Gyroscopic Investing

I was using 90% PP / 10% VP for a long period of time until recently. I decided a few months ago to take off a long period of time between consulting engagements for personal reasons and part of my "free time" led me to attempt to beat the PP.

Essentially, for the last two months I ran a portfolio that was 50% stocks, 15% gold, 25% LTT, 10% cash. Somewhat PP-like but definitely not PP. If anything, it was 50% PP/50% VP, except for the biggest change:

I sold all my stock index funds and built my own "index" of individual securities. The plan at the time was to avoid index funds and build my own because:

a) I felt I could beat the index which is forced to buy crap stocks like Facebook, Best Buy and Sears Holding, of which I want no part of

b) I felt I could sector-pick and tilt my index away from crappy sectors and towards "good" ones

c) Over a long period of time, I'd have lower fees than an index fund because if I reinvest dividends and don't trade much, it's approaching expense-free

Turns out I was correct on 2 of 3 (wrong on item "c"), at least over the last 6 weeks. I ran an "index" of 30 securities, and inclusive of the $7/trade brokerage fees, I beat the SP500 by 2% over the last 6 weeks with low beta. I won't bother calculating it exactly but I'd estimate a beta of 1.1

On any individual day, my group of stocks would move very close to the SP500 and beat it slightly. For example, SP500 up 0.5%, my "index" up 0.7%. I beat the index on 3 out of every 4 days on average and on days I lost, it was similarly very close.

Interestingly, the individual stocks appeared to have high betas. Over the 6 weeks, two stocks hit +20%, several hit + or -5%. Most hit +/- 1%. Overall, I did very well.

The reason I'm stopping is because it was driving me crazy. I have a no-stress attitude, and especially so while I'm winning/beating the market. However, I'd look at Google Finance (that was tracking my stocks), no less than 200 times each day. I'd make a few small trades every week to "balance" things out and tweak them further.

I had a list of 50 other stocks I liked but initially felt were too highly priced when I built my index, so I was watching for dips.

I'm very happy to have beaten the market over 6 weeks and feel that I can likely continue to do so going forward, although not as successfully as this. Annualized, I beat the market by almost 18%... but of course I can't guarantee the same performance over a full year as I did over the last 6 weeks.

It's also noteworthy that I took a full week, working about 40 hours of research to select my initial 30 stocks... and I'm embarrassed by the fact that I missed several things in my research that only became apparent after a week in.

Basically, I'm cashing out my chips, going back to 90% PP with 10% VP and going to stop obsessing over things.

I don't think I can ever go full PP because there's always opportunities that I "see" in the market, and given my successful track record over the last 10 years, I can't completely ignore them. My true VP is up 30% over the last year (not counting the "index" I made) and typically runs about 15% to 20% per year.

However, it's with great risk and lack of guarantee, and also with a moderate amount of stress. As of today, I sold almost all 30 of my index stocks and switched back to TSM. I have a feeling things are going to be crazy in 2013 and I'll be less stressed to be in pure PP than to screw around.

"My true VP is up 30% over the last year (not counting the "index" I made) and typically runs about 15% to 20% per year."

you should write a newsletter.

murphy_p_t wrote: "My true VP is up 30% over the last year (not counting the "index" I made) and typically runs about 15% to 20% per year."

you should write a newsletter.

I was going to restart my blog and put that on there but I'd be hypocritical because I don't believe in that kind of thing.

TripleB wrote: Basically, I'm cashing out my chips, going back to 90% PP with 10% VP and going to stop obsessing over things.

I don't think I can ever go full PP because there's always opportunities that I "see" in the market, and given my successful track record over the last 10 years, I can't completely ignore them. My true VP is up 30% over the last year (not counting the "index" I made) and typically runs about 15% to 20% per year.

I agree.  It's not worth the immense active stress of micro-managing a large stock portfolio allocation, especially if you can't afford large capital-destroying mistakes.  The only way it would work is if you 100% automated your approach at FolioFN or with self-written software algorithms and have lower commissions than $7 a trade.  Human emotion is a weird thing.  I have more problems with my small VP losing than I do large chunks of the PP, because the latter is not in doubt as to being viable long-term.  The release from the uncertainty is priceless.

Even though I'm not fully invested in the PP yet, I do follow the 90%/10% split, except I merge the VP into the PP and manage it as a single portfolio.

For my VP consisting in value stocks, I made a software that checks by itself whether my selling criterion have been met yet on this or that stock, and nothing more. If a selling criteria is met, it just tells me "SELL" and I just have to do it. It doesn't show me the current price, how much I virtually won, how much I virtually lost. Because I know that's the hardest part in this investing strategy : keep the emotions outside and follow your strategy. So, after finding a winning strategy on the stock market (which I think is possible), one has to find a way to force him follow it WHATEVER HAPPENS, or it won't work.

Simplicity and objective criterion are the key, and that's a reason why a global AA like the PP works so well.

Glad to have beaten the market over 6 weeks? If you play long enough, the house always wins. I thought I was an investing genius in 2007. I was up 73%. Then 2008 came along and I was down over 50%. I no longer attempt to "beat the market" which as far as I'm concerned is equivalent to trying to beat a casino.

I think separating the VP from the PP (different brokers even) lowers the stress level. If you do this you can afford to have more concentrated positions in the VP because it is money you can afford to lose. I think trying to find huge inefficiencies in the market for 20+ stocks is too much work for me. I can't see myself ever having more than 10 individual equities unless the market plunges and dozens of no-brainer cigar butts wash up.

recognizable & funny
I follow the same trail with a 50 % stocks, 20 % Bonds &  Gold & 10 Cash and with individual stocks.
I have lost against the full PP portfolio by 0.3 % a year (2002/2012).
I beat the global world stock index with 12 % (2002 / 2012). That is only 1 % a year.
So it is not worth the effort.
However I'm by no means stressed. I calculated the portfolio once a month and trade maybe once a year. I don't try to be  a stockpicker. I buy companies I know and need as a normal citizen.
I just like to own individual stocks instead of non personal EFT. So I can say to the "arrogant" IBM account manager: be quite or I will get you fired.
I follow the same strategy with the portfolio's of my childeren. Just asking what componies they like. So they own a tiny piece of Apple, Mcdonalds and H&M. Everytime they eat a hambuger, they price they pay will come back to them in dividend. That makes economical education far more interesting.

I slipped and bought a bunch of Smith and Wesson and Ruger stock yesterday when they were down about 20% over 3 days due to the CT shooting.

Up 5% and 4% on market open, immediately moved out and back to PP. I'm not addicted. I can stay with PP anytime I want.