Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
USDT is 9-11 for Central Banks the Bitcoin Black Swan - Tether Un-Stable Coin Ponzi Schemes! - 30th Jul 21
Behavior of Inflation and US Treasury Bond Yields Seems… Contradictory - 30th Jul 21
Gold and Silver Precious Metals Technical Analysis - 30th Jul 21
The Inadvertent Debt/Inflation Trap – Is It Time for the Stock Market To Face The Music? - 30th Jul 21
Fed Stocks Nothingburger, Dollar Lower, Focus on GDP, PCE - 30th Jul 21
Reverse REPO Market Brewing Financial Crisis Black Swan Danger - 29th Jul 21
Next Time You See "4 Times as Many Stock Market Bulls as There Are Bears," Remember This - 29th Jul 21
USDX: More Sideways Trading Ahead? - 29th Jul 21
WEALTH INEQUALITY WASN'T BY HAPPENSTANCE! - 29th Jul 21
Waiting On Silver - 29th Jul 21
Showdown: Paper vs. Physical Markets - 29th Jul 21
New set of Priorities needed for Unstoppable Global Warming - 29th Jul 21
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How to Make Money in Super Cycle Stocks Bear Markets

InvestorEducation / Learning to Invest Mar 03, 2008 - 04:57 PM GMT

By: Bob_Bronson

InvestorEducation Best Financial Markets Analysis ArticleThe stock market has essentially gone sideways since its March 24, 2000 high almost eight years ago. In fact, it has spent 99% of the time below that high and because profitable market timing is so difficult for most investors they have typically lost money during this time period.


[This is a correction, update and expansion of the report posted 9/25/07]

Meanwhile, our buy-and-hold (no turnover) model portfolio of four asset-class based, no-load mutual funds, which we've been continuously recommending for the past eight years, has gained 84% through Feb 29, 2008, without any drawdown exceeding 10%. [i] The four funds held reflect our continuous bullish position on bonds (VBLTX) and precious metals, especially gold, (VGPMX) and bearish positions on the U.S. dollar (ICPHX) and the stock market, especially technology (RYAIX). Also, some 50% of the portfolio is internationally based.

Our currently recommended portfolio, with very low volatility and maximum drawdown in a simple unrebalanced buy-and-hold strategy, is very different from the high-performance one that we developed for the last Supercycle Bear Market Period starting in the mid-1960s. 

Our previous model was based on a proprietary formulization of alpha/beta-based relative strength stock selection, augmented with simplistic market timing, rather than the strategic asset class diversification with no market timing employed in our current model portfolio. Its 20-fold growth, or 53% annualized performance, illustrated in the second chart below, was in sharp contrast to virtually no gains in the stock market during the less than eight-year period from 1966 through July 18, 1973. A copy of our July 20, 1973 report explaining our stock selection methodology and the transactional details of the 10-stock model portfolio is available upon request in a 21-page Word file. 

The operational simplicity of our current model portfolio strategy compared to our previous relatively high turnover, momentum-based strategy of four decades ago is deceiving since it requires long range anticipation of how institutional investors will likely change their mind in reaction to the dynamic fundamental forces that drive the economy and various capital markets during multiple business expansions and contractions.

In order to have roughly equal volatility impact from each of the four active positions in the portfolio and to keep the portfolio's maximum drawdown under 10%, the initial allocations were 5% in very volatile VGPMX, 12.5% each in VBLTX and RYAIX, 20% in ICPHX, and 50% in virtually non-volatile U.S. money market funds. 

The money market funds keep the portfolio volatility very low – to less than half of the stock market – and such interest income covers management fees without drawing down any principal, an important feature for many investors, especially those in retirement. Also the cash reserves can be used to further control and take opportunistic advantage of the extremely high volatility that typically occurs during bear market selling panics. We'll explain how this can be done when such a selling panic, like a MCHVIE, [ii] is on the immediate horizon.Our current model portfolio is uniquely very adaptive to most any investor situation since, on average, it has been virtually uncorrelated to the stock market and thus has a beta of zero. [iii]

So if one is not very concerned about drawdowns and/or holding money market funds is not desirable, then doubling the allocation percentages for the four active positions yielded 47% higher portfolio performance of 11.7%/year, which resulted in a 76% higher alpha at 8.6%. [iv]

Alpha derived from correlation-related volatility risk (i.e., beta) is a useful metric, but we have found maximum high-to-low drawdowns and other downside volatility risk metrics to be even more valuable to investors.

For example, the allocations in our model portfolio were selected to hopefully avoid drawdowns that exceed 10% from the highest daily closing high value to the subsequent lowest daily closing low value. (No guarantee, of course.) Since March 24, 2000, the stock market's maximum drawdown, as measured by Vanguard's S&P 500 total return index, has been 47.5%. On a compounded basis, it takes 6.2 times our model portfolio's maximum drawdown of 9.8% to equal that 47.5%! Thus, by this more meaningful metric our model portfolio has been only 1/6 as risky as the stock market during the past almost eight years.

