NASDAQ-100 daily returns since inception

[D1984]

I was working on a tweak to the PP's stock allocation that (if all goes as expected) can actually increase total return while decreasing TE vs the TSM (it could also be used in a Swedroe or Clive style FTM to dramatically reduce tracking error and increase returns. This tweak relies on non-correlation between two or three very different classes of equities. One of the asset classes is a variant of large growth that does VERY well when LCG does well and sucks out loud when it does poorly. To do an accurate backtest, though, I need NASDAQ-100 (not NASDAQ composite...that has almost 3000 stocks in it) daily return data (actually, just the open and close price would be fine) from January 31, 1985-the inception date-to present. I have said data for the NASDAQ composite but even though the Composite is heavily weghted towards LCG i.e. (it is market cap weighted and not equal weighted) it still has some mid-cap and small cap growth in it...and we all know small growth is one of the worst rturning asset classes (not to mention it sometimes correlates more with small blend or small value than with LCG).

I have daily open and close price data from Jan 1 2000 until now. Does anyone have daily open and close data (can be with or without dividends...the NASDAQ 100 pays less than 0.7% divvys anyhow so I'm not too worried about missing out on them) from anytime before that (and especially for any time before Jan 1 1995 as if I had to I could use RYOCX data for 1995 to 1999)? Thanks.

[stone]

D1984, I had wondered before whether for a US investor, it might make sense to hold stocks split between QQQ and Berkshire Hathaway. The Nasdaq100 seems to zig when Berkshire zags to the extent that that can be said for any diverse US stock holdings. I suppose Berkshire Hathaway is a conglomerate of large blue chip dividend stocks, a huge insurance business and a collection of small cap value type businesses.
I'm UK based and I hold the stock part of what otherwise is a PP as equal parts CTY, BRSC and TEM. Those stock closed end funds seemed to me to zig and zig somewhat differently from each other which was what I wanted.

[D1984]

Stone, a Berkshire Hathaway/NASDAQ mix wouldn't be bad (I'll run the correlations when I get the chance later today; I have BRK-A price return data back to 1977 somewhere if I can find it) but it has several shortcomings:

1. BRK did too poorly IMO in 2008 and 1990 to be considered as the "stable" holding opposite something volatile like QQQ. My personal criteria for "stable" funds/holdings was that they lost less than roughly 80% of what the market did that year (i.e. it lost 37% so losing anything more than about 30% or thereabouts is too much)

2. BRK holds a railroad/some banks/consumer discretionary companies etc; what I want for my "stable" blue-chip stock holding is mostly: A. consumer staples companies; B. non-financial dividend paying blue chips with low or moderate debt on their balance sheets, low to moderate PEs/PBV/PCFs, and that make products/services that people (or businesses) will use even in a recession; and perhaps C. "safe" stocks like regulated pipelines and utilities. Convertible bonds would also work for some of the stable holding. Basically I want stocks that will at least do OK in a bull market (in such a bull run when large cap growth and SCV are doing phenomenally well the "safe" stocks will be underperforming relative to the market) but in return they only lose maybe 15-29% in a market like 2008.

3. BRK is personified by Buffett; when he dies who knows what happens to them,

4. Berkshire does own some "small value" stocks but I like to keep my SCV separate from my blue chip large cap value,

5. Because BRK is only one company if it gets get hurt by a bad event (think the Lubrizol scandal) it can lose stock value even when the book value of the company is increasing...if you own a closed end fund or mutual fund then even if this happens to one of the stocks in it the dozens of others comprising said fund will still be OK.

All in all insurers like Berkshire...or Leucadia, Markel, Fairfax Holdings, Plymouth Rock Insurance (as the closed-end fund Central Securities), etc aren't bad companies to own as they essentially have an interest-free loan in the form of "float" and can thus borrow money cheaply to make good investments but they should only IMO make up a small portion of the "safe" stocks in a QQQ/safe blend for the reasons listed above.

My personal choices for the "safe" stock portion would be either:

A. A stable equity income, dividend, growth, or bluest of the blue chips fund (VDIGX, TWEIX, PRBLX, LEXCX, etc) that has proven itself in at least two bear markets,

B. A low volatilty fund (Powershares I believe has a low volatility stock ETF with index backtested data to the early 90s...the index it is based on lost less than 25% in 2008),

C. A blended fund that either holds stocks and bonds (VWELX, PRWCX, etc) or stocks and cash (COPLX, VFAGX, etc),

D. A convertible bond fund.

E. A consumer staples fund (Vanguard and Fido both have decent offerings here)

CTY does seem like a good equivalent of "A" above for a UK investor...IIRC it lost about 25% in 2008 and a few percent in 2007 but has been pretty goopd otherwise and has increased dividends for over 40 years.

