Bloodhound Exchange

European Reflection

Peter Gregory — Mon, 10 Oct 2011 16:02:23 +0000

A recent Danube trip from Germany to Bulgaria took us through eight European countries, ending on the Aegean. The course of the river dictated that most were in the south and east of Europe, seven were in the EU and six on the Euro. Once past Austria, we were into lands repeatedly invaded by the Ottomans and many others, including the Russians. The wars, often initiated elsewhere, including centuries of religious wars between the Roman and Orthodox churches, have left a legacy of pride, and often vengeance.
On arrival it’s difficult not to question how people can live in the Euro zone. The Frankfurt Sheraton is not an ideal survey but $13 for a bottle of water with dinner; $40 for continental breakfast, and movies in your room? $28! Really!
In every major city from Munich to Bratislava, Venice, Budapest, Belgrade, Sofia and Thessaloniki, people were well dressed, the streets were full, and cars everywhere. Begging was common.
I had not been to East Germany in a long time so asked our guide how it compared with Rumania and Bulgaria; her answer was that things had improved immeasurably since the Russians left, but East Germany was light years ahead; so the expensive solution for unification chosen by Chancellor Kohl paid off, at least for the Easterners.
The history of the Eastern European countries can be told simply by changing the names of the players; it is a story of conquest and re-conquest that goes back two millenia; wars justified by past wrongs, religion, and opportunity. There is no concept of lasting peace; some of these populations have been occupied by different powers five times in the 20th. century, often the consequence of naïve decisions taken by the Western Powers.
When I asked one guide which neighbors his countrymen thought would stand by them in a crisis, I was struck by his answer; they were all to the North and West, none to the South and East (from whence the Ottomans came 500 years ago, and Russians 60 years ago)
Another guide said “ten years ago when our Government was in trouble and I heard that truckers were barricading the main square I ran out and bought yeast. Why? Because over the kitchen table, as a child in an earlier crisis, I heard my grandmother talk about what we needed for survival; with yeast you can make bread, with bread you can survive. It was just instinctive so that was what I did”. Memories are not only history, they are guidelines. You realize that these are not just memories that have passed; our Serbian guide was very clear that the history of Western intervention in Kosovo is not finished yet in the eyes of many of his countrymen.
We had our exposure to the problems of Greece in Thessaloniki; there were plenty of cars and shoppers, but also student sit downs blocking the main thoroughfare chanting “we are awash in Coke and we have no bread”. On our departure day the Greek air traffic control system shut down, necessitating a 6 hour drive to Sofia, Bulgaria at 5 a.m. It took 4 hours (at a cell charge of $2.80/minute) to sort out the flight changes!
As the number of people with opinions on the Greek crisis seems to be larger than the population of the country, it was a constant subject on the European news. The crux of the matter seems to be the same problem that we debated in the UK forty years ago; at what point in political and financial integration do you give up your soverignty? While expanded trade with common borders is great for growth, financial integration should have gone in step with political integration, but as long as there are 23 languages, geographic and cultural, regional and religious consitiuencies, the population will take 50-100 years of gradual integration before a farmer in the south of France will accept that his taxes can be determined by industrialsts in the north, who are poles apart from his culture.
The politically-driven rush for the common currency left financial integration incomplete; the institutions necessary were not created and were delayed, which was fine as long as growth was steady and there were no crises. But our financial institutions were changing all of that, and Greeks did what most Americans did when our they threw cheap money around, they took it. Now, with the magic of spin, the clients are identified as the guilty and the perpetrators, the victims!
We are told that Greece (pop. 11M) may bring down the economy of the EU (pop. 502M—Greece 2.2%); even the World (pop. 7B—Greece 0.2%). It just doesn’t sound right, does it? In the meantime the problem is being pushed to the population.
I asked a Hungarian what a doctor would earn out of college; his answer was that he would earn 10 times as much in Sweden, 8 times as much in England, 5 times as much in Austria. In Bulgaria, the answer was “in Sweden 20 times as much”. With pensions halved in Greece and services in hospitals being reduced to satisfy the banks, the Greeks are about to suffer the same plight as the others, a brain drain of their most able.
