He is a very successful mutual funds switcher who has consistently achieved 30-40% annual returns with little downside volatility. He is one of the "wizards" in the best-selling book The New Market Wizards by Jack Schwager.
His ideas are easy to understand. In the early 1980s he noticed that, although in general stocks and mutual funds behave randomly day-to-day, some of the mutual funds, especially Fidelity Select sector funds, have a high probability -- about 70-80 percent -- of staying in the same direction for one or two days after the daily price change exceeds the average daily change for that fund. He calls this high probability the persistency of a trend.
We tested this concept and agree with Blake. Of all fund families, Fidelity Selects have the best persistency of trend. (The Rydex and Profunds series of sector funds, unfortunately, do not produce results as good as Fidelity Selects.) We also looked into stocks and commodities, but they don't have any significant persistency.
Unfortunately, in the mid 1980s Fidelity changed the rules. To curtail short-term switching (and Blake hints in the book that due to his success he may have been a culprit), they imposed a short-term redemption penalty of 0.75%, which destroys the system.
After experimenting with many ideas, we hit on a simple extension of Blake's idea: instead of looking at day-by-day changes, accept the Fidelity rules and use month-to-month changes to eliminate the penalty altogether. After a lot of historical back-testing we concluded that these funds have a high degree of monthly -- not just daily -- persistency and the system generates over 30% compounded annualized return with little downside risk.
Basically, our system, which we call STS (Select Timing Service), generates buy signals whenever a fund's price rises and the monthly change in price is greater than F * average monthly change for that fund. The multiplier F is a key factor here. It is a proprietary quantity and depends (among other things) on the volatility of the fund in question and usually varies between 1.0 and 2.0.
(We also looked into shorting funds since Fidelity Brokerage allows shorting some of the Select funds. However, we found that the degree of persistency is much less if you go short.)
Since such a signal can occur for any fund, the key to success here is determining which fund to buy. We will only consider funds that have a persistency of trend higher than 63%.
Also, the chosen funds must have enough volatility to produce decent returns. In other words, if a fund is very persistent but its average monthly change is only 0.5% -- which is true of some funds -- then we're not interested. We want funds that typically change more than 3% or 4% per month and are persistent.
The funds that we have chosen are always ranked in a descending order of persistency. Thus, if we get signals for two or more funds -- which happens quite often -- we will go into the highest persistency-ranked fund.
Since markets are constantly evolving and changing personalities, we re-compute both the trigger points and validity of persistency for all funds daily. If a fund's persistency goes below the 63% limit, the fund is no longer considered a candidate. Likewise, an outside fund can jump into the candidates' list because it has become more persistent.
In a sense, the STS strategy is similar to a card-counting strategy employed by blackjack players in casinos. They wait until the deck of cards becomes ten-heavy before they start betting. By doing that, they greatly increase their chances of getting a ten. Likewise, we increase our chance of success by investing only in funds that have demonstrated in the near past a high probability of staying with the trend.
Disclaimer: DollarLink Software is not associated in any way with Gil Blake or with Fidelity Investments.
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To sign up to the free, no-obligation trial of the Select Timing Service or if you have specific questions, send us an e-mail at email@example.com.
The mechanics of this investment system are straightforward. You would invest a fixed amount of money, say, $10,000, all into the recommended fund. Approximately one month from now, you will receive another recommendation. If the fund you hold now is different from the one recommended, you replace it with the newly recommended fund.
By the way, for diversification's sake, we have considered buying two or more different Select funds. Our historical backtesting, however, suggests staying in just one fund at a time. All a multi-fund strategy gets us is a drop in overall return on equity with no significant reduction in downside volatility -- which is low to begin with.
Like most fund families, Fidelity does not like switchers and will charge you 0.75% of the assets for a short-term (less than 30 days) redemption. However, the STS system was designed to avoid this charge by holding a fund just over 30 days.
There is one exception. As a safeguard, we use stop losses. If our chosen fund starts dropping -- it can happen; after all, this is a game of probabilities -- we'll sell it if it loses N percent or more from the purchase price, even if it means getting hit with the 0.75% short-redemption penalty. Thus, you may get a new signal from us even if the month has not passed. (We concluded from our historical backtesting that N should be between 5% and 8%, but is dependent on the fund's volatility.)
The trial is free and without any obligations.
After the trial we will send you signals without you having to pay us in advance. You will be billed only if the signal sent was profitable. Signals are sent at intervals of at least 30 days.
We have two payment plans: per-signal and annual.
In the per-signal plan the bill will be for $20 per profitable signal. Since we assume you made money based on our signal, we feel $20 is most reasonable.
If the signal was not profitable, you will not get a bill and will continue to get further signals. If it was profitable and you don't pay the bill, then we will take you off the subscribers list and you will not get subsequent signals.
The annual plan costs $150 per year. (The STS system has about an 80% expectation of success. Therefore, since subscribers pay only for successful signals, it is expected that on the average there would be 9.6 profitable signals per year, which is $192. Thus, to make the prepayment more attractive, we are offering it for $150 per year.)
We reserve the right to change these rates at any time. Subscribers will be given 2 months notice of upcoming changes.
Profitability is the fund's return for the holding period. Distributions, if any, during the holding period also count.
If the fund's return plus distributions, if any, is greater than the return from a money market account, we consider the signal to be profitable.
If our signal suggests going into cash, then we define the signal to be profitable if the money market return generated from the cash is greater than the return of the S&P 500 index during the period we stay in cash. (Dividends from the S&P 500 stocks are excluded from the S&P 500 return.)
Good luck. Persistency pays!
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