Decision Moose

[Clive]

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[Austen Heller]

Hi Clive,

You've mentioned Decision Moose many times in your posts, so I decided to do some research on this investment method.

For those who are unaware, the Decision Moose (DM) tells you to put all of your money in 1 of 9 possible investment choices, then once a week, the DM tells you to either HOLD your current investment or SWITCH to one of the other 8 investments.  The investment choices are: Cash, Gold, Long-term Bonds, and 6 types of world stock ETFs.

There are (at least) 2 issues that are troubling to me:

1) The analysis which leads to investment choice is completely hidden - a "black box" that may stop working at any time.

2) The DM site can be shut down or start charging a high fee at any time.

In my analysis on the DM, I looked at each of the investments held by the DM since 2005, and then compared the performance of the investment held by the DM to the other 8 investment choices that the DM was not invested in.  Here is a graph of the analysis:



For each time period in which an investment was held, I plotted the performance of the investment held by the DM (the yellow dot), and also plotted the investment performance of the other 8 investment choices (the black dashes).  So, as an example, you can see that during the 16-week period ending on 3/20/2008, the DM had been holding the #1 (best) investment (Gold) - very good!  As another example, during the 15-week period ending on 7/24/2009, the DM had been holding the #8 investment (Cash) - not very good!

The data can be summarized in a different way, by looking at the rank (out of 9) of each investment that is held by DM, and then plotting versus the length of holding time (in weeks).  For instance, it's OK to pick the 7th, 8th, or 9th best investment, as long as the holding time is short.  Likewise, if the 1st, 2nd or 3rd best investment is picked, it would be good to have very long holding times.  Here is the analysis:



My analysis has focused on the 34 investment holding periods since early 2005.  You can see that the DM is selecting a top investment (ranked # 1,2,3) in 13/34 cases (38% of the time).  A middle investment (ranked # 4,5,6) was picked in 8/34 cases (24% of the time).  A bottom investment (ranked # 7,8,9) was picked in 13/34 cases (38% of the time).  But, when a top investment was picked, the holding time was generally longer than when a middle or bottom investment was picked.  For instance, in 4 cases, a top investment was picked and the holding time was at least 15 weeks. However, there were 5 cases in which a bottom investment was selected and the holding time was at least 10 weeks, which is troubling.

Over the selected time period of analysis (3/24/2005 - 9/29/2005), the DM approach had a return of 91.15% (annualized rate of return = 12.45%).  Over the same time period, my analysis of the PP indicates the return is in the range of 60-70%, which is also very good.  However, let us remember that the Decision Moose approach will often have you at 100% equities, which is certainly very high risk, and should be considered a "wealth building" approach.  By contrast, the PP is more of a "wealth preservation" approach, so while the PP returns will sometimes be lower than the Decision Moose, the risks of the PP will be lower too.

[Austen Heller]

The 100% all-in on one asset alone however is a big worry and the only way to reduce that risk is to limit the amount of funds allocated to the method.  Reducing the allocation down to 25% of total funds is of comparable single asset risk as that of the PP.

That is a great point.  I am very tempted to use the Moose as a small % of my total portfolio, as part of the Variable Portfolio.

2 additional points I can make:

1) On the Plus side, you can see on my first graph above that most of the Decision Moose holdings (Yellow dots) have positive returns, and any negative returns were small (less than -5%).  So, if the DM performs as it has over the last 5 years, future drawdowns should be low.

2) On the Minus side, I find it hard to "trust" someone else to make investment decisions for me.  Following the advice of the Moose could be compared to other "hands off" approaches such as paying a financial advisor, or following an investment guru's newsletter.  Back in 2006-2007, when I knew a lot less about investing, I bought Bob Brinker's Marketimer newsletter, for only $185/year.  This thing cost me a lot of money, since it recommended staying fully invested in stocks and even recommended points to "buy on weakness" as the S&P500 went from 1500...1400...1300...1200....  I kept buying all the way down, until I finally exited at 1200 with major losses.  Will I remember this lesson forever, or will greed make me forget?  Probably the latter.

[SmallPotatoes]

I wouldn't much trust a moose to manage my money.

[Austen Heller]

I'm predicting Decision Moose as likely coming out of long dated treasuries into either IEV, ILF or EPP next Sunday.