I wasn't planning on using QQQ for the "volatile large cap growth" portion but actually a 2X daily QQQ equivalent (UOPIX or QLD); that was why I needed daily data for the backtest. The increased volatility of a 2X NASDAQ fund (up more than 100% in 1998; more than 200% in 1999; down about 70% each year from 2000-2002 and in performing so lost more in those three years combined than the Dow did during the Depression; up roughly 100% in 2003; lost nearly 73% in 2008 but roared back in 2009 and 2010 with 121% and 37% gains respectively, etc) when combined with an SCV fund and "safe" stock fund (or combined with just an SCV fund if you want to maximize volatility capture gains and/or have offsetting assets like gold and LTTs or have more than 65% STTs/TIPS in a tilted FTM port) actually helps increase returns significantly.

I also did a backtest with Alger's Spectra fund (SPECX...available no-load at E-Trade) as the volatile LCG portion; it consistently has returned about 120-130% upside and downside capture (when LCG does well it does great; when LCG catches a cold SPECX catches stage three pneumonia) since the early 70s. The results were roughly the same as with a non-leveraged Nasdaq fund.

Vanguard PrimeCap or Calamos Growth work as well but they aren't as volatile as Alger Spectra or a NASDAQ fund (not even considering a 2X NASDAQ fund!) and so actually produce less volatility capture gains.

It is truly amazing what kind of volatility capture gains you can get with three non-correlated funds like the above. From 1994 to 2011 a combination of FDFAX (the only consumer staples fund that goes back that far), UOPIX (backtest only before 1998 and using NASDQ composite data for the backtest since I'm still looking for NASDAQ 100 daily data), and SCV (DFSVX....or RMT if you don't have access to DFA funds) when rebalanced annually returned almost thrice what the funds held separately would have returned (assuming you put a third in each fund and rebalanced vs doing the same and not rebalancing). I can post the numbers if anyone is interested.

Such a combination (or even skipping the safe stock section and going half and half SCV and volatile LCG) would provide better returns in a PP and somewhat better returns in a Larry-style FTM while generaly reducing tracking error in both vs the TSM. They also would virtually eliminate the 3 flat years (1997-1999) in a USA based Clive-style FTM portfolio (15% gold, 25% SCV, the rest in a 5-yr or 10-yr STT ladder) that happened because gold got killed in 1997, SCV lost in the double digits while the stock market as a whole boomed in 1998, and anything but the shortest term Treasuries lost money in 1999 as rates rose sharply (1999 wasn't too good to SCV either...they didn't lose money but again lagged the market). Clive's FTM portfolio is IMO even better than Swedroe's for reducing volatility and surviving inflationary/deflationary periods but tracking error of such a magnitude that one would tread water for three years of the biggest bull market in history (and the final epic rise and topping of the dotcom bubble) could cause an investor to abandon such a portfolio right when it was about to shine in 2000 and beyond.

Of course it goes without saying that intl diversification (EM small and value, intl large value, and maybe a growthy large-cap firecracker like JAOSX or BREAX) should be added as well.

How many years have you been using your three-fund combo and how has it done vs the FTSE 100 since you started?

[stone]

D1984, I'm about as far from being an experienced investor as you could imagine. I've only held the (sort of) PP for the past year and it has been the first attempt at investing I've ever made apart from buying a few stock mutual funds just over a year before, getting cold feet and selling them immediately. I didn't loose any money doing that (and actually reserved some tax sheltered space in an ISA) but I came to the realization that I didn't want to .
I'm very lazy with the analysis compared to you. I have two parallel PP accounts. In one of them, I have been expanding it by moving cash savings into it over the past year as and when my better half deems fit (she doesn't follow the markets at all so this is based on her thinking I'm less insane or whatever ). For that account the division between the assets has periodically been rebalanced by topping up. What has really struck me is how, to date, the TEM has shown better overall gains than gold even though it had a dire plunge at one point of, I think, >25% or there abouts. The BRSC has also shown gains over what I spent on buying it despite the discount widening during the year and also a >20% plunge at one point. I haven't market timed when I put money in unless you count waiting until options expiry dates for gold purchases.
The results of current value compared to purchase cost are BRSC+5.39%,CTY+2.77%, TEM+9.94%, gold+7.50%, TR60+11.23%, overall 8.12%. Much of that is from quite recent purchases because it now has three times as much in it as it did when I started it last March. That also doesn't include the dividends and interest. CTY has large dividends of about 5%. Because we have much more cash than we have in the non-cash I wasn't including cash as part of the (sort of) PP. The other (non-taxable) account is more awkward for me to keep track of because I moved brokers with it part of the way through. Sorry to be so vague.