Should we jump to the conclusion that, in the EU, we are building politico-economic institutions that are too big for anyone to manage? We think not; the structure of safety nets that has been called for was just not addreessed ahead of time, and by not dealing with this issue beforehand, the political community are now having to step through a very complex process with a gun at their heads. Media “experts” berate them for tardiness! A Greek economic spokesman made the heartfelt comment “Measuring debt over GDP is fine, but debt is fixed and we are managing GDP down, so when the ratio goes up, they don’t understand that it means that we are doing what we said we would do”!
Within the last 24 hours Britain, who wisely delayed integration into the Grand European Currency Adventure and are, at the same time, pursuing an extremely conservative fiscal policy, saw two sobering events:
1. Sir Mervyn King, the Governor of the Bank of England (founded 1694) said “this is the most serious financial crisis at least since the 1930s, if not ever”!
2. Moody’s downgraded 12 British financial institutions.
That’s serious.
Reflecting on the historical, relationship, mixed capabilities and expectations of these countries; the magnitude of the institutional problems that EU leaders are working their way through; and Sir Mervyn’s concern in a Britain which is at arms-length from the problem, throws into contrast the game of chicken with our economy in which our Political Class are currently absorbed (despite having access to 46 Nobel Prizewinning Economists).
I began by talking about the uncertainties of life in these countries; invasions take time to develop, and there is forewarning. The only invasion Greece has had has been electronic; electronic invasion is on its way and it’s instantaneous. In a review of the virus war on the BBC, an intelligence expert gave three examples:
The attack on Estonia in 2007; all aspects of life in Estonia are very heavily integrated over the internet; a political argument over the movement of a Russian war memorial triggered an attack that almost almost cyberbombed it back to the stone age. The attack was sophisticated, using botnets that modified their tactics and concentrated on specific servers, including the Parliament, the President’s office, and the banking system.
Zeus. By June 2009, the mutating Zeus Trojan horse had compromised 74,000 FTP accounts that included BoA, NASA, Oracle, Cisco, Amazon. In 2010 credit cards of 15 US banks had been compromised. 80 million Sony users were impacted. In 2010 the FBI announced it had arrested 90 members of a ring that had used Zeus to steal more than $70M. It is estimated that 3.6 million PCs in the US are infected. The code for Zeus is now public, you can buy it for $700, or $15,000 if you want all the features so that you can target it to steal email, bank information, credit cards, etc.
Stuxnet. This is a worm that spread itself indiscriminately but it was programmed to attack networks that contained very specific configurations of Siemens controllers. These happened to coincide with the configuration of the Iranian nuclear centrifuge controllers and, when the Stuxnet worm found them, it caused great damage to their Natanz facility. No one has claimed the credit for Stuxnet, but it is widely believed that only a nation-state would have the resources to mount it, and with biblical references embedded in the code, Israel and the US are widely believed to be responsible.
The BBC spokesperson said that, in effect, we have no protection from devices of this and future sophistication; and that our power, water, transportation and financial systems are woefully inadequately prepared to deal with them.
Back to the lessons of Eastern Europe; what can we gain from their history about living with the threat that I just described.
1. Electronic attacks are independent of geography; they don’t require missiles and battleships, and they are instantaneous. Ignoring the risk is not an option.
2. We are a nation of great resource and while we may not be prepared for the immediate aftemath of an attack, we have invested heavily in recovery, so just like a hurricane, we might need resources for days, not years. Keep your gas tank full!
3. We are becoming more and more dependent on electronic storage that is not under our control; make sure that you can prove all your major assets. Imagine having to prove to a bank whose records have been wiped out what assets of yours they hold! Keep hard copy records of anything you might need to prove.
4. Change your passwords regularly! See our new blog on a “Bloodhound way” to create memorable passwords that give you high security.

