New Year’s Resolution: Understand that Action Requires Confidence

Most individual investors make a major mistake: Looking for a "hot hand."  They spend a lot of time and money chasing last year’s (or last month’s!) performance.  Quite frankly, this is also the attitude of many top Fund of Fund managers who earn big salaries.  Find the hot hand!

Why?  The biggest reason is that it is easy to do.  Anyone can look at performance versus benchmarks and act decisively on the basis of a little information.  Even long-term track records can be unpersuasive to those who decide that the manager has "lost it."  The recent track record seems like unassailable, objective evidence.  In fact, it is one of the fastest ways to lose money.

Why are Warren Buffett’s investors willing to sit through a weak stretch of performance?  Because they understand his approach and methods.  He makes sense.  Combine this with the long-term record, and it is quite reassuring.

Evaluating Trading Systems:  A Source of Confidence?

Evaluating a trading system can, in theory, provide as much confidence as reading one of Warren Buffett’s annual reports.  Since very few people have this skill, it is even more valuable.  Most trading systems offer eye-popping results that can never be attained in practice, usually because the developer created a perfect fit to all of the past data.  Most system evaluators become accustomed to seeing these claims and expecting much less.

The average investor may not have all of the quantitative and methodological skills to evaluate a trading system, but it is right to be wary of anything that seems too good to be true.  Every method has periods of losses and imperfect signals.

Confidence in one’s approach is the key to taking action even when times are challenging.  Those who lack a system flit from idea to idea, always trying to catch the last wave.

TCA-ETF Update

As we have been doing each Thursday for several months, we are attaching the weekly update of our TCA-ETF model.  This was designed as a means for readers to look over our shoulder as we designed and implemented a new method.  We also thought that other ETF investors might find our rankings to be interesting.

Somewhat to our surprise, we got a number of inquiries about investing in such a program.  Since this is a daily trading system for a limited partnership we are limited to 99 accredited investors.  But it got us wondering.  Could we adapt the program so that the average investor could enjoy the same technological advantage.  After some thought about trading frequency and number of positions, we did a five-year test of the model.  We were delighted by the results.  It turns out that weekly trading of ETF’s is almost as good as daily portfolio adjustments.

This program is immediately available to any interested investor for whom it is suitable.  The model is just starting a new cycle, and the Gong has sounded.  We believe it to be a good time to begin or add to equity positions.  One advantage of the TCA method is that it goes completely to cash in extended bad times.  The investor does not need to worry about trying to do market timing.

We will provide a report on the methods and testing to anyone who is interested in taking a look.

This week’s ratings are a little misleading, since we use the Wednesday closing data.  Today was an excellent day, and we now have a total of six positions out of 44 ETF’s in the universe.  Below is the table as of yesterday’s close.


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  • Roger January 31, 2008  

    “This program is immediately available to any interested investor for whom it is suitable.”
    I am not sure I understand your offer. Is it for a membership/system/software that you are making available, or are you inviting us to simply follow on our own the weekly table you publish?
    “We will provide a report on the methods and testing to anyone who is interested in taking a look.”
    Yes, I am definitively very interested in receiving it. And thank you for the previously sent Gong Report.

  • Jeff Miller February 1, 2008  

    Roger –
    We are money managers, not sellers of systems or software. I was just trying to be responsive to some inquiries from potential investors. We have an advisor group with TD Ameritrade. Investors have their own accounts, which trade as part of the program.
    I’ll keep doing weekly updates on the system as long as it provides a useful vehicle for making some other points, but they are not intended to be trading recommendations.
    Thanks for your question. I can see that this requires clarification. As I said, there is a complete explanation available on request.

  • Roger February 3, 2008  

    Thanks for you timely response and all your insightful comments.
    My question was a sincere one and I am glad you understood it as such.
    Your expertise as a money manager was what led me to write, intrigued about how you plan on sharing your investment program ideas.
    I do have a TD Ameritrade account and am indeed interested in investing following your program.
    Please send me the “complete explanation” on how to go about it, that you mention is available on request.
    Thank you

  • Roger February 4, 2008  

    You blog is a great resource.
    I’m very interested in your report/complete explanation. Please send it to me.
    Thank You

  • Peter February 6, 2008  

    Excellent blog. I’m also very interested in learning more about the trading system you mention. Please send me the material.
    Thank You.

  • John February 12, 2008  

    Enjoying your blog greatly. Please send further information about your modified trading system.
    Thank you.