[stone]

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD
-4.61 49.87 14.47 55.98 20.59 51.81 -40.81 96.71 29.41 -17.82 13.14

-19.1 13.91 15.05 22.51 22.11 -4.7 -21.36 24.14 24.68 2.12 3.02

-34.52 49.97 31.92 33.57 38 -14.04 -41.26 59.82 78.99 -13.2 12.66

D1984, I looked on Morningstar for the annual returns for TEM, CTY and BRSC from each of the last ten years. It shows how those three investment trusts  behave differently from each other.

[D1984]

An allocation of 15% International Small (IS), 15% International Value (IV), 70% 5 year T as a Fat Tail Minimisation Blend (FTM) [Splitting value and small out separately rather than holding a single Small Cap Value fund means that you have greater control over how much small and value is actually held compared to that of a all inclusive fund].

Doesn't this also mean that your "international small" fund will hold some smallcap growth as well? SCG has returned the least of any of the four categories (SCV, SCG, LCV, lCG) by size and growth/value factor. That's not to say that there aren't some decent "international small" funds (TEMGX and VINEX come to mind although the former is more small valuey than small blend) but these funds aren't as pure small value as, say, DFIVX...although to be fair a smallcap blend intl fund also wouldn't have done as badly as DFISX or DISVX did in the mid to late 90s; those years were not very kind to international SCV.

A big difference in the assets you mentioned D1984 is that the FTM/DM/PP individually rarely lose, and even when they do lose they lose relatively little. Which means that rebalancing between the three arises more out of profit taking - when one has relatively pulled ahead of the others - potentially by a sizeable amount. i.e. you can still capture 'rebalance' benefits or 'volatility capture' gains, but are doing so in a less risky manner.

While it's true that the PP/FTM/DM themselves rarely lose year-over-year individually, the assets each holds can indeed have very badly losing years (gold in 1981 and 1997, stocks 2000-02 and  2008, LTTs/zeros in 1981, 1994, 1999, and 2009) just like SCV or 2X NASDAQ can (OK, maybe not quite as much as 2X NASDAQ but given that we are comparing a 2X fund vs a 1X fund/ETF that is too be expected). I never suggested that anyone should hold a mixture of SCV and 2X NASDAQ as the only thing they invest (doing so would mean that someone was either reckless, stupid, or financially suicidal IMO) in but rather that it be held as the "domestic stock" portion of a PP or FTM port (in either case it would be at maybe a 15 to 20% allocation-any of the remaining stock portion would be filled by intl stocks-but no more and would have counterbalancing assets as well). If volatility is still a concern a consumer staples fund or non-volatile stock fund like I listed above can be added so that rather than holding the domestic stocks as 50/50 2X NASDAQ/SCV they would be held as 33/33/33 2X NASDAQ/SCV/low-beta stocks.

Finally, doesn't a lot of the gain in the DM/PP/FTM belnd come from 2002 when DM performed so spectacularly? It seems like 2002 is an outlier and not too likely to be repeated.

2002    2003    2004    2005    2006    2007    2008    2009    2010    2011    YTD
-4.61  49.87  14.47  55.98  20.59  51.81  -40.81  96.71  29.41  -17.82  13.14
                             
-19.1  13.91  15.05  22.51  22.11  -4.7  -21.36  24.14  24.68  2.12  3.02
                             
-34.52  49.97  31.92  33.57  38  -14.04  -41.26  59.82  78.99  -13.2  12.66

D1984, I looked on Morningstar for the annual returns for TEM, CTY and BRSC from each of the last ten years. It shows how those three investment trusts  behave differently from each other.

Stone, thanks for posting these. Those numbers are fairly similar to what an EM fund (think EMF, VEIEX, or DFEVX), a non-volatile stock fund, and a volatile stock fund (although I think your volatile fund-BRSC-was LSE listed smallcaps/midcaps and not SCV or volatile LCG, correct?) would have done here (with the exception that using SCV/2X LCG means the volatile fund I was talking about would have higher highs and lower lows than the one you posted).

D1984, I'm about as far from being an experienced investor as you could imagine.

Probably no further from it than I am.  My only "claim to fame" as an "experieinced investor" is that I went to almost all cash in late July 2007 (the only thing that wasn't converted to cash was about 4% of my assets....my non-vested portion of employer proft sharing kept in company stock-because I couldn't sell all of it until I'd been with the company for five years) and thus missing the 2008 bear market. Of course, I also didn't get back into the market at all until late 2009 and thus managed to miss the batter part of the huge rally that started in March of '09 (at least that year's profit sharing contribution from my employer carried my 401K to about a 9% return that year; that contribution bought company stock in April of 2009 when it was trading at maybe half its book value and at only a litttle more than the value of its cash holdings...not that I can brag about this-missing the crash and then still having an OK 2009-as proof of my investing prowess; far from it...if I had had my way all of the profit sharing contribution would have been put immediately into cash but company rules required that at least 60% of it be put into company stock until I was fully vested).  In early 2010 I put much of my non-speculative investment money into a PP.

