Trading Method | Slack Investor

Measurement … the Sweet Science

“….when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind…”

Lord Kelvin, a Science “Hall of Fame” member was right … Particularly so when it comes to your investments. As well as some notable scientific discoveries, including the invention of the absolute temperature scale which defines the lowest possible temperature – at which atoms stop moving (-273.15C) – The wise Lord Kelvin showed a respect for measurement … and the nerd in me remembers the graffiti homage from Physics Lab toilet doors …

Absolute Zero is Cool!

Slack Investor takes the measurement of investment performance very seriously and puts some effort into doing it right. Slack Investor is old enough to recall the famous case of the Beardstown Ladies Investment Club – a club that published a book in 1994 that claimed a market-beating investment performance from a group of talented, but amateur, investors from a small town in Illinois, USA.

The Beardstown Ladies are a group that are still going, a 14-woman investment club that hit the financial headlines with their “The Beardstown Ladies’ Common-Sense Investment Guide” which included a seemingly astounding financial performance that beat the best of Wall Street with their investment returns of 23.4% pa between 1984 and 1993.

This gave other amateur investors a real kick and did wonders for their book sales. It was far better than the 14.9% gained by the index S & P 500 and almost twice the 12.6% return of the average US stock mutual fund.

However, after an independent audit, according to the LA Times, in 1998, their was a recalculation of their the performance figures amid questions about accuracy. The ladies, sadly, have an audited revised portfolio return of a 9.1% a year – a great effort … but lagging the index!

The problem was, the lovely ladies from Beardstown had innocently forgotten to account for their cash flows into the fund (Contributions) and these had been added into their portfolio performance to give an inflated figure. Their book is still for sale … and they have published four others … The US loves winners(?)!

The Slack Investor message is to not always believe what you read … wait for the independent audits … and, like Lord Kelvin, to avoid “meagre and unsatisfactory knowledge”, take some time in your measurement of portfolio performance. More of this next month …

June 2017 – End of Month Update … and Stop Losses!

Slack Investor remains IN for US, UK, and Australian index shares.

Despite a bad month for the UK index where the previous month gains were wiped out, there are no alarm bells yet. All markets have had a reasonable financial year (to Jun 30, 2017) with 12-month returns for the US, UK and Australian Index of 15.2%, 13.0% and 9.6%, respectively. These returns, for simplicity of calculation, do not include dividends. For the Australian market, the dividends would add another 4-5%!

And now for a confession …. Slack Investor has been slack … and not moving his market index stop losses properly! I put this down to an oversight and have included an extra few columns on the Index pages to help me not do this again.

Stop Losses are very important to the Slack Investor’s method and offer a detached way in which to make decisions at the end of every month. The stop losses are set at the time of share purchase and moved upward according to a modified version of Dow theory. This trend method was discussed in an earlier post The Trend is Your Friend …

Slack Investors’s Index trading method involves moving the stop loss level upwards to a new higher low when it is established on the monthly chart. There are a couple of rules that I have to keep me in the index trade as long as possible.

Stop Loss Rule No. 1: A Higher Low can only be established below the 10-month moving average (the wavy black line on the index chart pages).

Stop Loss Rule No. 2: Stop Loss Rule No. 1. does not apply if the monthly closing price is more than 20% above the set stop loss.

For the UK Index, back at the end of February, the end of month price rose 21% above the stop loss level. I should have moved the Stop Loss level then … but I have now caught up and include the adjustment on the UK Index page. I include the technical chart information for some readers who are interested … but don’t worry, Slack Investor will tell you at the start of each month what each of his decisions are in the monthly updates for the US, UK and Australian Index.

Warren Buffet has some much more famous investment rules …

Rule No. 1: Never Lose Money.

Rule No. 2: Never Forget Rule No. 1.

Mr Buffet is being a little flippant here, and even the great investment master has lost money at times on individual investments. However, overall he has not lost money … and this is the same approach that Slack Investor is trying to emulate. It is impossible to completely avoid losses, it is just part of investing, and there is no use beating yourself up about a loss when it happens … However, you can limit losses by using stop loss levels … and, with Slack Investor Stop Loss rules … they should be limited to around 20% (there may be some slippage!.

I have updated all Index pages and the Portfolio page.

2017 April – End of Month Update

Slack Investor remains IN for US, UK, and Australian index shares.

April 2017 has seen rises, in the US and Australian markets and a dip in the UK Index. So far, the Slack Investment Cycle returns for the US, UK and Australian markets are 141.0%, 7.6% and 12.0%, respectively.

Bull markets are a funny thing – and there is no doubt that all markets that Slack Investor follows are in various stages of a bull run – they are comforting as the Slack Investor can congratulate himself on what a stock market genius he is (Ironic comment!) – And yet, I can’t help but feel a sense of unease that things have been “too good for too long”.