This sounds a sombre note on which to end a delightful trip, but we have never experienced the dangers that these people have survived. We can’t afford to be complacent!

Are We Nearly There Yet?

Peter Gregory — Tue, 16 Aug 2011 15:55:51 +0000

It’s all about jobs, right? Unfortunately creating jobs is an ephemeral process with many dimensions, so its much easier to make political points out of debt, which only has two parameters, income and expenditure. Anybody can understand that, especially if you have the benefit of the having a Congressional Budget Office to create long term projections. It’s exciting to hear 20 year projections about debt, especially when next year is the tenth year anniversary of the ten year forecast that the US would have NO DEBT at all! Now that we understand all about debt, we can talk knowledgeably about all the other countries who do/may/ have a debt problem, always assuming that those responsible for running them do nothing about it for 10 years (sounds like us!). Jobs ……… maybe they will take care of themselves until we have a vocabulary for discussing them.

It was while pondering the fact that the market keeps cratering, while we keep hearing companies reporting good earnings, that lead us to take a look at our database to see whether there was a divergence between prices and earnings. We looked at the last 12 months of EPS reported up to July 24th., and the gain over reported figures a year ago compared to the initial share price. Then we looked at the change in share price over the same period, to compare them and then, since we had introduced a measurement of earnings change/share price we looked at the typical size of that number (which is really the PE ratio inverted). To be exact, the first row shows the increase in trailing 12 months EPS before DNE between the latest reported quarter and the same quarter a year earlier; unfortunately you cannot measure this as a percentage because a percentage change from -10cents/share to +10 cents/share does not make sense, so the change is shown as a percentage of the initial share price. The second shows the percentage change in share price over the same period and, since we measured the EPS change relative to share price in the first comparison, we showed the actual EPS/share price at the latest reported date. The data was based on our database July 24th. and excludes companies with a share price below $2.

What does it tell us? The top line shows that out of around 2900 companies 33% experienced a decline in EPS while only 30% suffered a decline in share price, so prices were not punished more than earnings. When you look at those with positive earnings, however, many saw a higher increase in share price than the increase in earnings, most of which gained less than 10%. The bottom line is the inverse of the PE ratio, which is not meaningful for negative numbers, so if you look at the positive group, it shows that most EPS/price ratios are in the 0-10% range (i.e. PEs greater than 10) with one third in the 10-20% range (PE’s between 5 and 10) and very few with lower PE’s than that.

Looking for security?

Peter Gregory — Mon, 18 Jul 2011 15:34:44 +0000

Every investor has goals for return and risk. Risk is hard to measure; familiar measurements like standard deviation (often referred to in the industry as “risk”) and beta (which is based on standard deviation) are inadequate because standard deviation cannot differentiate between growth, volatility and decline. In the following diagram, all three portfolios A, B, and C have the same mean and standard deviation, but they look very different to the investor! Growing portfolios (like A) are therefore said to have a high standard deviation and to therefore be “risky”!

Downside deviation, upon which the Sortino ratio is based, excludes upwards movement from its measure of volatility. For portfolios with significant gain, it is a more satisfactory measurement.

We wanted to find a more tangible measurement of risk that an investor could relate to more easily. The question we asked is “How likely is it that I could have obtained an average annual return of 20% if I had invested in Model Strategy X for 8 years, and I had started on any day in the last 24 years?” Bloodhound’s ability to invest a specific strategy and follow it for 24 years enabled us to answer the question which, since we could do the analysis for every Model Strategy, enabled us to add “and which Model Strategy would have given me the highest probability of obtaining 20% over an 8 year period, and what was that probability”.

Here is the result: in order to be able to fit the table to the page we abbreviated the strategy names with their first letter, so SA5_10 is the strategy “SuperAggressive5, with a portfolio of 10 stocks (C, M, G, A refer to the Conservative, Moderate, Growth and Aggressive strategies respectively). The categories are color coded.

