My indicators weren’t particularly timely; in February of this year, they started telling me to re-enter the market. That was over three months after the market lows. However, that was earlier than most! (Or do you know anybody who unequivocally called the low when it happened, and got in with their own money?)
Since then, I have been gradually increasing my exposure, and by now, I am 90% invested. Time to end the pussy-footing — time to show which skin I have in which games!
In this article, I’ll show you some of my major investment vehicles.
(Soon, I’ll post about some other strategies that I find intruiging, but haven’t really invested much into, as well).
1) Risk Parity, with an added momentum filter
In a nutshell: risk parity says invest in your preferred assets according to their volatility. High volatility = riskier = you need to reduce exposure.
My bespoke system adds a momentum filter: invest in your preferred assets according to their volatility, but only if they are trending above their 200-day moving average. Go to cash if they’re not. Since I published the article in late-April, I’ve enjoyed out-of-sample gains of 21.16%.
In an ideal world, when we at some point transition from a go-go economy to a recession, our Nasdaq position will become jittery and more volatile, and so we will take a lot of money off the table even before the MA filter cuts in. Treasuries will be trending and hence be once again investible. Voilà, we’ll make money even in bad times.
With bad luck however, a crash like in 1986 will wipe out a lot of our money. QLD (our leveraged Nasdaq holding) is currently over 20% above its 200-day moving average; we’d lose that before even thinking of selling, and perhaps another 15-30% afterwards. Such is investing with moving averages in bull markets. If the market stagnates before it crashes, you’re fine. If it crashes first, you have little crash protection.
On the other hand: a simple non-leveraged version of my original Risk Parity strategy, using proxies (FOCPX and VUSTX), and going back to 1987, experienced until 2022 only one negative year (1994, natch). And this was without the margin of safety that my momentum filter adds!
Another comforting element may be that my other signals (Zahorchak, Baltic Dry, Coppock, Long-term sentiment, RSI) will hopefully warn me when it’s time to take some money off the table.
From 2011: CAGR approximately 20%; maximum monthly drawdown -14.2%, worst year -13.78%.
Year to date: +21.39%. July: +4.29%.
Allocations for August (this is a strategy that re-allocates monthly): 57.18% QLD, the rest is cash.
Out of sample performance (since May): +21.16%.
2) Drftr’s “Simplified Ultimate Momentum”, with 4 assets
Followers of Drftr, a very personable Dutchman who often comments on Seekingalpha.com, know that he likes a very simple strategy of 50/50 stocks and bonds, either one of which is sold and goes to its out-of-market asset when it sinks below its 200-day moving average.
In the new structure I am using, we keep it simple, but use four assets: the Nasdaq, the Dow Jones Industrial Average, intermediate treasuries, and longer-term treasuries (IEF and TLT, respectively). The idea is that when you own assets that are tailored to different stages of the economic cycle, you profit.
QQQ is better in exuberant years, DIA works well when value is the place to be, TLT is great in hard-knocks recessions, and IEF is a great buffer. And we go to cash when nothing at all works.
The version I use has double leverage, with its assets being QLD/DDM/UST/UBT. I chose it because of its favorable ratio of risk to return, and because it fits my investment-risk profile. You need to understand your own risk tolerance before you use anything like it!
For this variant: From 2011: CAGR 12.66%; maximum monthly drawdown -10.86%, worst year -9.73%.
Year to date: +10.43%. July: +3.67%.
Allocations for August (this is a strategy that re-allocates monthly): 50% cash, 25% DDM, 25% QLD.
3) Dividend growers, with an additional momentum filter
Dividend growers are companies that have paid out dividends, without skipping a beat, for at least ten years. Some have been at it for half a century. The point of this strategy is: you buy a company that yields, say, 2%. After ten years, your initial investment now yields 4%. 20 years of patience mean you now have investments that pay out a reliable 10%, year in and year out.
This is a great strategy for young folks, so if you’re thirtyish, I advise you to buy and hold such stocks. However, since I am 62, buying and holding 20-30 years no longer sounds terribly prudent.
I like to quote Arne Alsin: “Give me an edge, or I won’t play”. Better yet: give me two or three edges. DG investing not only has a empirical truth (companies that try very hard to create yielding value are more successful than others). In addition, a DG stock is also less likely to lose value in hard times, because those tenacious DG investors are always on the lookout for a better deal.
And yet… I am not a buy-and-hold man. I don’t want my stocks to lose 50% in the next Great Financial Crisis (the GFC II?) I need a logical rule that tells me when to bail out.
Which brings us to my third “edge”. To quote Walter Deemer: No stock in an uptrend has ever gone bankrupt. Applied to dividend growers: DG stocks that are in an uptrend will always be preferable to those that aren’t.
Our instrument for knowing when something is in an uptrend is the Golden Cross/Death Cross. This means, you buy or sell whenever a stock’s 50-day moving average crosses its 200-day moving average.
I think this is a suitably slow-acting momentum filter that in the best case, never reacts to short-term inclement weather, but still provides a sell signal when a company has lost its course.
Here’s my Golden Cross algorithm, courtesy Portfoliovisualizer. Just enter your preferred stock instead of the default SPY.