've only held the (sort of) PP for the past year and it has been the first attempt at investing I've ever made apart from buying a few stock mutual funds just over a year before, getting cold feet and selling them immediately. I didn't loose any money doing that (and actually reserved some tax sheltered space in an ISA) but I came to the realization that I didn't want to  .
I'm very lazy with the analysis compared to you. I have two parallel PP accounts. In one of them, I have been expanding it by moving cash savings into it over the past year as and when my better half deems fit (she doesn't follow the markets at all so this is based on her thinking I'm less insane or whatever  ).

Were you the guy on here (maybe it was someone else and I'm mistaken...if so I apologize) whose wife wanted to be all in cash and wouldn't invest in anything else? Seriously, this is one of the (admittedly many) reasons why I'll never get married. I don't want to let another person tell me how to invest/save/spend my money and if any woman tried to tell me how to do so I'd tell her to leave and not to let the door hit her on the ass on the way out. I can't even stand the idea of so much as having a joint checking account with someone. I definitely agree with Harry Browne as regards his opinions on marriage (at least as he formulated the in "How I Found Freedom in an Unfree World" ) and I personally would regard being married as not just a loss of individual sovereignty, loss of my personal liberty, and having unwanted committments to another person, but as being akin to being someone else's slave (especially with the divorce laws the racket they are now...you have to do what your spouse says or risk losing your assets, having you wages garnished, being kicked out of your own home based on lies and false accusations, etc) and losing a significant amount of the rights I have now to do as I please (as long as I don't harm anybody) in my own time without having to worry about what another person thinks of it.

[stone]

D1984, I completely see where you're coming from about needing to avoid having investment decisions muddled by having two people with conflicting views and the same pool of savings. On balance though I have to say that getting together with her has been far and away the best thing that has ever happened to me. I'd rather be penniless and living with her than a billionaire and not with her. The thing is that we have never had any niggles about spending money. We had a joint current account mortgage, spent what ever we wanted and never gave money a thought. It was only once we had in that way inadvertantly paid off the mortgage very early that any of this difference came to light. Then my better half got a payout when her employer was taken over by another company. She was perfectly happy to continue not thinking about money at all. In many ways I think her position on this is actually the logical one, certainly more logical than my (perhaps unwholesome and certainly distracting) fascination with money. It is perfectly true that many many people have made worse investment decisions than being 100% cash. I guess that over the years we have been together my wages have been about a third of the money we have had, her wages have been about a third and the payout when her employer was taken over was about a third. On that basis alone what she says is paramount. I also have had psychosis in the past and that doesn't exactly qualify my judgment as being something to trust .

Back to what BRSC is. It holds small and micro companies listed on LSE or on AIM. AIM is a London exchange that has very lax standards. I suppose companies on the AIM market are a bit like used cars in a car auction. To my mind long established managed investment trusts that have experienced people on the ground make sense with "dodgy" markets such as the London AIM or Emerging Markets though I know most people on here are indexing die hards. Is BRSC really not as volatile as you were thinking was appropriate? The 78.99% gain in 2010 is a sizable gyration. The closed ended structure of investment trusts means that swings in the price/NAV ratio accentuate the volatility. I also like the robustness of the closed ended structure and the fact that it avoids the fund being saddled with trading costs. Investment trusts seem indestructable. That CTY investment trust dates from the 1800s I think. Leveraged ETFs seem by contrast somewhat flimsy and saddled with a lot of trading cost burden.

In the UK we don't have much in the way of classic large cap growth companies (though NASDAQ 100 companies do of course opperate over here). I suppose ARM holdings is the only company like that on the London exchange but I'm happy to be corrected on that. I guess the UK business model is to start up with the hope of being aquired by a NASDAQ 100 company. The other issue is that some of the NASDAQ 100 seem to be morphing into being stodgy large stable dividend type companies. Isn't Microsoft now a holding of some avowedly low beta funds?

[stone]

D1984, going into cash in 2007 is quite a claim to fame. Was there anything you can put your finger on that made you decide? Were you tempted to get back in in the spring of 2009 or did everything seem doomed at that time?

[stone]

D1984, QQQ is 20% Apple isn't it? I suppose QLD might be considered as 40% exposure to Apple. As such it has more individual company risk than many portfolios with individual stocks would have. I know you think holding individual stocks is dangerous and I can see your point. I have pondered though whether holding an equally weighted set of say ten diverse decent individual stocks might be the optimal way to capture volatility within a PP or FTM type portfolio. ngcpa on here said he holds individual stocks within a PP and had a thread about it:
http://gyroscopicinvesting.com/forum/ht ... ic.php?t=7

[D1984]

Stone, as regards MSFT, AAPL, and individual stocks:

AAPL makes up a little less than 14% of the NASDAQ 100 IIRC. It did make up about 20% at one point in 2011 but they reweighted so no one company could make up that much. The other four or five top holdings now make up at least as much and probably more than Apple does and there are 94 stocks besides them and Apple as well. I'm not to worried about single stock risk at this point although if Apple got to maybe 23-25% of the index I might be concerned.

