1	Return on Investment August 17, 2004
2	WEALTH=Money Invested*(1+Return/Period)^{time money invested} Money Invested Time Money Invested Return per period
3	Professional’s Incentives Our goal increase our wealth Professional’s goal Earn commission Charge fee Help client grow wealth Keep boss happy Professionals need pay Make sure you know how pay calculated Try to align their pay with your goals
4	Risk Risk and uncertainty related Risk is probability of something bad happening Uncertainty is the unknown, the unquantifiable Future
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6	Day 3 Alternate to Reverse Mortgage Retirement Draw Real Estate vs Stock Portfolio Recommendations Beating the Market Drach Trend Reversion Portfolio Strategy Shortcuts Keys to Portfolio Management Success Goals
7	Reverse Mortgage? Monthly income Balance climbs instead of falling Pay off by selling
8	Alternative to Reverse Mortgage Borrow max on real estate Open portfolio account Invest, in stocks Pay monthly p&i out of portfolio account Let it grow Spend excess
9	Alternative to Reverse Mortgage
10	Alternative to Reverse Mortgage
11	Alternative to Reverse Mortgage
12	Alternative to Reverse Mortgage
13	Compare Monthly Reverse Mortgage Set income Alternate Variable appreciation Set cash out (p&i)
14	Compare Terminus Reverse Mortgage Sell house to pay mortgage Alternate Mortgage paid off Home free and clear Money in account $130,000
15	Compare do nothing
16	Why doesn’t everybody do it?
17	Retirement Draw Conventional Wisdom Switch more of equity into bonds as retirement approaches Hmmm! Trading away higher return for lower risk
18	Retirement Draw IRS ‘term certain’ method lets you spend the reciprocal of years left each year. Years left is determined by actuarial tables. Required after 70 ½
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20	Retirement Draw
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23	Real Estate vs Stock $100,000 to invest Simply case Real estate 4% (inflation) Stocks 10% (pre 2000 history) Leveraged case $500,000 single family residence 50% margin
24	Real estate
25	Stock investment -- $100,000 Margin
26	Stock investment 50% leverage
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28	The South Sea Bubble “Lesson from the past is keep your expectations realistic. Don’t let promises of “sure-win” situations and “instant wealth” lure you from a consistent and disciplined investment strategy. Investors today have access to vast stores of information. Use this to your advantage. Read books, go to seminars, or hire professionals. Use you intuition as well. If it seems too good to be true, it probably is. …this need not mean investors become stodgy -- taking risks is essential to some payoff. But calculated risk is a far cry from manic speculation”
29	Bernard Baruch “…even in the very presence of dizzily spiraling prices, we had all continually repeated “two and two still make four” much of the evil might have been averted. …even in the general moment of gloom in which this foreword is written, when many begin to wonder if the decline will never halt, the appropriate abracadabra may be: “They always do”
30	Specific Portfolio Management Recommendations Save more, delay consumption longer Open a FOLIOfn account, ShareBuilder Put everything in SPY -- slowly Put everything in SPY, QQQ, DIA, EFA, EWJ -- slowly Subscribe to the Drach Market Letter, any market letter Make an investment plan, write down goals, think thru some what ifs Put some $ in beat the market strategies
31	Specific Recommendations Put everything in SPY Put everything in SPY, QQQ, DIA, EFA, EWJ Subscribe to the Drach Market Letter Put some in beat the market strategies
32	Specific Recommendations Put everything in SPY Put everything in SPY, QQQ, DIA, EFA, EWJ Subscribe to the Drach Market Letter Put some in beat the market strategies
33	ETFs Passively managed portfolio of stocks, usually designed to mimic an index. Priced and traded throughout the day. They offer all the flexibility of stocks: They can be purchased with market, limit or stop-loss orders; can be short-sold; and can be traded on margin. Like stocks and unlike mutual funds, there are options based on them. Don't have much asset turnover, their fees are lower than even the most cost-efficient index mutual funds. For example, the first-ever ETFs, Standard & Poor's Depositary Receipts (SPY), known as Spiders, carry a lean and mean expense ratio of 0.12%. Less tax consequence and trading cost than Mutual Funds
34	Large ETFs
35	Fixed Income ETFs The ETF Advisors line-up includes: 1-year FITR (TFT), 2-year FITR (TOU), 5-year FITR (TFI), and 10-year FITR (TTE). iShares funds 1- to 3-year (SHY), 7- to 10-year (IEF), 20+ year (TLT).