Looking at the index chart pages, I get the feeling that it has been a long time since my stop losses have been adjusted upwards in the UK and ASX markets – and this will have the potential to erode any gains should the markets fall suddenly. However, I am comforted that the Slack Investor monthly-decision based method is tried and true and has brought rewards in the past … so I’m staying the course … the objective Slack method is designed to keep you in the markets as long as possible and only withdraw from the fray during a major downturn.

I am also comforted by the fact that we frail humans have behavioural biases, we lack patience and we want to tinker with things! Although Slack Investor is unable to track down the original source, an often quoted study by Fidelity (e.g., Business Insider) investigating the Fidelity trading accounts between 2003 and 2013, found that its best performing accounts were the inactive ones – Either owned by people who had forgotten that they had an account, or by dead people!

The Slack Investor does not recommend complete inaction though – but trading less has its merits.

While it is fresh in my mind I will drop in another example of the fine New Zealand experience below…

Day 3 Milford Track NZ – Slack Investor’s corpulence is almost eclipsed by the magnificence of Sutherland Falls. Reminder … must exercise more often!

For more information on parameters such as progressive gains, look on the Slack investor ASX Index, US Index and UK Index pages for updated details – and a look at the charts. Next end of month update on the index charts will be early in June.

What’s that smell? Is this Spring? … It’s Dividend Season!

There is that smell in the air … Is it love? Winter is breaking … New growth erupting on the stems… and Ah Yes, It is Dividend Season – the Prince of Seasons! That time of the year when the companies that you have invested in reward you for your efforts and present you with a fraction of the results of their toil.

There is no finer season – it occurs twice a year! Each company has worked hard during the financial year trying to increase sales and profits … they have crunched the numbers and made reports and hopefully held their numbers close to their chests ready for a festive occasion where the managers and shareholders gather. There is a triumphant report to the shareholders and final dividends are calculated from a share of the profits and a date is set where the patient shareholders receive a cash gift into their accounts as a reward for supporting the company through this last financial year. Hopefully there is growth in sales and dividend, and prospects for the coming few years are good …

Well, this is how its supposed to happen … and if you have done a bit of homework and assessed the company and industry … and management … and competitors … and economic environment … and heaps of other stuff … OR, you may have just been lucky! … Its how it often happens.

Because Slack Investor is not the most fastidious of researchers (He would much prefer others did the hard work for him!). Sometimes his luck doesn’t run and reporting season brings some bad news and there is a drastic price slide as other investors bale out.

Investors seem very sensitive in dividend season and tend to react strongly when there is a perception of bad things in the air. Particularly stocks that have a lot of good news forward-priced into them (high PE). Triggers such as as when analyst expectations are not met … or profit guidance is revised down … or a product disaster … can reduce share prices by 20 -30% in a matter of hours.

Slack Investor is not watching his stocks hour by hour and has suffered from a few of these corrections. But the beauty of his slack approach is that no decisions need be done on the day … absorb the bad news overnight and ask yourself the question

Given this bad news … Would I still buy the stock at its new price?

If the answer is no, sell at the next opportunity. If the answer is yes, keep an eye on the stock for the next few days … One of two things will happen

The drastic stock price retreat was an over-reaction and value buyers start pouring in and the price returns to its former glory… your slackness has been rewarded.
The bad news filters through to the general community and analyst and brokers change their recommendations to their clients, people continue to sell and the price slides further.

Unfortunately, the second scenario is more common and even though you may think the stock is more of a bargain now … through experience, Slack Investor has known other bad news to follow bad news and it is prudent to sell the stock (perhaps at a loss) – you can’t hold back the tide! If it is a stock that you like … you can always buy it back when sentiment improves.

You can’t trust a SPIV … but you can trust a SPIVA!

A SPIV, in the beautifully old fashioned slang favoured by my mother, is a sharp dresser that makes his living in usually disreputable ways – Arthur Daley take a bow!

… A SPIVA … well that’s a completely different story!

In a follow up to why index funds are a good start to investing in shares, Slack Investor was combing the press (rather than his hair!) this week and came across this cracking group of financial wonks known as SPIVA that love nothing more than analysing reams of financial data. Slack investor loves a well constructed piece of research that he doesn’t have to do himself – and for 14 years they have been looking at world markets and publishing reports every half year.

There are two main types of funds: Active Funds where the stocks are actively managed according to financial experts – they control the stock selection and timing of the buys and sells – their expertise does not come cheaply and to piggy back onto their knowledge you have to pay a management fee of usually 1.5 to 4% every year. You can invest in these funds directly by filling out an application form – or you could buy shares on the ASX in a Listed Investment Company (LIC) such as Argo or AFIC.