In the example that I took, of investing for 8 years and looking for an annual compound return of 20%, the table shows that the strategy most likely to have delivered that return is SuperAggressive5 with a 10 stock portfolio, and (in the lower table) the probability of doing so was 100%!

We also included, for reference, the worst performance. This represents the performance that you would have achieved if you had invested on the worst possible day in the last 24 years and held your investment for the period of interest. For an 8 year investment period, the best performance on the worst possible investment day came from SuperAggressive5 and the worst investment return achieved over that period was 31% a year.

Of course, we have to remember that we invest in the present, for a return in the future, and here we are looking at the events of the last 24 years, not the next. However, when EVERY 8 year period that you could have picked averaged more than 20%, it is encouraging, to say the least! This, in 24 years that included Black Monday, two occasions when the market fell 50%, wars, terrorism, the “Crash of 2.45pm” in May this year, and six Presidential terms.

Why? Why is it that a high growth strategy produces greater certainty of a return? We cannot answer for certain, but it seems to be that the volatiliy of the strategy enables it to recover faster and more certainly than a “Conservative” strategy that is based on larger companies with lower average returns.

One might, perhaps, expect a Conservative strategy to lose money less often but this, too, is nt necessarily so. If you examine the 24 years of detail that we have for SuperAggressive5, for example, you will see that it took a hit in 2000, 2002 and 2008, but replied in each case with an outstanding return in the following year (parenthetically, it also lost less often than the SP500 index, which should represent the ultimate in conservatism!) . Notice also that it is the 10 stock portfolio that appears most often; again, the 10 stock portfolio usually outperforms a 20 stock portfolio so the correlation seems, again, to be with return. It seems to us that if you can tolerate higher volatility on a day-to-day basis, the ability of the strategy to produce high gains overwhelms losses.

It is important to take notice of the shorter investment periods. If the measurement of success is not gain, but to not lose money in individual years (0% and 1 year in our table), then other strategies make their appearance. What this indicates is that when you look at one year performance, results are more variable; but they become more stable, the longer you stay with the strategy. If there is one message that comes out of our research, it is that staying with a strategy produces greater predictability.

Is there something special about SuperAggressive5? As with any mathematical measurement, one cannot tell from the chart whether there were three other strategies that produced almost the same result for each point in the chart, hence our general conclusion that aggressive strategies seem to offer greater confidence of any given return.

To test this we removed any Aggressive or SuperAggressive strategies from consideration, which created the following result.

Notice, again, that out of the Conservative, Moderate and Growth Model Strategies, it is the Growth (the highest returning of those included) strategies that dominate, which seems to corroborate our earlier conclusion that higher returns produce greater likelihood of a return over time.

From Screening To Strategy

Peter Gregory — Tue, 17 May 2011 13:22:22 +0000

Many investors are familiar with stock screening as a way to select candidate stocks for their portfolio; Bloodhound takes screening to the next level.

Screening has two disadvantages:

The number of stocks that pass your screens varies with the state of the market, so if you are looking for a portfolio of 20 stocks, the only way you can reduce the candidates to 20 is to add screens that you would not otherwise use.
Until time passes, you do not know whether your screen produced stocks that Wall Street will reward, or not.

Bloodhound solves both of these problems. We use your screens (or one of ours) to find candidates; you use just the screens you trust, and you can include any of 1400 fundamental, or more than 120 technical algorithms, or create your own. Then we add a ranking method to sort the candidates that pass. Ranking rates candidates according to a measure of value (like Earnings, for example), divided by the cost of obtaining that value (like the share price).Then we pick the highest ranked candidates to create your portfolio.

Next, we add trading rules; these include the amount of money you want to invest; how often you want to trade stocks, what you want to do with the proceeds, whether you want a stop-loss or not, etc.

Now you have a complete investment strategy, and we do two things with it:

We use our 24 year fundamental and technical database and our state-of-the-art simulator to analyze the performance of your strategy, daily, for the last 24 years. This shows you how it performed in all kinds of markets, which stocks it held, how much it gained, what drawdowns it experienced, how often it traded.
If you like the results, we find out what stocks it would pick if you were investing today, and if you are, and have an account with one of our linked brokers, you can invest the entire portfolio with a single click.