36	Indexing
37	Beat the Market Strategies Discretionary News, Hot Tips, gut Fundamental Good company, good stock investment Technical Charts, indicators, price action System Manage Cash Risk Portfolio
38	Beat the Market Strategies Fundamental, CFA Buy into the company Good company = good stock analysts project earnings, Target Price determined from discounting future cash flow Technical, MTA Price and volume Past movement used to forecasts future/target price Momentum Reversal
39	Approaches to Investing in Equities Disciplines can be complementary Money management professionals often use some combination of the three Emphasis varies A matter of personal preference
40	Future Professionals Weather forecasters Book makers Urban Planners Corporate Strategic Planners Iraqi occupation planners Economists John Naisbitt “Megatrends” Danny Devito’s football pool
41	Drach Robert F. Drach Master List Fundamental Market Timing Quantitative, market indicators Buys and Sells Technical
42	Drach Timing
43	Drach vs S&P 500
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45	Plan 1) Develop Model (PLAN) A)Build Model Pick a group of equities Build method to sort equities from most oversold to most overbought. Structure model to buy equities that are oversold, and maybe, short equities that are most overbought Structure model to adjust equity level appropriate for position of market in its cycle. Fill model with price, and/or indicator history. B) Test the Model C) Tune the Model D) Repeat A through C Until 'Ready to Trade‘ 2) Trade the Model (EXECUTE) 3) Monitor Portfolio Performance (FEEDBACK) 4) Repeat 1 through 3 Until all your money is working. 5) Switch Models, evolve with market
46	Trend Regression Portfolio Management Master List Stocks you like, Fundamental Stocks expected to move together Market Timing 100% Long Buys and Sells Reversals
47	Master List Screens Growth, history and projected Consistency of earnings Value p/e p/s Dividend yield R² Correlation
48	Market Timing Buy when? Stock ratio Stocks as % account equity Adjust stock ratio based on Market vs Investor’s age
49	Market Timing Buy when everybody else is selling Everybody = general public Not insiders or smart money Sell when everybody else is buying
50	Market Timing -- BUY P/Es are falling Price Volatility is increasing. The Press is negative: Doom and Gloom in headlines. Trend Analysis: Prices go below the 180-day moving average. Believed Cause and Effect. Interest rates and gold prices rising. Volume: Market volume increases by 15 % or greater.
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52	Market Timing – SELL P/Es are climbing. 75 % of P/Es have shifted higher. Price Volatility increasing. Press is positive, reporting how wonderful market is. Trend: Majority of stocks over 180-day moving average. Cause and Effect: Interest Rates and Gold Prices both declining. Overall Market Volume up by 15% or greater.
53	Market Timing 100% long Drach “It is a common perception that the market provides a constant rate of return when in fact almost all truly successful strategies share the common characteristic that around 80% of the profit is attained in around 20% of the time.”
54	Buys and Sells Where is stock price relative to other stocks in model? Buy/sell those most depressed?
55	Beat the Market Strategies Momentum Reversal Buy and Hold
56	Trend Regression Portfolio Strategy Based on reversion to the mean, reversal Bernard Baruch’s “They always do”
57	Trend Regression Portfolio Strategy -- Model 50 equities 540 data points (10 years of weekly OHLCV) Optimizes smoothing weeks Built with Excel, VBA
58	Findings A Trend Regression Portfolio Strategy seems to work, in all but 2 of the back-tests discussed so far, following an optimized Trend Regression Portfolio Strategy gained more than a buy and hold strategy for the model’s 50 equities. Hedging and Timing impact performance, but don’t necessarily improve the performance over staying 100% Long. Some optimizations seem quite robust as shown by the Smoothing-weeks, Proportion Timed colored grid and by the 3-year and 10-year tests for HILO equities optimizing at same Smoothing-weeks, Proportion Timed combination. Trend Regression Portfolio Strategy works better for longer time-periods, i.e. the longer it is used.