Passive Funds are constructed in such a way that they passively follow an index. These funds can be mostly automated and are much cheaper to run. They have annual management expenses of usually less than 0.5% per year.

What do the wonks at SPIVA think about the Australian Active vs Passive scene? Their mid-year 2016 report is full of interesting stuff but the killer finding is that nearly 60% of large cap actively managed funds failed to beat the ASX 200 index (passive) in the most recent financial year, with this number rising to nearly 70% over a five-year period.

Things are even worse for international stocks, SPIVA reports that over 80% of Active international equity fund managers underperformed their benchmark index. This rises to over 90% over a five-year period.

Slack Investor is not against individual active fund managers … some are very good, … consistently … Roger Montgomery comes to mind … but because of the much smaller annual fees that they charge, passive funds seem to have a great edge in most cases … and the data from SPIVA bears this out. There is much more to say on the pros and cons of managed funds … and exchange traded funds vs individual stocks … but this will have to be another post(s).

First Investment … Index Funds … Sounds Fun!

OK … the cushion is sorted and we are ready to start on the path to financial independence with our first investment.

However, we are just starting and our first plunge into the share market shouldn’t be with an individual company … this is too risky … exposure to the whole market through an index fund is a good first step.

The main reason for this strategy is that Slack Investor has found that – despite his great prowess as an investor (?) there are many unknowns when it comes to an individual share or stock.

Slack Investor does a great deal of research on a company before he parts with his dollars and, despite being convinced at purchase time that this company will be a great winner, this does not always turn out to be the case.

Slack Investor has been in this investing game for a considerable time and despite this 30-year experience and diligent research his documented win probability for an individual company (Selling the share for more than I bought it) is surprisingly (to an optimist like me!) low.

Slack Investor win probability ... is just over 50%.

This sounds like I don’t know what I am doing … However, bear with me …If you follow Slack Investor and use the enduring wisdom of many successful investors

“Cut your losses short and let your winners run.”

… You will be well on the road to financial freedom.

This is because individual stocks that you keep in your portfolio (Winners) may increase in price by 5-500% (or more!) but if you limit your losses on losing stocks to around 15% you will end up with a solid investment portfolio. For the record, the Slack Investor portfolio has between 20-30 individual shares/managed funds and, including dividends, has achieved a 5-year average annual Internal Rate of Return (IRR) of 14.6% (as at 30/06/16)

If you don’t want to get involved with a stock broker, and you have $5000, then the most excellent Vanguard Funds offer exposure to the whole Australian, US or World markets through their managed funds. For example the Vanguard Index Australian Shares Fund offers exposure to the whole Australian share market for a management fee of 0.75% p.a. with a published 5-year annual average return of 8.7% (after fees)

Or, you could take the plunge and sign up with an Online Broker. Slack Investor uses CommSec. After a bit of paperwork you should then be able to trade on the ASX online and get exposure to the world of Exchange Traded Funds (ETF’s). You will have to pay brokerage for each trade but otherwise, costs are low.

Two such Australian ETF’s are SPDR S&P/ASX 200 (STW) and Vanguard Australian Shares Index Fund (VAS) . They have management costs of 0.19% and 0.15%, respectively, with 5-year average net total returns of 9.98% and 9.32% respectively (31/08/16).

The stock market is a capricious beast and susceptible to whims and world events. Of course, past returns on the stock market are no guarantee of future returns – but, if you put your faith and money into the whole market through an index fund for 3-5 years you will usually be rewarded.

The Trend is Your Friend

“The trend is your friend”

The origins of this trading maxim are a little hazy but scores of successful trading schemes have grown from these roots. The highly successful US trader Ed Seykota is the source of many wise words on trading and he completes this saying with

“ … except at the end where it bends”.

This summarises the simple message of trend trading – but the complexity comes in determining when the trend has started and finished.

The basis of trend trading is in Dow theory. Charles Dow was one of the pioneers in technical trading and described how a stock price chart can be seen as a succession of peaks and troughs. He defined an uptrend when a chart was showing a series of higher highs and higher lows and a downtrend when a series of lower highs and lower lows were being established. The uptrend breaks when the stock price moves below a previous higher low. Slack Investor makes use of this trend finish signal as an exit for the index trades shown on the ASX Index, UK Index and US Index pages. There is a refinement to this simple strategy and the Slack Investor will exit an index trade only when the closing price is below a stop loss set by a previous higher low. This refinement helps to screen out any short term price lows that might occur during trading.

Ed Seykota has also has stated that

“Trends become more apparent as you step further away from the chart”

These wise words echo the Slack Investor strategy of trading the long term trends – by analysing trends on weekly or monthly charts.