But that’s not where investment ends; as Benjamin Graham (the father of modern investing) said:

“……the investors chief problem is himself, temperament is more important than expertise in accounting, finance or stock market lore…”

So Bloodhound tracks your portfolio for you, every day, rates every stock in the market against your strategy, and tell you if and what you need to trade.

All you have to do is to follow your strategy. If you know how it has performed for 24 years, it will probably do a better job of managing your portfolio than you can. You can sleep at night, because Bloodhound doesn’t, and if you are too busy to check on things, we are doing it for you; all you have to do is check in, and if you see a red Alert, it will tell you what to do. Strategic investment beats trying to time the market!

Save the turkeys for Christmas!

Peter Gregory — Tue, 01 Mar 2011 18:49:16 +0000

While the major indexes continue to climb well, presaging confidence in the economy despite the political hyperbole, Bloodhound’s Model Strategies have had what can best be described a a lackluster start to 2011. With everything that we say about the wisdom of staying with a proven investment strategy and the impossibility of market timing, maybe this is the proof that Bloodhound really doesn’t work!

How can it be that with 25 different strategies, so many appear to be hitting similar problems, and what’s more important, what are we going to do about it!

One explanation could be that many of theModel Strategies select smaller companies, and that the boom in the big indexes does not reflect companies outside the largest 500 in the United States. While that could be part of the explanation we are, after all, a research company and we should have a better explanation!

Time to look further. Firstly, remember that all of the strategies have their own individual screens that they use to select candidates, then they rank the successful candidates using a ratio that divides a measure of value by the cost of that value. 1/3 of the Model Strategies use Gross Margin as their measure of value, 1/3 use Return on Assets, and 1/3 use Return on Equity, Book Value, Dividends or Sales Growth. Those that use Gross Margin, for example, are buying the companies in the market that have the highest Gross Margin in relation to their share price…….good companies to own!

But then there is the “rule of 5″; that in any portfolio of 5 stocks there will be one superstar, one you wished you didn’t own, and three that are……..OK. If the turkey takes a 50% hit in a portfolio of 10 stocks, that impacts the portfolio by 5%; if it happens early in the year, there is little time for the other stocks to make up the difference (unless, like SuperAggressive5, you happened to pick up Basset Furniture which is up 57% in two months!)

Maybe we flew into a flock of turkeys! When you look further, that is exactly what has happened: growth in smaller stocks probably is slow but the strategies that are most affected hold SMSI (down 42% and held in 2, including mine!) , TASR (down 26% and held in 5 strategies), TKLC(down 37% and held in 3 strategies). Unfortunately SuperAggressive2 actually holds both TKLC and SMSI.

So were these bad choices? When you are buying companies with the highest Gross Margins, you are buying into management that runs a very effiicient operation; so is there something else going on?

SMSI lost 36% of its value on February 9. It happened too fast for anyone to react unless they were watching the real time data, and if you were, there is not much you could have done because when a freefall happens, there are no buyers, so you cannot sell your stock until it hits the bottom. Then, if you do sell, all you do is lock in your loss. Bloodhound did not sell, and SMSI is now back 12% from its bottom. What happened to the company? After announcing an 18% increase in revenue for last year they made an announcement that their quarterly earnings would be lower because their largest customer (Verizon?) was over-inventory, possibly because of the late launch of its 4G network. So Wall Street wrote 40% off the value of a company that is making 90% margins on its key product!

TKLC fell from 11.73 on February 9 to bottom at 8.17 the next day. A similarly fast fall, but TKLC has not bounced, yet. The reason given for TKLC’s problems was ongoing uncertainty over the company’s management, and on February 16th, the Chairman resigned and two new Board members were appointed. Why this caused a precitous decline is unclear, but the market behavior, of instant diminution of the company, was characteristic. Analyst positions on the company now seem to be slowly improving.

