Paper Money
No investing strategy can work everywhere and all the time, otherwise its competitive edge would be arbitraged away. However since Investors RouteMap was launched in 2000, our experience is that it is possible to generate exponential improvements in long term performance by combining many different strategies. Specifically, we combined trend and value types of investment strategy initially and added a third dimension for investment sentiment in 2005. Each of these categories is in turn a combination of several individual strategies.
This has worked well in equities and foreign currencies but not initially in bonds, until the strategies were upgraded. The apparently disproportionate subsequent fall in our recommendations is an optical illusion because the peak value was twice as high. (see Relative Performance below). Bond recommendations performed poorly both because of the limited range of strategies used initially and because our valuation strategies have been negative during the latter years of the bond bull market.
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ExplanationThe charts above show total returns including dividends in US$ for all recommendations. (However Style is Price Only which understates returns by about 2.0% a year.) Un-invested balances are assumed to be held in US T-Bills. The comparable benchmarks are FTSE World Index, IMF Special Drawing Rights and our own index of comparable long term government bonds. A five category scoring system is used - Buy, Add, Hold, Reduce, Sell. These combine trend, investor sentiment and valuation strategies. The Recommended List includes all long investments from the time when they are rated Buy or Add till the rating falls to Reduce or Sell. In contrast to convention for recommended lists, the RouteMaps may recommend high levels of liquidity in order to preserve capital when they predict adverse market conditions. In practice liquidity has ranged up to 66% for Shares, 80% for Forex, 90% for Styles and 100% for Bonds. Therefore, if results were random, the performance of recommendations by any RouteMap would be half as good as the benchmark in rising markets and half as bad in falling markets. The two complete stock market cycles over the past decade have provided ample opportunity to assess performance against this criticism. As performance has been considerably better, the track record refutes such criticism. Figures are shown in US$ for convenience. Owing to exchange rate fluctuations, past performance differs if measured in any other currency. Performance is shown gross. Net results will depend on the levels of commission and dealing spreads in the chosen investment vehicles as well as any transaction taxes in the country where dealings take place. It will also depend on the degree to which the investment vehicles track benchmark indices (a.k.a. tracking error). Please note that the Bonds RouteMap derives bond indices from government bond yields, as published in statistics by national governments, central banks or stock exchanges. They are designed to represent performance of a comparable fixed interest instrument across borders, specifically 10 year bonds trading at par and weighted by GDP. Such theoretical prices are not suitable for performance benchmarking, which is based on market capitalisation. For the purpose of this exercise, transactions are assumed to take place at month-end. While dealing charges are excluded, this is unlikely to be significant because strategies are designed for low turnover averaging one Buy and one Sell transaction per year. NB: Models can only be as good as the data on which they are based. Whereas LTCM in 1998 used only five years of arbitrage spreads, which excluded the 1987 crash, and banks in 2008 used only ten years data for VAR calculations, which excluded the last recession in 1990, our models have been back-tested, where possible, to 1972 before going live in 2000. Even so, there are some circumstances with which these models cannot cope, such as wars or market panics. Historically these include the Arab-Israeli War in 1973, the Wall Street Crash in 1987, the Invasion of Kuwait in 1990, Long Term Capital Management collapse in 1998, World Trade Centre atrocity in 2001, the global financial crisis of 2008 and the Euro-Zone scare of 2011. Typically normal market behaviour resumes within a few months. Subscribers are therefore advised to avoid such leverage that they may become forced sellers during such exceptional circumstances, because such accidents do happen.
Relative PerformanceIn addition to providing recommendations in absolute US$ or local currency terms, the RouteMaps also provide recommendations compared to a relevant global benchmark e.g. Out-Perform or Under-Perform. This is the Global Investor's Perspective in the drop-down menu of the chart selection system. Recommendations of the Shares RouteMap have out-performed substantially, incurring only modest setbacks during the three bear markets in 2001, 2008 and 2011. Styles initially out-performed more modestly, but has improved, following revision of the strategies in 2007. Forex also out-performed substantially, given the lower volatility of exchange rates, but suffered during the 2008 financial crisis. Following several upgrades, the poor early start for the Bonds RouteMap has also improved - here also with an interruption during the 2009 financial crisis. |
