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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club -- Ignore unavailable to you. Want to Upgrade?

To: Kirk © who wrote (11673)	2/4/2000 6:45:00 AM
From: Mr. BSL	Read Replies (1) \| Respond to of 15132

Kirk, the following is reprinted from the 9/30/99 Dorsey Wright & associates From The Analyst By Tom Dorsey. Highlights are mine. "IS IT TIME TO SELL YOUR STOCKS?" Here we go again with the mis-information the market reporters throw out every time the market hits the skids. This time it is CBS MarketWatch with the above mentioned article from Marshall Loeb. They should really know better than to put out this type of information. The public is increasingly becoming aware that with a little common sense and some soulless barometers one can effectively stay out of harm's way and actually manage risk in one's portfolio. The people who would like to dispel this idea that you can add value to your investment endeavor is the Mutual Funds and the market reporters. The Mutual Funds because they are much better off if you just buy and hold. Eighty five percent of them never outperform the S&P 500; they in effect don't add any value to your funds and then simply sit back and ride the market up and ride the market down, underperform the S&P 500 and collect the annual fees. Nice tidy business. The market reporters, god bless them, are typically a group of people who have never been able to really understand risk management so they simply assume that it can't be understood. I can't imagine having such a shallow understanding of the investment process. Mr. Loeb says about market timing "It doesn't pay to try to "time" the market, to guess what its immediate next moves will be, and then pull out or put yourself back into the game. You're much better off getting in and staying in." Well, if you had followed his advice in 1929 it would have taken you 25 years to get back even. If you had followed his advice in 1973, it would have taken you 7 1-2 years to get back even after that bear market. In 1998 the average stock was down 40% on the year and this year only 38% of the NYSE stocks are up, and only 24% of the NASDAQ stocks are up -- although the Dow Jones is up 17%, or it was a few days ago. You see, people buy mutual funds thinking they are getting some sort of profes sional management. They think this management will take them out of harm's way at the right time and for that it is worth the fee they pay. Well, it's generally news to these investors that their fund manager is paid to be fully invested. His job is to try to outperform the S&P 500 or the asset class he manages. If the S&P 500 is down 20% on the year and he is only down 19%, he is considered to have done a great job for his clients. The only problem is Mr. Jones is down 19% and that is real money to him. If Mr. Jones bought an index fund, he would be in the same situation. Everyone wants someone to manage risk in their account. No one wants to ride them up and ride them down again. Where these reporters miss the boat is that risk management and market timing is not a strategy of jumping in and jumping out of the market. It is designed to preserve capital in markets that are not supporting higher prices and to take more exposure in markets that are supporting higher prices. Market timing is designed to keep the investor's account from being wiped out in a bear market. Mr. Loeb goes on to present the same old rhetoric of "From 1980 through 1989 for example, there were 2,528 trading days. If you would have stayed fully invested in an index of the Standard and Poor's 500 stocks, your average annual return would have been a breathtaking 17.5 percent. But had you pulled out and missed only the 10 best trading days out of those 2,528 days, your average annual return would have dropped to 12.6 percent. Had you missed the 40 best trading days, it would have fallen to 3.9 percent." That is the same old party line the reporters want you to believe and the mutual fund s want you to believe. They selectively leave out the rest of the story. We calculated the daily returns of the S&P 500 in order to determine the best and the worst performing days. Here are the 10 Best and 10 Worst Days on a percentage basis for the S&P 500 from December 31, 1989 to December 31, 1998: The 10 Best Days The 10 Worst Days 8/27/90 3.19% 8/6/90 -3.20% 1/17/91 3.73% 8/23/90 -3.00% 8/21/91 2.94% 11/15/91 -3.66% 9/2/97 3.13% 3/8/96 -3.08% 10/28/97 5.12% 10/27/97 -6.87% 9/1/98 3.86% 8/4/98 -3.62% 9/8/98 5.09% 8/27/98 -3.84% 9/11/98 2.95% 8/31/98 -6.80% 9/23/98 3.54% 9/30/98 -3.05% 10/15/98 4.17% 10/1/98 -3.01% The first part of this study looked at what our return would be had we missed the 10 best days of the market. This means that we would be invested every other day within this 8-year period (December 29, 1989 to December 31, 1998) and sell our positions the day before these best market performances and go back into the market after the best day's performance. If we had an initial investment of $100,000 in SPiDR's at the start of this period, this would have grown to an amount of $239,822 by December 31st 1998 achieving a return of 139.82% return in this situation. This compares to a return of 247.8% had you just bought and held. Now to be fair we must look at what would have happened if we missed the 10 worst days in the market place. That return would have been 472.82%. A more fair comparison would be to say we missed both the 10 best and 10 worst days in the S&P 500 from 1990 to 1998, then our return would have been 260.78% -- better than the buy and hold strategy. Buy & Hold (1990 - 1998): 247.8% Missed 10 Best Days (1990 - 1998): 139.8% Missed 10 Worst Days (1990 - 1998): 472.8% Missed 10 Best & Worst Days: 260.8% (1990 - 1998) I'll end this story with a comment he makes in the report. Again, this is a party line comment made by many reporters in the past. "Remember October 19, 1987? Stocks plunged 508 points in a single day, and many of the prognosticators were seriously saying that 1929 was starting all over again. As it turned out, one of the best times for you to have bought stocks in recent years was soon after the 1987 crash." Well, our NYSE Bullish Percent took us to defense September 4th 1987, and back to offense after the crash at 8% bullish the first week in November. You missed the 20% one day decline, he didn't. Why? Because he was not educated in how to manage risk. If you have more than, let's say, 8 years to get back even if you ride down a bear market then stay fully invested. My daughter Samantha is 11 years old and can ride down many bear markets and come back nicely. While we make every effort to be free of errors in the data on our site, it is derived from data from other sources. We believe these sources to be reliable but we cannot guarantee their accuracy. Copyright ¸ 1995-2000 Dorsey, Wright & Associates, Inc. dorseywright.com