This would definitely be interesting to see.  I have been holding onto a chunk of long-term treasuries for a while, but as the rates get closer to 0%, these may have to jettisoned.  Of the 3 non-cash components of the PP, the long-term treasuries are the only one that can fail to offer the needed portfolio protection and upside gains, but only under the condition where rates approach the zero boundary.  If rates on the 30-year dip down to around 3%, it may be time to head for the exit.  The risk-reward ratio at that point is just no good.  Sure, rates could go lower than 3%, but the upside gains from such moves gets smaller and smaller as we approach 0%.  Not to mention that 0% is fantasy anyway...the 30-year rate would probably never get below 1.5-2% under any realistic scenario.

[MediumTex]

If rates on the 30-year dip down to around 3%, it may be time to head for the exit.  The risk-reward ratio at that point is just no good.  Sure, rates could go lower than 3%, but the upside gains from such moves gets smaller and smaller as we approach 0%.  Not to mention that 0% is fantasy anyway...the 30-year rate would probably never get below 1.5-2% under any realistic scenario.

It's funny how things that at one point may seem inconceivable at another point begin to seem inevitable.

In any case, you are suggesting a possible bottom in LT treasury rates that is 200 or so basis points from where we are today.  That would probably be good for a 50% or so gain in LT treasurys from today's prices.

[Austen Heller]

In any case, you are suggesting a possible bottom in LT treasury rates that is 200 or so basis points from where we are today.  That would probably be good for a 50% or so gain in LT treasurys from today's prices.

Exactly.  According to my calculations, if 30-year bonds go from today's rate (3.7%) down to 1.5%, that would be good for a 53% rise in value.  SO at today's yield, there still plenty of "meat on the bone".  But as rates get lower, the amount of meat starts to shrink.  With stocks and gold, there is no limit on the amount of meat; these assets can always double, or triple, or go up 10x.  But with bonds, we have to be aware that there are limits to the profits.  The downside is always limited to 100% of your money, but if the upside is also limited (as with bonds nearing the 0% rate boundary), the risk/reward ratio must be considered.

[Storm]

You have to take into account that in such an environment where yields approach 1.5-2%, the economy would be in a deflationary spiral so anything above 0% would be a nice return, and even the cash portion of your PP would be giving a nice return (although difficult to calculate).  The coupon rate on my LT treasuries is 3.875% so there is no harm in holding them throughout an extended deflationary period.  Where else can you put your money that will give that kind of a return during a deflationary period?

[Jan Van]

Don't know if you guys have fancy testing/simulation tools, but one thing I was wondering about is adding something like a trailing stop loss at 4~6% or so, and how that would work out. This mainly because of the loss between 10/16/2009 and 01/22/2010 in ILF (Latin America).
When looking at the chart ( http://www.barchart.com/chart.php?sym=I ... F2010#jump ) it shows a nice uptrend on the first buy, so I wouldn't have hesitated to buy there. But I am wondering about how to better protect against the downside...

[6 Iron]

Clive, I am intrigued by your interest in decision moose, particularly considering such a substantial weighting. I have thought of using a small portion of my variable portfolio to scratch the market timer's itch in this fashion, but I have the following issues with Decision Moose:

What if he stops?
Why the secrecy behind his forecasting technique, since he gives away the signal?
His performance since I started monitoring in 2008 has lagged his prior performance. Does our present global economy not fit his model, or was there more luck involved in his performance?

[possum]

DM is getting knocked around pretty good and has seemed out of sync with the market for quite a while.

Just missed a 4+% increase by being in cash this week - not a pretty switch so far.

[MeDebtFree]

These relative strength based approaches get knocked around quite a bit but when they zoom they really zoom.  Be patient, live with the volatility, and at some point you will be handsomely rewarded (IMHO).

[possum]

DM is getting knocked around pretty good and has seemed out of sync with the market for quite a while.

Just missed a 4+% increase by being in cash this week - not a pretty switch so far.

Looks like the Moose creator realized the the system was out of sync as well and has tweaked it in the last couple of weeks according to some subscribers.

[Jan Van]

Don't know if it has been tweaked yet, but sounds like he's working on it.