MSFT has a beta of around 0.97 or 0.98 so it is overall almost as volatile as the market as a whole (just a tiny bit less). It did better than the S&P 500 in 2007 (the S&P 500 did around 5% counting dividends, LCG did around 13%, and MSFT returned about 20.8%). It did do worse in 2008 then the S&P 500 but did better in 2009. It fell more in the few months of mid-2010 after the Deepwater Horizon blowout (almost all stocks had a minor correction at that point) but then rose more in July and early August 2010 than the S&P 500 as a whole did. It didn't fall quite as much as the market did in August 2011 during the debt default scare. Overall I'd still say it's at least as volatile as the market. It may not be a classic "price growth" stock like AAPL or GOOG but if management can keep earnings and dividends growing at at least a double-digit (perferably in the low-to-mid-teens or above) annual rate the share price will eventually follow. Maybe some low beta funds or equity income funds do hold Microsoft but that's probably because it is now seen as a good dividend play and becuase it has a fairly safe debt to cash ratio and is considered a cash cow rather than purely for its beta which afterall is roughly the same as the market as a whole.

I don't plan on holding individual stocks in the PP like ngcpa does (if it works for him, though, then more power to him). If I was inclined to hold individual stocks in a PP, though, I'd hold at least twelve or fifteen different ones and they would all be held in DPPs/DRIPs, held in my own name and not registered with a brokerage in my street name only, and I'd be sure to hold the individual certificates (actual paper certificates, not electronic ones) as well. Why go through the effort of holding individual stocks if you are not adding the extra layer of protection that holding them in "physical form" (like holding Treasuries via TreasuryDirect instead of via an ETF or holding gold directly in bullion form instead of buying GLD or GTU) provides?

[D1984]

Then my better half got a payout when her employer was taken over by another company. She was perfectly happy to continue not thinking about money at all. In many ways I think her position on this is actually the logical one, certainly more logical than my (perhaps unwholesome and certainly distracting) fascination with money. It is perfectly true that many many people have made worse investment decisions than being 100% cash. I guess that over the years we have been together my wages have been about a third of the money we have had, her wages have been about a third and the payout when her employer was taken over was about a third. On that basis alone what she says is paramount.

Why not just let her invest her 2/3rds in whatever she wants (even if it's 100% cash) and you invest your 1/3rd separately in whatever you wish? That would seem to make sense to me. 100% cash  does minimize any risk of market losses (since one is by definition not in the market if they are in 100% cash) but leaves one exposed to inflation risk (even 2% inflation can slowly eat away at your cash pile if it's only earning 1%) and devaluation risk (just ask an Icelander in 2008 or a Thai in 1997-98 how fun that is when you're in 100% cash...and for that matter, didn't your own pound sterling get devalued when Soros was playing his games back in the early 90s?). If I was inclined to hold 100% cash I'd have about 40% of it in a 1-5 year treasury ladder and ILSCs/I-bonds/TIPs, another quarter or so in low or no-load high cash value permanent life insurance (diversified across IULs/ULs and WL) because permanent insurance gives intermediate term corporate bond returns with near money market liquidity and safety, my everyday spending cash in rewards checking accounts so I could at leats earn 2-3% on it, a few percent in long-term CDs with little penalties like Ally and PenFed, and the rest (probsbly 20-25%) in foreign currency in case the dollar (or in your situation, the pound) devalued suddenly. Please tell me her "100% cash" was not all in a savings account paying nearly nothing.

We had a joint current account mortgage, spent what ever we wanted and never gave money a thought. It was only once we had in that way inadvertantly paid off the mortgage very early that any of this difference came to light. Then my better half got a payout when her employer was taken over by another company.

Is the current account mortgage like the "money merge account" or Home Ownership Accelerator (using your mortgage like a checking account) here in the States? I was going to get one of those but they have variable rates....4.75% fixed for 30 years wasn't a bad deal so I went with that instead.

On balance though I have to say that getting together with her has been far and away the best thing that has ever happened to me. I'd rather be penniless and living with her than a billionaire and not with her

This I cannot understand at all...well, of course I can understand the grammatical and linguistic content of your sentence, but I can't understand where you are coming from. If offered the chance to be a billionaire (or even a multimillionaire with two or three million) if it meant being alone the rest of my life, I'd take it in a heartbeat and not think twice about it. To be fair even if I wasn't a millionaire (and I'm not now, although by saving and investing wisely I hope to be one day) I'd rather be alone all my life anyhow so that's not really a difficult choice for me. I guess I just value my independence and freedom too much and don't trust others very quickly if ever.