TASR’s decline has been less dramatic; a slow drop since the start of the year. TASR has been a great demonstration of Bloodhound’s uncanny ability to pick a winner; Lion, the previous SuperAggressive 4, found TASR in 2003 and recorded a 2,004% gain on the transaction! While you might think that security products can only be a growth industry, TASR reported February 23, 2011 a 22% drop in quarter-on-quarter sales and a drop in Gross Margin to 59%. Analyst reaction has been mutedly positive.

So it looks as though the turkeys came a little early this year, but true to our strategic focus we will stay with the strategies that have worked for a quarter century. When stocks get whacked like this, over-reaction is not uncommon, and if you find yourself on the floor, the only next direction is up. If things do not improve, we will be looking for a short term tax loss in December, but we wouldn’t count on it just yet!

Bloodhound Model Strategy 2010 Performance Compared to the Leading Mutual Funds

Peter Gregory — Sat, 29 Jan 2011 19:13:37 +0000

Bloodhound Investment Research has again published its year-end comparison with the New York Time summary of leading mutual funds in 2010 and here are the results. For those unfamiliar with Bloodhound, we provide 5 Model investment strategies in each of 5 categories that range from Conservative to SuperAggressive; the requirements for each are defined on our website. The Model Strategies build individualized portfolios; those included in the table are based on portfolios of 20 stocks.

The leading funds highlighted in the NY Times are typically small cap, high growth, and are therefore closest in style to Bloodhound’s SuperAggressive group; almost all of the Model Strategies are one-year buy and hold strategies requiring very little maintenance.

All of Bloodhound’s strategies have been evaluated through the wide variety of market conditions that has existed over the last 24 years, all details of which are available to our users

The New York Times leader list seldom contains the same funds from year to year; the 5 year comparison is especially illuminating.

Why Financial Advisors Should Consider Bloodhound

Peter Gregory — Mon, 24 Jan 2011 15:51:29 +0000

A financial advisor has to balance the time available for each client with the diversity of services that she/he provides and the cost of providing them. An increasing number are now finding that Bloodhound provides an attractive and very cost-effective solution for those advisors who provide support for equity investment. Here is why:

Bloodhound is systematic. Our investment approach is based on following a strategy that is analyzed every night on your behalf; portfolios are selected from more than 4,000 stocks. Every strategy that we, or you, create is analyzed daily for 24 years. Your strategy creates your portfolio, and enables us to alert you to what to trade and when. Our focus is on long term value growth; like Benjamin Graham, many of our strategies are buy-and-hold. Because it is systematic, emotion is removed from the buying and selling process.
We provide Model Strategies for you to choose. They are classified as Conservative, Moderate, Growth, Aggressive and SuperAggressive and in order to qualify, each strategy must meet rigorous criteria for both return and “risk”. For example a Growth Model Strategy must have an average return of more then 18% a year; but on the risk side, it must can not have lost money in any year more often than the SP500 index, must have beta of less than 1.4, and portfolios must have experienced a 5% or 10% decline during any year not more than 1.4 times as often as the SP500 index. All of these criteria must be met both since 2000 and since 1987, when our data starts.
You can recommend Model Strategies that provide dividends, and those that provide exceptional returns (see our blogs on paying for college and our comparison with the leading mutual funds in 2010)
The Bloodhound methodology encourages client dialog; our strategies are based on systematic investment for the long term, we provide 24 years of historical performance for each strategy and in great detail. The client can participate in selecting the strategy and you become joint participants, or you can select a strategy and use it for finding stock recommendations. Finding a current stock recommendation from the strategy takes seconds over the phone.
The cost is very low. $695/year for Bronze membership that includes our Model Strategies, the building and maintanance of one portfolio, 24 years of charting and financial data on stocks, a life time planner, and other tools. The number of portfolios managed is expandable.
We provide you with your own private benchmark, one that can find stocks for you.
The results are excellent (our first user recently passed a 100% gain on her investment). Here is a summary:

For more information, call us at 1-888-516-3348 to find out why more and more fund managers and advisors are find it cost effective to expand their services with Bloodhound.