[Jan Van]

Well, it's free for a couple of weeks:

http://www.decisionmoose.com/Moosignal.html

"Stop sending money... for now. Access all club pages for free from December 25 through January 6! Check out one of the most comprehensive (and certainly the cheapest) online investment newsletter in the world at no cost. The current update (12/17) will be available for free as of midnight, Christmas Eve. The following update (12/24) will be available before the open on 12/27, also for free. 2011 subscriptions go on sale January 1, but open access will remain through January 6th. "

[Maestro G]

DM's current IWM position looks very close to stop-loss'ing out into cash (or perhaps a rotation into SP500) at around a break-even overall gain/loss level.

Since the 12/03/10 switch to IWM, DM is up approx. 12%!

Seems like the model is on an upswing.

Maestro G

[AdamA]

DM was down less in 2010 (around -5%) than the similar style/model that I've opted to track (that was down -19.4% in 2010).

2006 +31.4%
2007 +34.8%
2008 +28.6%
2009 +46.4%
2010 -19.4%

Per the website, the past 5 years have returned 99% for DM, roughly 13.2% apr.  How have you managed to do so much better?  (Your average APR is 24%).

[MediumTex]

Most of the original Turtle traders (focussed run winners, cut losers quickly) have gone on to build substantial real wealth. DM, RtW, Zee's, my own...etc are just forms of that style.

I thought I read on another board that the turtle system had run into some serious problems in recent years and had been tweaked to regain its mojo.

Is that correct?  If it's correct, doesn't that mean that the system could break again? 

On balance, how much greater are the risk-adjusted returns of the system you are using compared to the PP?  I see the bigger returns, but I don't have a sense of how much more risk was needed to get those returns and how much of a learning curve there is to actually understand how and why the strategy works in the first place.  I do not think that an investor should ever trust a black box.

Clive, I have also noticed that your own method seems to be in a constant state of evolution.  I think you are that rare individual investor who has enough talent and skill to consistently bring home large returns (HB talked about people like you and they are out there).  The thing I wonder about, though, is how a relatively unsophisticated investor could replicate your success without taking on unwanted risk.  I also wonder if following your approach, even if you understand it perfectly, wouldn't basically be a black box to someone else, and thus violate HB's rule against not following a strategy you don't fully understand.

[AdamA]

I thought I read on another board that the turtle system had run into some serious problems in recent years and had been tweaked to regain its mojo.

My understanding of the Turtle system (or really any trend following system) is that they often don't work...probably, they don't work the majority of the time, but, when they do work, they do very well and this makes up for the losses. 

I think the discipline required to follow such a strategy is rare.  I would never have the stomach for it.

[Lone Wolf]

Bottom line for me MT is that I'm nowhere near wealthy enough to be able to live of 1 or 2% real rewards that could be earned from 'safe' investments (i.e. index linked treasury's), so I have to take on more risk. The way I see it is that I could invest in properties and generate 5%+ type real rewards relatively easily, but with the inconveniences that managing such endures. A 4%+ real from investing is IMO the better option.

I am genuinely impressed that you have lived off of your investment income for 7 years.  That's an awesome achievement.  It's also a very rare one because that kind of investment success over some rocky markets doesn't just happen on its own.

But I want to ask you something from my point of view (as a guy with not much appetite for risk.)  If I find myself in a position where I can't live off just my investment income (as a relatively young-ish family man, that is exactly the position in which I find myself!), I would be even more nervous about reaching for yield.  As you take more risk, aren't you concerned that you could unexpectedly erode your net worth and find yourself even more needing to reach for yield to make up the lost ground?

It sounds to me like your VP goes beyond "money you can afford to lose".  How do you handle the possibility that the additional risks you are taking don't break your way?  (I realize that you're not a 100% "orthodox" PP investor and have a different view of the VP's role, which is why I think your perspective on this would be educational.)

[AdamA]

I was looking at the web site again, and then numbers are just too good to be true.  It seems like something is a little off...does anyone know anything about Decision Moose beyond what's offered on the web site.  I'm not thinking of investing with it, just curious. 

[Reub]

Clive, do you see any advantage in buying the DM newsletter?

[moda0306]

Clive,

I see you left out 2009, where you would have had a 20%+ loss.

Just sayin'.  I've done this before and it's interesting to see the results, though.

[moda0306]

I thought stocks did 17% in 2010?

[AdamA]

Clive--

So it's similar to the momentum method used by Mebane Faber?