[D1984]

D1984, going into cash in 2007 is quite a claim to fame. Was there anything you can put your finger on that made you decide? Were you tempted to get back in in the spring of 2009 or did everything seem doomed at that time?

I was not particularly tempted to get back in during the spring of 2009; I was still expecting the market to fall another 20-25% as at least one or two megabanks (think Chase or BAC or Citi) got taken over by the FDIC and liquidated and their bondholders and stockholders got nothing (hey, it happened to WaMu...although in hindsight it only happened to them so Chase and Jamie Dimon could get a big wet kiss in the form of WaMu's assets but none of their bond debts or obligations). I made the mistake of thinking that Obama actually had a spine. I should have known better when he appointed Geithner and let him stay even after it was obvious he was a big bank toadie and a tax cheat besides (I'm not enamored of paying taxes but having a tax cheat run Treasury is about as "fox guarding the henhouse" as you can get). I also wasn't expecting the government to bow to big bank pressure and make FASB allow "mark-to-magic" accounting ( "our assets are worth whatever we say they are worth" ) instead of requiring banks to value their crap mortgages and toxic derivatives at market value. Finally, the "stress tests" that should have demonstrated that (at least) BAC and Citi were insolvent were a joke; they assumed unemployment wouldn't go beyond about nine percent and let the banks value their assets at "mark-to-magic" as above (the banks called it "mark to model" but the moidels may as well have been magical based on what the assets were actually worth). I might have nibbled again on some stocks once the banks had been taken over and the market was down the expected 20% or so, but alas, that never happened and owing to all of the above a huge rally broke out in mid-March 2009 and stayed going more or less until Deepwater Horizon.

The reasons I went into almost all cash in 2007 mostly had to do with what I saw going on around me. To wit:

1. NovaStar and New Century (and a few other subprime and Alt-A MREITs) started going down like flies in early and mid-2007 as the first wave of the credit crisis (the one that was mostly just about subprime mortgages) hit. We actually had a clerical temp at my company who had worked for NovaStar and for Ameriquest before she moved to Georgia. Some of the stories she told couldn't be belived at the time (although I believe them now)...125% LTVs, no verification of anything (income or assets) on many loans, 6% or 7% cash back at closing on top of the 120 or 125% LTV loan, templates for dummied-up 4506s and 1040s so borrowers could qualify for NON-stated income loans (alll they had to do was fill in the template and print it...the 4506 was to show the broker had asked for income verification and gotten consent and the 1040 was the actual tax statement) by giving themselves a higher income than they really had, ex-strippers and ex-used car salesmen hired as mortgage brokers with little or no training and no criminal background checks...it was crazy. She had quit when she was asked to do things she knew were illegal.

2. WaMu (and IIRC Golden West) were issuing neg-am option ARMs to anyone with a pulse. That was bad enough but what WaMu (and again, I think Golden West was doing this as well) were booking earnings (and in WaMu's case, paying dividends) based on the accrued neg-am interest on the mortgages (the accrued interest functioned sort of like a zero-coupon bond against the homeowner's residence...the homeoewner chose to not pay that portion of the interest so it accrued and compounded along with what he already owed). Of course, accrued interest isn't actually interest paid to you, so what did WaMu do in order to pay it's dividends (which it faithfully increased every quarter until it went broke)? It borrowed money against the value of the accrued interest! I have no problem with someone (or some corporation) borrowing money against accrued interest on a Treasury zero; we KNOW that will be paid to them when the bond matures. Borrowing money against accrued interest on a 110% LTV no-doc option ARM "liar loan" (where in order to buy, say, a $400,000 home the borrower said his income was $80,000 a year when in reality he worked for $6 an hour at McDonalds) is another story, especially when the asset in question (the home) securing the mortgage is only really worth maybe $360,000 (at bubble prices then...it's probably worth about $180,000 now) but the appraiser knew how the game was played. Needless to say, WaMu reported rising earnings almost every quarter until one quarter it didn't. I don't want to single out WaMu since Countrywide, Golden West, American Home Mortgage, Option One did all of the same crap as far as writing bad mortgeges goes but WaMu takes the cake for paying dividends based on interest income they hadn't actually received.

3. A company called Harmon Trading Group LLC was providing 4X overnight margin (and more than that intraday I believe) to buy and sell stocks. They got around the margin limits (Reg T and the like) by making you a partner (you actually became a limited partner in the LLC if I remember correctly) and borrowing the money in the overnight repo market and lending it to their partners. This also somehow allowed you to get around NASD 2520 and the pattern day trader rules even if you didn't have the required minimum $25,000 to play with (I think because the partnership was officially doing the trading and not you...you were just a percentage partner based on how much money were had with them). They were offering far more than the 50% margin allowed by Reg T and everything was going fine for them until it didn't. I never had an account with them but since you were a partner if you did and not justa  brokerage account holder who knows if their partners had SIPC coverage or not...probably not. The 4X margin reminded me of what I had heard when on i the last months of 1928 and into mid-1929 right before the crash. It didn't seem very intelligent, riskless, or sustainable and in hindsight it wasn't.