59	Findings B For longer tests, Relative Gain and Index Gain are inversely correlated, as Index Gain decreases Relative Gain increases. Therefore, Trend Regression Portfolio Strategy reduces drawdown as relatively speaking; the model works best in a bear market. Short duration optimizations may produce high future returns. However, historic short duration optimizations cannot yield better returns than historic longer period optimizations for the longer historic period, if the shorter period is contained in the longer period. Not only is model performance, TRiPS%, sensitive to indicator sort order, it seems performance is generally better for reversal (ascending sorts), than for trend following (descending sorts). There are times when trend following will produce better performance than reversal.
60	Findings C Stock picking, selection of 50 equities to track in a model, has a big impact on the Trend Regression Strategy Portfolio model’s performance. There is more than one way to select groups that yield tradable performance, TRiPS% over 1.0%. Groupings that seem intuitively to have potential don’t necessarily produce good back-test results.
61	Findings D Choice, of which indicators to use for generating buy and sell signals, has a big impact on model performance. The same indicator is not likely to be best for all models. More than one indicator has yielded tradable performance, that is, TRiPS% over 1.0%. Sometimes the right indicator can save a group from extinction. The best indicator in back-tests is not necessarily the best indicator for the future.
62	Findings E Market Timing can influence Trend Regression Strategy Portfolio model performance. Choice of indicator has an impact on success of market timing. Match-up of Trend Regression Portfolio Strategy group and indicator is important to the success of market timing. It doesn’t appear that there is one indicator that will work regardless of the group. Many models optimize at 100% long all the time.
63	Backtest - Optimize Optimize over as long a data set as possible. Use as few parameters as possible. Bias yourself to systems that show robustness across parameters. Forward test—preferably using the anchored technique of forward testing to be consistent with rule 1. Identify the region of parameter values that appears to be the peak, and pick the parameter with lowest performance value therein that has higher performance values for the parameters on either side. Ideally you will have the same parameter values for all markets you are trading a given system on.” Once you start trading a system, resist re-optimizing or retuning.
64	What‘s verdict on optimization?
65	Shortcut Screen Fundamentals Screen Technical Stay 100% long Hedge Paper-trade if you can’t backtest
66	SCREENS http://moneycentral.msn.com/investor/finder/customstocks.asp http://search.wallstreetcity.com/wsc2/prosearch.html
67	Keys to Portfolio Success Internalize Wealth Formula Invest more Leave $ invest longer (defer gratification) Get higher return (accept risk) Reduce Expense Fees and transaction cost Manage Risk Diversification mitigates risk Time mitigates risk Testing mitigates risk
68	Keys to Success - II Strategy counts Good strategy beats random Bad strategy loses to market ETFs match market Good Strategies Drach Trend Regression Portfolio Management Come and Go
69	Goal(s) What’s important to you Die rich vs. die broke Work forever vs. retire early Spend now vs. delayed gratification Independence, responsibility Less than 5% of people have their goals written down. Only 5% of people are truly successful in life. Is there a correlation? When Alice asked the Cheshire Cat which road to take, he asked, "Where do you want to go?" Alice said, "I don't rightly know," to which he astutely answered, "If you don't know where you want to go, then either road will get you there." -- Write it Down, Donnie McKinney
70	"lyle@diyportfoliomanagement.com" lyle@diyportfoliomanagement.com Feedback World’s best Money Managers http://www.nelsoninformation.com/wbmm/login.asp Education Opportunities http://www.morningstar.com The Money Machine
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