Playing It Safe!

Peter Gregory — Mon, 03 Jan 2011 22:05:15 +0000

Just what is a safe investment; certainly nobody wants one that is unsafe! But how do you measure safety? At Bloodhound, our research focus is to try to understand measures of investment performance that can match the expectations of the individual investor, and here are some of the things that we have found.

The investment community quantify “risk” to describe variation in value, measuring it by the standard deviation of changes in price. The following chart illustrates three different possible portfolios:

If they represented the performance of your portfolio you know which one you would rather have, but unfortunately the average and standard deviation are the same for all of them. Standard deviation cannot differentiate between going down, going up and oscillating between them. Not a very helpful measurement of what investors think of as risk!

The following chart contrasts the behavior of two real portfolios during 2010; one is the SP500 index, a large grouping of the largest companies in our economy and certainly one that might be regarded as “safe”! The second is a small (10 stock) portfolio based on the most aggressive of Bloodhound’s SuperAggressive Model Strategies (SuperAgg5), which you would expect to be about as far from the SP500 index as it’s possible to get. In order to make them comparable, we based their performance on their value at January 1st. What do you notice?

You may be surprised to see the extent to which the SP500 index varies during the course of the year. You would have worried about it at the start of the year, then again in May, until finally in August it took off, looked as though it had run out of gas in November, when it faltered, then had a nice ride to year end. The other portfolio, SuperAgg5, also fluctuated during the year; took off a little faster, held up a little better in the second quarter, started August below the SP500 but then took off and ended with double the gain for the year.

We have noticed repeatedly that high gain strategies, although they may be somewhat more volatile than the index and than more conservative strategies, recover faster and stronger. For example, the SP500 index has lost money in 6 of the last 24 years (one in 4) and as of Jan 1 2011, is still 9% below its value in January 2008. By comparison, SuperAgg5 has lost money only twice in 24 years (a 20 stock portfolio has only lost once!) and as of Jan 1 2011 it is 35% up on its Jan 1 2008 value. Which would you regard as “safer”? By the way, in addition to the frequency of losing money, don’t lose sight of the return! The average annual return on the SP500 index over the last 24 years is about 9%; for SuperAgg5 the average annual return is 62%. If you made a one-time investment of $5000 and held it over a 10 year period, a 60% level of return would turn it into $500,000 whereas a 9% return would produce only $12,000!

Another measurement that we make is to see what would have happened if you had invested in a strategy over any 10 year period in the last 24 years. 90% of investors in SuperAgg5 would have exceeded a 38% return, and if they had picked the worst day in 24 years to start, would still have exceeded 28% a year. If they had invested in the SP500 index, the numbers would have been minus 1% and minus 5%! Just goes to show that “large” and “conservative” are not safer than those that have high gains and quick recovery capability.

We believe that investors would prefer to avoid anxiety, and to provide as much support as we can we approach the problem in three ways:

Most of our Model Strategies trade just once a year. Although the cable media thrive on creating a state of perpetual anxiety, we have shown over 24 years of history and more than 500,000 different strategies, that excellent returns follow if you follow your strategy steadfastly and ignore the chatter.
We believe that most people want to avoid a year in which they actually lose money, so we make that a condition of all of our Model Strategies, from the most conservative to the most aggressive; they have not lost money more often than the SP500 index either over the last 10 (4 times) nor the last 24 years (6 times)
While losing money is certainly a milestone that we can focus on, we decided to set goals for the number of times an investor would have seen a strategy lose either 5% or 10% of its value at some point during a year. Again, every Model Strategy is required to meet goals relative to the SP500 index that relate to its performance. Because we expect them to deliver significantly more performance than the index, we vary the goals with performance, which lets the user decide the trade off in performance he or she feels comfortable with.

