Edges are where the social, political and biological action is. Edges are the first places shaped by change. On the edges of seacoasts, forests, riverbanks, civilizations and investment markets—gulls scream, chipmunks gambol, poison ivy grows, ideas germinate, artists flourish and predators wait. Edges are where most of the feeding happens.
The edge is where I began operating from in the 1990’s when my investment style evolved to management that is more active. In laymen’s terms, I sell investments that start going down. That sounds pretty sensible to me.
The central investment theme of the 1980s and 1990s was buy and hold. “No one knows what will happen, so don’t try to do anything different” was the rationale. Buy and hold has been sold to the public as the safe place to be with messages inferring “stay in the center of the herd and you are less likely to be eaten.” Wall Street’s propaganda machine literally scares investors away from the edge with messages like this.
In up-trending markets, buy and hold looks pretty good so why risk going near the edge of the forest? But in fact, over the past 50 years, the market went up only 50.6% of the days the market was open. For 49% of the time, the markets went down. If the markets over the long term look so good with a 50/49 ratio of winners to losers, what would happen if we tried to skew it to 55% 45% winners and losers? Or 60/40? Should we blindly accept Wall Street’s fatalistic view that no one can do this so don’t try? After all, those nice folks in the dark suits wouldn’t lie to us, would they?
The peak in biotech stocks on March 7, 2000 is a good example. My system generated a sell signal for biotech on March 9th, and I sold just two days after the peak. Clients in that strategy banked a 30.41% gain in five weeks on that trade. If I had waited another week, we would have not made a penny. In addition, if I had waited five weeks later we would have lost 30%.
Certainly not many trades show the dramatic nature of my work like this one, and many trades do register a loss. However, all I have to do is show less than 49% losers and we have a chance to improve performance, don’t we? (Incidentally, a list of all trades in this strategy is available on request)
This example illustrates the benefits of an active or proactive style of investing when dealing with volatile investments like stocks. The ability to play defense is the best way to protect investments from major declines, but surprisingly, defensive managers like myself have been considered “out there”–on the edge–and not accepted by the mainstream investment community at all.
Cambridge, the broker/dealer for the securities brokerage side of my business, has grown from a handful of investment reps when I joined them 12 years ago, to having over 1,000 of the most successful reps in the business. Most of these are traditional financial planners and brokers. Although a few like me are focused on active portfolio management, I find myself on the edge in this crowd. But things are changing!
I was surprised by a recent conversation regarding active management vs. buy-and-hold on our on-line Cambridge discussion group. It was actually well received, with a lot of interest and universally positive comments from the group. This is a far cry from a similar conversation we had in 2000 when I was thought to have lived in outer space for suggesting investors actually sell to avoid risk.
The huge losses many buy and hold investors experienced in 2001 and 2002 as they clung to the center of a declining market did a lot to change investor and adviser thinking about buy-and-hold, moving them away from the center and toward the edge.
It sure feels strange to have the center getting closer after living on the edge for so long.
