2016)
The Market Direction Model (MDM) also went through some tough periods when the general market did not trend (2015 Jan-Aug) or the market sold off just enough to push the model into cash without developing into a meaningful correction (2013–2014).
Fortunately, with QE on the wane, I was able to reinstate some of MDM’s former rules since the level of manipulation diminished in 2016.
Last 12 months performance Mar 2016 — Mar 2017 (as of this writing 3–3–17) using the following instruments:
1x NASDAQ Composite +8.8%
3x TECL +29.5%
3x TNA +30.2%
3) Each investor must understand their own risk tolerance levels. This requires some emotional investment. Most sites do not discuss this important factor.
Every strategy has its weaknesses. But it is important for the creator and anyone who follows such strategies to understand such weaknesses on both an intellectual and an emotional level. Intellectual understanding is insufficient. One’s emotions can push an investor to sell a stock or ETF prematurely if the risk is beyond what their emotions can handle. In other words, if a stock or ETF moves x% above their pain point, the investor is likely to sell. Thus, it is up to each investor to understand their pain points so they can position size appropriately or not trade that particular stock or ETF at all.
If one does not do their due diligence on the strengths and weaknesses of a strategy, it will most likely end up costing the investor significant sums in the end.
On the other hand, if you can compound your account at even +20%/year, your account will nearly double every 3 1/2 years. In 14 years, a $100,000 investment would become $1,600,000 (before taxes).
A retired businessman who went into stock trading full-time wanted to leave his two sons enough money so his sons could send their own children to top private schools. By compounding his trading capital which stood at about $120,000 at the age of 62, he was able to leave them more than $1.5 million dollars at the time of his death at 75, AFTER taxes. His annualized returns were about +28%/year.
To see if our investment strategies are useful to your investing style:
1) Read through our Focus List reports in our report archives. If you type in Focus List into the keyword search bar (https://www.virtueofselfishinvesting.com/reports/search/p:1/q:focus%20list/s:1), look for all reports with “Focus List” in the title, and you will get a good sense of what we look for when buying and selling stocks.
2) Read through the Market Timing Results page if you plan to put part of your investment portfolio into market timing: https://www.virtueofselfishinvesting.com/market-timing-results. There are links that will guide you to understanding the strengths and weaknesses of the strategies.
3) Read through the portion of our FAQs that may be of interest to you. You can read up on various topics by typing in keywords into the search bar: https://www.virtueofselfishinvesting.com/faqs
4) Email us with any questions you have.
5) Subscribe. We have noticed that those who better understand how we invest are far more likely to become permanent members. And that means putting in some work to understand our strategies. As with all things, if you want something different to happen, if you want to change the direction of your finances, you’re going to have to do something different. Understand what we do, and pursue your new outcome.
Incidentally, we wrote the following piece on why we continue to do what we do:
The emails, inboxes, and notes we have received from investors over the years since we started Virtue of Selfish Investing back in 2010 make this endeavor that much more meaningful.