There is no perfect answer to “playing it safe” but we are continuing to try to define goals that are more meaningful to investors. With Bloodhound, we know a great deal about each of our strategies from many perspectives, and you can know that, too, before you invest a penny! Wouldn’t that make you feel safer?

Saving For College? Let Bloodhound help.

Peter Gregory — Sun, 02 Jan 2011 17:16:29 +0000

“Your child’s college tuition could be one of the largest expenditures you ever make”. Intimidating, isn’t it, and yet with prestigious schools now at $50K/year and costs rising, a 4 year undergraduate education is just that!

Here is the first year and total 4-year cost (in $K) based on a current annual cost of $50K/year, an annual inflation in college costs of 5%, and the age of your child.

If your child has just been born, you are looking at a total four year cost of $519,000 when they enter college in 18 years.

Don’t despair! Albert Einstein said “the most powerful force in the universe is compound interest”; here is where Bloodhound may be able to help you.

Bloodhound researches and supports Model Strategies; these are sets of rules for investing in stocks, and they are selected into groups ranging from Conservative to SuperAggressive, with five in each group. To qualify as SuperAggressive, a strategy must have maintained an average annual return of more than 25% over both the last 10 years and the last 24 years, while losing less often than the SP500 index. They are all buy-and-hold, you make an investment once a year, that’s all! Here are their returns in 2010 and their averages over the last 24 years.

You can see that they have achieved far more than the 25% required to qualify. The question that is important in this context is “how much money would I have to invest this year in order to cover my college costs completely?”. Here is the answer, based on the assumption that you invest in one of these strategies and that it returns the minimum average, for these strategies, of 25% a year.

If your baby has just been born, a single investment, this year, of $9,300 would provide the entire 4 year cost of $519,000 by the time he, or she, entered college! The longer you leave it, the more expensive it becomes; if he, or she, is 5 years old today, you would need to set aside $22,300.

This calculation is dependent on just four things: sustaining a 25% return, costs rising at not more than 5% a year, your ability to use a tax-sheltered account for your investment, and your maintaining a Bloodhound account so that we can tell you which stocks to invest your portfolio in each year. Bloodhound provides a great deal of information about its Model Strategies that you can investigate as a Silver user ($995/year), or you can just subscribe as a Bronze user ($695/year) and just use the Model Strategy you selected.

If you would like to have the spreadsheet we used to calculate these figures, please send us an email on our website. With it, you can explore different assumptions, you can explore spreading the investment over several years, and you can explore using the proceeds of the fund to pay your Bloodhound subscription after the first few years!

Now the good part! If your fund has reached the required amount when your child enters college, you don’t immediately donate it all to fees. You have a sizeable fund; pay the fees each year from the fund and you have an ongoing legacy. For example, if your fund is equal to the four-year cost and making 25% a year, you can practically pay each years fee from the capital gain and barely diminish the fund at all, so you keep your investment!

Einstein was right!

Bloodhound Model Strategies and the TaxMan

Peter Gregory — Wed, 15 Dec 2010 15:18:46 +0000

Because of the complexity of the tax code, taxes are very specific to the individual, especially in the area of life time planning, so in general Bloodhound concentrates on Gross returns so that the individual investor can consult with their tax advisor about their individual circumstances. However, long and short term capital gains tax provisions are across the board and worth addressing in the context of Bloodhound’s Model Strategies, many of which are one-year buy-and-hold.

At the time of writing, short term capital gains tax applies if the asset has been held for less than a year, and applies at standard tax rates. Long term capital gains tax applies at 5% for taxpayers in the 10% and 15% brackets and 15% for those in higher brackets. What do you do if you are holding a one-year buy-and-hold strategy?

Bloodhound’s long term strategies provide a significant advantage for savvy investors. Most portfolios will include some stocks that gain, and some that lose. The tax code provides a very strong incentive to take your losses short-term, and your gains long-term. Check your portfolio before the end of the year to consider taking your losses (if any), but hold your gains over the end of the investment year.