4. The final reason was something that I experienced personally (well, not personally but it happened to someone I knew well; it wasn't just information I read about in the news and online like the examples above). I had a coworker (I'm not giving his real name here but let's call him Joe) who was a classic case of the "monthly payment consumer". If he could afford the monthly payment somehow he didn't care about the price. Joe wasn't a bad guy; he would give you the shirt off his back if you were in need and he wasn't lazy-but he was somewhat impulsive and prone to making decisions without thinking them through (mouthed off at the boss if he was angry rather than holding his tongue, been married and divorced three times, didn't always use protection and so had three kids that weren't planned despite the fact that at the time he made less money than I did and thus was getting by with help from EIC/Medicaid/food stamps, had two vehicles and an ATV repossessed from him when he didn't pay because he found more pressing uses for the money than meeting his car note, bankrupt once already and the "least subprime" of his credit cards was Orchard Bank if that tells you anything). Classic case of "in need of a Dave Ramsey ass kicking" if you ask me.

Anyway, Joe decides he wants a house for himself and his third wife. The problem was he didn't have a down payment (he was short of gas money for his truck for the last few days every two weeks until payday rolled around...you can forget about saving for a down payment) and his income didn't qualify him without overtime. Oh, and he also had a $40,000 truck (the one he was short of gas money for) that was taking up most of his income that could have gone towards a house payment.

So he goes to apply for a mortgage. He lies about his income (he was making just barely enough with overtime to qualify so he just inflates his hourly pay on the application so that it looks like he's working 40 hours a week for about twice what his actual wage was instead of working 40 hours for his regular pay and then pulling 20-25 hours of OT per week) in order to qualify. He conveinently "forgets" to mention his truck payment (he transferred the title and loan into his dad's name-his dad had good credit-a few month's before he applied so it wouldn't show on his credit and then told the mortgage broker that he owned the vehicle free and clear while he was in reality making paymnents to his dad who in turn paid the truck dealership each month...it was one of those "we-finance-anybody buy-here-pay-here" dealerships if that gives you an idea of Joe's credit) when asked about any other debts he has.

He gets around the down payment by having the seller make a "tax-deductible gift" to the "Nehemiah Foundation" which is then given to him as a 3% down payment (meanwhile the seller marked up the price 4% to make up for the gift to the non-profit). Basically this was a (legal at the time...not sure if it still is) racket to help get around the law that makes it illegal to have the seller provide a down patyment to the buyer without disclosing to the bank or mortgage lender that the down payment came from the seller. He doesn't have to pay PMI because he gets a piggyback second mortgage for 17% of the loan amount which when combined with the 3% gift downpayment means he's officially at 80% LTV (I bet you can guess that the appraisial was inflated as well).

Well, to make a long story short Joe gets his house, moves in, and about three months later (in mid-2007) the overtime dries up somewhat. At first he makes up for it by getting an unsecured 29.9% APR loan at CitiFinancial for $7,500 (and when he has trouble making payments on that loan CitiFinancial generously gives him another $5,000 unsecured loan so he can make the payments on the first one....I'm not making this up...I wish I was). After both of those run out (he later got his garnished by CitiFinancial for not paying and would declare bankruptcy again) he then can't meet both his new truck payment (in the meantime he had traded in the $40,000 truck for a brand new Dodge truck that cost $45,000; he had $2,000 negative equity after the trade-in so he owed $47,000 when he drove the new truck off the lot; don't ask me why the dealer let him do it) and his mortgage so he ends up losing his house after being late several times and finally going into foreclosure. The lender he got his mortgage from (Taylor, Bean, and Whitaker) eventually went bankrupt (gee...I wonder why?). By the time he was finally foreclosed on it was 2008 but I could see the warning signs as early as 2007; he didn't have a prayer of affording both the house AND the truck as soon as the overtime ceased. In any reasonable and sane lending climate (in 20006-07 the lending climate was more "give money to anyone who can fog a mirror" than it was "reasonable and sane" IMO), he never would have gotten a mortgage in the first place.

I guess you can say by July of 2007 I saw what was coming and decided "no thanks, I'd rather not lose my money investing in this crap". Had I really had the courage of my convictions I would have shorted Citi and WaMu and made a nice profit on that (I didn't; I was afraid to short and in fact have never shorted a stock) but as it is I'm just happy that I didn't lose any money in 2008.

[stone]

D1984, fascinating tale about 2007 situation and a good explanation as to why jumping back in in 2009 didn't make sense at the time. The spring 2009 situation really brings it home to me the dubious wisdom when people say that the thing to do is to wait until things get bad and then buy lots of stocks. Like you say, at the time it seemed as though the grimness was only getting started.

