Legacy Funds

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Investing by time frame

I like to think of the market, as do numerous other market technicians, in terms of long term, intermediate term, and short term time frames.  What I consider to be long term is a monthly chart, intermediate term a weekly chart, short term a daily chart, and then I go down to real time using an intraday chart (and even intraday charts can be hourly or 60 min, 30 min, 15 min, 10 min, 5 min, all the way down to 1 min for those that don’t believe in bathroom breaks — for me I use 15 min charts).

Furthermore, I believe that ideally one should track all time frames to give a power rating for a buy or sell signal, but that gets more complicated.  I will delve into more detail in future blogs, once we cover simple strategies for each time frame.  For now the best thing to do is to pick a time frame and make a commitment to always monitor it to that frequency.  I prefer to start from the longest time frame and continue to zoom in to get a total picture.  The long term time frame also works best if you only want to be bothered to check on your portfolio holdings once a month.  Remember it only takes a few minutes to check, and you may or may not have to make any changes.  Let me show you a real live example using SPY.  At the end of the month, you pull up a chart like this and see if SPY is above or below the 20 month moving average or MA as we covered in previous blogs.  You should be out if it is below, and you should be in if it is above.  It really is that simple.  Let’s see what we have currently:


Pretty straightforward.  After exiting in Jan 2008, you would still be out of the market, and saved yourself from a large decline.  Not bad for taking just a few minutes a month to check on your portfolio.  We can also get more fancy when we have holdings in the market by keeping a stop that is slightly below the 20 month MA to provide protection “intra-month” in case the price violates the MA.  You would readjust the stop each month to reflect the changing value of the MA.  That’s it.  The strategy is not perfect, there will be times that you get out and then get a signal the following month to get in at a higher price.  This is like all the years you pay for fire insurance but your house doesn’t burn down.  It only takes 1 fire.  Same thing here — over the years the protection from large declines will more than cover the slight losses or lag in performance.  No trading strategy is perfect.  However, trading or even investing without a strategy carries the highest risk.  If you want to be more active, next time I will cover a strategy that checks at the end of each week.


June 27, 2009 Posted by | Legacy Funds | , , | Leave a comment

It’s all in the timing

We have all been preached the mantra that it is time in the market and not timing the market that makes money.  Well of course that depends on how well one times the market.  What many fail to realize is that timing is always taking place whether one is a buy and hold investor or a market timer.  The buy and hold investor has to make the initial buy into the market at some point in time and has to sell at some point in time.  Not very different from a market timer, except that a market timer with a strategy has an entry and if disciplined a pre-determined exit to cut losses to a minimum if entry is “mistimed” and a profitable exit to take profits when timing signals dictate.  Time is a non-renewable resource, and the goal is to have better timing in the market to save time.  If you can get out of the market and avoid a 30% decline, think of all the time in the market you just saved yourself.   So there are three basic beliefs when it comes to timing the market:

1.  Those that believe it can’t be done, markets are efficient, whatever…  These folks will not be able to time the market  if they don’t even believe it is possible.

2.  Those that believe it can be achieved easily.  These folks will be taught a very memorable and costly lesson or lessons (for those that don’t get it the 1st time) by the market that it is anything but easily achieved.  If this seems to contradict my earlier posts regarding being able to time the market, charts, technical analysis,  etc., read below to see how even with showing you the tools and giving you ideas of how to do it, market timing isn’t easy.

3.  Those that believe it can be achieved but is a difficult endeavor.  These folks have a shot at being up for the challenge provided they are willing to strive hard and remain disciplined.

Now when it comes to charts and technical analysis, even when there is a clear buy or sell signal given it is not easy to follow.  You can have a sell signal on financials but the talking heads on tv are all preaching buy, valuations are low, … You have to ignore that and sell or even short.  Bullish sentiment will be high at the right time to short.  You can also get stopped out a few times for small losses if you are short and the market goes higher until you catch a good downtrend.  The voices inside you will want you to follow what everyone else is doing vs. staying disciplined and sticking to your strategy even through a couple of losing trades.  Automating this can take away the emotion, but just like a plane doesn’t fly on autopilot alone, neither should a trading system.  There will be times when a human decision is crucial and can’t be replaced by any amount of code.