Also, unlike most any other investment strategy, rebalancing our model portfolio is not much of an issue as reflected by comparing the first two charts below. Since what we call the “irrational complacency” driven echo-mania intraday high on October 12, 2007, the second chart shows that the 5.8% in our rebalanced model portfolio's performance is roughly similar to the 6.9% gain in our unrebalanced model portfolio. These gains have been during the same 4.5-month period through February 29, 2008 during which the stock market has declined 14.1%.

As a consequence, the curvilinear best fit lines (thin black lines in the first two charts below) illustrate that our model portfolio – unrebalanced or rebalanced -- is accelerating its outperformance of the stock market -- like it did in 2001 and 2002 – without margin or trading or paying commissions.

All of this goes to show that there are several ways of making money in Supercycle Bear Market Periods, both aggressively and conservatively. Of course, the reality is also that there are many more ways to lose money during such extended and volatile under-performance periods for the stock market. We fully expect the current Supercycle Bear Market Period to persist for several years - probably another seven years to Oct 2014 - and for our model portfolio to continue to outperform, especially on a risk-adjusted basis.

Bob Bronson
Bronson Capital Markets Research

[i] We measure maximum drawdown using daily portfolio values. Using longer time intervals, like month-end data, typically hides the highs and lows that occur on an intra-month basis. For example, the 47.5% maximum drawdown for the VFINX, Vanguard's total return index for the S&P 500 index from its Mar 24, 2000 high to its Oct 9, 2002 low is 8% higher than the 43.8% computed using the Mar 31, 2000 month-end high to its Sep 30, 2002 month-end low. Similarly, the maximum drawdown for our model portfolio was 8.3% using month-end data, which is over 15% lower than the 9.8% derived from using daily data.

[ii] A MCHVIE is a Mass-Correlation, Hyper-Volatility, and Illiquidity Event that we expect to end the current Supercycle Bear Market. Subscribers to our private e-mail list will receive more descriptive info about the coming MCHVIE.

[iii] Beta is the product of the correlation and the ratio of the standard deviations of the portfolio and the stock market. So while our portfolio has exhibited a daily standard deviation of 0.49% compared to the stock market's standard deviation of 1.10%, since the correlation coefficient has been only 0.006, the portfolio beta has been only 0.0026, or essentially zero.

[iv] Since the portfolio's beta is essentially zero, on average, the portfolio's all-important alpha, or beta risk-adjusted annualized return, is simply equal to its annualized total return in excess of the risk-free return. Alpha equals the portfolio's excess return minus beta times the stock market's excess return, where in each case excess return is the total return minus the risk-free rate of return (e.g., 90-day T-Bills or money market mutual fund returns). 

 

 

By Bob Bronson
Bronson Capital Markets Research
bob@bronsons.com

Copyright © 2008 Bob Bronson. All Rights Reserved
Bob Bronson 's 40-year career in the financial services industry has spanned investment research, portfolio management, financial planning, due diligence, syndication, and consulting. At age 23, he and his partner founded an investment research firm for institutional clients and were among the first to use mainframe computers for investment research, especially in the areas of alpha-beta analysis and risk-adjusted relative strength stock selection. Since 1967, he has served as an investment strategist and consultant to various investment advisory firms and is the principal of Bronson Capital Markets Research. If you wish to read more, read his BIO

A note to visitors ~ We do not have a website, but we maintain a private e-mail list. I'm also often asked why we provide research and forecast information for free. Since we are not looking for new business from the internet, I periodically post some of our research and forecasts in exchange for feedback from others. And since we don't publish in academic or industry trade journals, such internet discussion gives us as much peer review as we want and can conveniently assimilate at this time.

Also, the few archiving discussion boards in which I have the time to participate give us new ideas and allow us to establish and maintain intellectual property copyrights for our proprietary research, and to establish a verifiable forecasting record. At the same time, we are able to publicly document our forecasts and help others who otherwise don't have access to our work.

To be added to our private e-mail list, we only ask that you periodically provide feedback: questions, comments and/or constructive criticism to keep our research work and forecasts as error-free, readily comprehensible and topically relevant as possible. If you would like to be added, please explain, at least briefly, what you do, since our e-mailing list is categorized by the backgrounds of the recipients.

Robert E. Bronson, III Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments


29 Sep 08, 21:51
VGPMX - WHeres the Gold ?

I have been trying to figure out why in the last two months VGPMX (Vanguard Precious Metals) has sunk 50%? It has been billed as a 'Gold Oriented' fund but when you look at it, it seems to be more Platinum and Energy oriented.

Is this now a case of complete mis-management? How can a fund priced at approximately 4 billion dollars and supposedly gold oriented in a hot gold market tank like this? Sure the market is in a state of disarray, but this fund is one that I would think would be a 'fairly' safe haven but it is actually the complete opposite. Today alone it dropped 12%.

I understand risk is high, but now it seems that the risk is in the management and managers of this fund. Has this 'greed' of the sub-prime debacle somehow infected this area of the market?

Thank you,


Post Comment

Only logged in users are allowed to post comments. Register/ Log in