We did have one of those variable rate mortgages where the debt is in your checking account as you describe. The mortgage started out as 95% loan to value.

My better half does manage the bulk of the cash part of our savings.  I only have cash as NSI ILSC (sort of UK ibonds I guess). I totally agree about the devaluation risk of cash even in relatively benign times. In 2007 it was $2.20 USD to £1  GBP, I think, and now is about $1.58 but in 2010 went down to $1.45 or so I think.

I guess every one has different circumstances and financial requirements. I think we have an OK set up for us. There is no logic behind my interest in financial stuff. I don't have any financial goals or anything. I suppose if I'm honest my motivation is probably as juvenile as simply not wanting to be tricked by "the system" simply as a matter of foolish pride. My better half wants to be sure of always being able to support the horses she keeps as a hobby. Other than that, money only has a fairly aimless "to keep options open" role which is probably fairly bogus anyway.

[MachineGhost]

I have daily open and close price data from Jan 1 2000 until now. Does anyone have daily open and close data (can be with or without dividends...the NASDAQ 100 pays less than 0.7% divvys anyhow so I'm not too worried about missing out on them) from anytime before that (and especially for any time before Jan 1 1995 as if I had to I could use RYOCX data for 1995 to 1999)? Thanks.

Yahoo! has it.  ^NDX

Different stocks respond to different phases of the business cycle.  In general, small cap growth outperforms at the very beginning of the expansion, such as March 2009 to May 2010, then it shifts to the other categories, with large cap growth at the end.  I haven't done a formal study on this so it sounds like you're ahead of me.

MG

[D1984]

Yahoo! has it.  ^NDX

Unfortunately Yahoo Finance (it was the first thing I checked before I even wrote this post) only goes back a few years (not even to 2000). I am using QLD and UOPIX data from 1998 to present but don't have any data from before that for just the NASDAQ-100.

And I haven't done a formal study on it either...I just was looking at what could counter SCV, gold, and long Treasuries in the 1997-99 period to reduce tracking error and I figured why not go for the most extreme large cap growth (since the S&P 500 and even TSM is heavily weighted towards large cap growth) that I could find?

[MachineGhost]

Unfortunately Yahoo Finance (it was the first thing I checked before I even wrote this post) only goes back a few years (not even to 2000). I am using QLD and UOPIX data from 1998 to present but don't have any data from before that for just the NASDAQ-100.

I'm not sure what you're looking at but Yahoo has ^NDX data back to 1985.  The index itself only started in 1983.  Generally, the difference between NDX and SPX is the beta, you could simply simulate NDX back further by adjusting SPX returns.

MG

[D1984]

MachineGhost, when I got to http://finance.yahoo.com , type in ^NDX in the ticker symbol box, and open the historical prices list or historical price chart the data only go back to September 2010. When you access it do you have access to daily open and close pricesall the way back to 1985? If so, could you download it as a CSV and post it as an attachment (if the forum allows those)? Thanks.

[MachineGhost]

MachineGhost, when I got to http://finance.yahoo.com , type in ^NDX in the ticker symbol box, and open the historical prices list or historical price chart the data only go back to September 2010. When you access it do you have access to daily open and close pricesall the way back to 1985? If so, could you download it as a CSV and post it as an attachment (if the forum allows those)? Thanks.

Unfortunately, attachments aren't supported.  But try this URL:

http://finance.yahoo.com/q/hp?s=^NDX&a= ... f=2012&g=d

MG

[D1984]

Quote from: D1984 on Today at 02:04:35 PM
MachineGhost, when I got to http://finance.yahoo.com , type in ^NDX in the ticker symbol box, and open the historical prices list or historical price chart the data only go back to September 2010. When you access it do you have access to daily open and close pricesall the way back to 1985? If so, could you download it as a CSV and post it as an attachment (if the forum allows those)? Thanks.

Unfortunately, attachments aren't supported.  But try this URL:

http://finance.yahoo.com/q/hp?s=^NDX&a= ... f=2012&g=d

MG, thank you but still no dice. I tried it and it appears on that link the data still only goes back to September 15 2010 and the downloadable CSV still only goes back to September 2010. Oh BTW the UK Yahoo Finance website DOES let me go back to 1985 on NDX but I'm afraid it won't be congruent with the American one as far as numbers are concerned.

P.S. Your Barron's Gold Miner's data is available in the other thread...I posted it to r@pidshare

[MachineGhost]

MG, thank you but still no dice. I tried it and it appears on that link the data still only goes back to September 15 2010 and the downloadable CSV still only goes back to September 2010. Oh BTW the UK Yahoo Finance website DOES let me go back to 1985 on NDX but I'm afraid it won't be congruent with the American one as far as numbers are concerned.

I confirm that both datasets are identical.  It sounds like licensing issues are at play.

MG