I am currently invested in these dividend growers, which I will be selling whenever the Death Cross rule applies. I check the algorithm on a weekly basis.
CME, EBAY, LRLCY, NVO, TRI.
4) Beaten-down country ETFs
I wrote about this on January 14. In a nutshell: at the beginning of the year, buy the ETFs of those countries that were down the three previous years in a row. Sell at year-end; wash and repeat.
Gains since 1903: +30% per year.
As posted, I bought Columbia (GXG), the Philippines (EPHE), and Taiwan (EWT).
All three trades have developed nicely until now. Year to date returns for GXG: 18.53%. For EPHE: 4.61%. For EWT: 19.22%
Please keep in mind we’re only seven of twelve months in, so let’s wait and see!
5) A.I., as well as other tech stocks and ETFs
My post of May 23 describes how I think investing in the yet-early-stages of the Articifial Intelligence bubble can make sense, as long as you employ good money management.
Meaning: don’t expect miracles; don’t fall in love with the idea of getting rich; sell as soon as it seems the trend is turning, even if that’s way too early. (ARBB, aka Always Remember Bernard Baruch: “The secret of my becoming wealthy was selling too early”).
So I am owning (or discarding) a number of A.I. stocks and ETFs and some other assorted tech gobbledygook — depending on their 30-day moving average:
AAPL, AMOM, ARKQ, BIDU, BOTZ, BTC, FIX, LSCC, IRBO, MSFT, PLTR, PWR, TSLA, UBOT.
(Use this strategy; just fill in your weapon of choice instead of the default BTC).
BOTZ for instance lost money in July: -1.91%. YTD: 20.65%. You can’t always win!
In contrast, PLTR is doing a lot better: +29.42%; YTD +108.71%.
You need to know that this is a strategy that requires your daily attention. No procrastination or wishful thinking allowed!
(As I am sure you have noticed, I like a mix of yearly, monthly, weekly and daily strategies. Some assets need time to play out, while others are squirrely. Note that I have recently sold BTC, LSCC and TSLA).
6) Two of Toma Hentea’s Strategies, but with changed out-of-market assets
Toma uses Gary Antonacci’s dual momentum approach for the two strategies I like here. That means, you’re only invested when your asset is not only the “best in pack”: your “pack” needs to be in a positive trend canal as well.
Treasuries were the out-of-market asset for his strategies, but that didn’t work at all in 2022 (the worst year since 1871 for treasuries combined with stocks, as you may have heard). Was 2022 only an anomaly? Perhaps, but the evidence is still out whether we are now in a secular high interest-rate environment, or whether it’s just 1999, and we can party with bonds again.
So, instead of treasuries, for me, cash is king when the going gets rough. Does this tweak kill performance? Let’s look at how well these two approaches have performed.
The first strategy was called “the closest thing he knew to a Holy Grail” by Varan, a much-respected commenter at Seekingalpha.com.
I like Toma’s Holy Grail because almost all years, save 2022, have ended in the black. This is quite unusual; most momentum-based strategies have had difficulties in dealing with the years 2015 and 2018.
Also good: it may have had a quick and sharp drawdown spike in 2008, but otherwise, the maximum drawdown was never worse than about 8%. And that is excellent when you consider its CAGR (compound growth rate) of 13.38% (from 2006 onwards).
Toma’s Holy Grail employs a wide arrays of assets, including three different kinds of bonds, real estate, foreign country stocks, gold, and US stocks: this means you’re diversified in case the U.S. is stuck in the doldrums for a few years.
CAGR +13.38%; maximum monthly drawdown +15.97%; YTD +7.45%.
The strategy has (oddly) been in cash for several months now, and is thus not really earning anything right now. Good for nervous nellies, but bad for anybody who is watching how well Tech has been doing the last few months! But hey — we have enough Nasdaq-centered strategies, so it’s good to diversify with something that has a totally different approach.
With some proxies, we can view theoretical performance going back to 1997. Performance is still good: the only negative years were 2000, 2008 and 2022. CAGR is 11.59%, and the maximum monthly drawdown is -13.09%. I like the look of that equity curve!
The second Hentea strategy is also in cash, and has been so since June. I like it because it has a similar risk-reward structure as the Holy Grail, but is more concentrated on Europe, which is why it already earned 22.81% this year — Europe has been on a roll. As a Europe-based investor, I always like to own stocks from here, if that is strategically warrented.
Toma Hentea’s EU/USA Dual Momentum: CAGR +11.74%, maximum monthly drawdown -17.45%, YTD +22.81.
Really excellent article, Martin! I had to come back and read it more closely. Appreciate the value you are offering by way of your newsletter. I'm definitely bumping this subscription to the top of my list of "must-reads".
Thanks for sharing, Martin. Excellent mix of strategies. Do you analyze your collective exposure and risk profile? (How do these strategies perform together?). In terms of how I am investing, I am primarily sticking to my buy & hold stock/bond allocation. I have a fund of energy-related stocks as I like the value and long term prospects. I also have been working with some alternatives like DBMF, CTA, BTAL, KMLM, LBAY, and RA. Lastly, I have been a bit more conservative with US Treasuries yielding >5% and being state tax exempt for those of us in the US.