So in essence what is my definition of market timing?  It is easier to first define what market timing is not.  Market timing is not a call on market direction.  It may look like that from the outside looking in, especially when the timing is correct.  But really market timing is a strategy that helps me manage risk when managing money — risk of course being defined as a loss of capital (not variance as is the case in the MPT or modern portfolio theory world, sorry couldn’t resist taking a stab at it) .

June 19, 2009 Posted by | Legacy Funds | , | 1 Comment

New bull or just a bear market rally?

The rally off the March lows can at times feel like the start of a powerful new bull market.  That is what bear market rallies do, fool the masses.  Last March marked an extreme in bearishness, people started to believe the end was near, the market can only go in one direction and that is down.  Odd that in general investors look at the market as only capable of a single direction and not really think in terms of cycles.  We don’t seem to have that problem in other areas.  When it is night, we don’t have this foolish belief that it is going to be dark forever, we know that daylight will follow.  Same with the change of seasons, the cold days of winter don’t last forever anymore than do the hot, humid days of summer.  But in the market, when the market is down, we have difficulty accepting that this isn’t going to be the way things are from now on.  Same thing on the upside, we start to think downtrends are a relic of the past.  In fact, when everyone believes that the market is only going to go up is very close to the worst time to be invested.  Same on the downside as many that were caught short in March and remained short (yes there are plenty of fundamental reasons, but still it won’t always matter in the short run) ended up adding fuel to the upside when they had to cover their shorts at higher prices.

Anyway, I realize I have not answered the question as to what kind of rally this is.  If you recall from a previous blog explaining how to differentiate between bull and bear markets, we based it off a 20 month MA.

sp monthly

Clearly we are still in bear market territory.  We are enjoying a nice rally, but until it gets back above the 20 month MA, we must treat it as just a bear market rally.

June 13, 2009 Posted by | Legacy Funds | , | Leave a comment

Should financial advisors follow conventional wisdom?

Being human, we have the tendency to follow crowds and stick to what everyone else is doing.  This helped us survive over the years, and gave us numerous advantages.  However, in the market, whether it is the stock market, real estate market, Dutch tulip market, or any other market throughout history, following the crowd especially when the euphoria gets to an extreme level has numerous disadvantages.  In bubbles, the conventional wisdom and crowd behavior will be wrong with the common belief being “this time is different”.  For the hundreds of years of recorded history,  it has never been different.  The only thing different is the name of the bubble.

But herein lies the challenge for the financial advisor.  If a financial advisor lost money for the client, but the advisor followed conventional wisdom, then it is somewhat excuseable.  Reasons given such as who could have known…nobody could have seen it coming…you must have a long term horizon…or any other excuse of the decade will usually be acceptable.  If on the other hand the advisor lost money by going against conventional wisdom, then he likely has some explaining to do.  So it looks like financial advisors will put their practice at risk by going against conventional wisdom.  So then maybe turning to portfolio managers offers a solution.  Nope.  Most portfolio managers operate under the premise that they are paid to buy stocks, and how much an investor allocates to stocks via the portfolio manager’s fund is the investor’s responsibility — which basically puts risk management back in the investor’s lap.  Worse, many times the investor is not even aware he is responsible for the risk management so nobody ends up covering it.  Furthermore, most portfolio managers are only ranked by how well they follow their benchmark.  I read somewhere that Morningstar’s Manager of the Year was down 20% last year.

So what does one do?  Bubbles will always exist.  Most financial advisors will follow conventional wisdom to conform with the regulatory “prudent person” mandate.  It doesn’t make it any easier that going against conventional wisdom and trying to go against the crowd will feel awkward at the time as well.  The best time to get out of the market will be when euphoria is at an all time high, and the best time to go long will be when bearishness is extreme.  However, clients will soon start demanding some downside protection and start questioning why are they paying a fee for an advisor and not getting any protection in return.  Financial advisors that are capable of going against conventional wisdom to save their clients from losses will find they attract more clients and their practice will flourish.  Whereas those that are stuck following following conventional wisdom will not be so lucky as clients will refuse to hire them.  These clients will decide that they are better off investing in a low cost index fund, preferable an ETF.  Maybe one day an actively managed ETF will exist that does everything a financial advisor wishes to do but can’t for one reason or another…but that may be a topic for a future post.

June 1, 2009 Posted by | Legacy Funds | , , | Leave a comment