Why is the guy who runs this board out of the market?

**titan3d** · 02-14-2007, 10:41 PM

Is he some kind of market timer? Staying out of the market for such a long time seems to violate everything that is known of modern portfolio theory. It almost seems like the board owner is trying to trade his TSP account. This sets a very bad example for others to follow. Why not just invest in the market and rebalance once a year?

**tsptalk** · 02-14-2007, 11:32 PM

yawn

**FUTURESTRADER** · 02-14-2007, 11:51 PM

more of a response then was deserved

**tsptalk** · 02-14-2007, 11:56 PM

I didn't want to sound rude, I'm just a little tired of the question. Since my daily commentary is obviously not read by all (how could anyone not know why I'm out

) I found this by John Hussman who runs one of the most succesful mutual funds out there. Just one of the many investment people I respect who is now in defensive mode.

Source www.hussmanfunds.com:

Let's play a little game – it's called “Baron Rothschild,” who once said “I made my fortune by selling too early” (a comment also made by Bernard Baruch). It's a lot like various kids' games where you know something bad will happen but you don't know when. These include “Musical Chairs,” “Don't break the ice” (where you take turns hammering out little ice blocks hoping that you won't cause the whole surface to collapse), or “Kerplunk” (where a load of marbles rests on sticks that have to be removed one by one). My impression is that investors are playing this sort of game here.

Suppose that the dealer lays cards down, one after another. Each is an annual market return. At any time, you can call out “Baron Rothschild” and go to a defensive position, or you can gamble and get the entire market return the dealer shows next. The gain cards read, say, 15%, 20%, 25% and 30%. If you're defensive, you lag the market by 10% when the market return is a gain, but you get, say, 5% if the market return is a loss.

There is one -20% loss card. Once it appears, the game ends and everyone counts their dough, compounded.

It turns out that if the loss comes anytime before the 5th card, you're almost always ensured to beat or tie the dealer by immediately blurting out “Baron Rothschild” even before the first card is shown. For example,

20%, 20%, 20%, 5% beats 30%, 30%, 30%, -20%.
15%, 15%, 15%, 5% beats 25%, 25%, 25%, -20%.
20%, 10%, 5%, 5% beats 30%, 20%, 15%, -20%.
5%, 5%, 5%, 5% ties 15%, 15%, 15%, -20%.

You can easily prove to yourself that even for a six-year market cycle, you still generally win even if you call out “Baron Rothschild” after year two. It just doesn't pay to risk the big loss.

The point of this isn't that investors should always take a defensive stance - some market conditions are associated with very strong return/risk profiles that warrant substantial exposure to market fluctuations. The point is that the avoidance of sigificant losses is generally worth accepting even long periods of defensiveness. Because of the mathematics of compounding, large losses have a disproportionate effect on cumulative returns. Remember that historically, most bear markets have not averaged 20%, but approach 30% or more. A 30% loss takes an 80% gain and turns it into a 26% gain. It's difficult to recover from such losses, which is why the recent bull market has not even put the market ahead of Treasury bills since 2000 or even 1998. So again, the point is that the avoidance of significant losses is typically worthwhile even if, like Baron Rothschild, one is defensive "too soon."

**Spaf** · 02-15-2007, 12:32 AM

Originally Posted by titan3d

Is he some kind of market timer?

No! Your termonology is incorrect

Market Timing is the act of attempting to predict the future direction of the market, typically through the use of technical indicators or economic data.

Staying out of the market for such a long time seems to violate everything that is known of modern portfolio theory.

Checking 2006 and 2007 the accusation does not appear to be valid.

It almost seems like the board owner is trying to trade his TSP account.

That doesn't make a lot of sense!

This sets a very bad example for others to follow.

What is "This"? What are you referring to?

Why not just invest in the market and rebalance once a year?

Folks are free to do what they want !

**Rod** · 02-15-2007, 02:37 AM

Your question is not one of sincerity, but one intended to ridicule where Tom is presently allocated.

**titan3d** · 02-15-2007, 02:51 AM

Originally Posted by Rod

Your question is not one of sincerity, but one intended to ridicule where Tom is presently allocated.

Not ridicule but amazement. If you are going to try to time the market to avoid losses, you have to follow a system and stick with that system no matter what.

I can't understand what kind of system would stay out of a rising market for 7 months. Even a simple system using moving average crossover should have gotten back into the market when the 50 and 200 DMA crossed to the upside back in mid September 06. A moving average system will never pick the absolute market top or bottom, but you will still catch most of the uptrend trend and avoid much of the downtrend.

**Rod** · 02-15-2007, 03:09 AM

Originally Posted by titan3d

Not ridicule but amazement. If you are going to try to time the market to avoid losses, you have to follow a system and stick with that system no matter what.

I can't understand what kind of system would stay out of a rising market for 7months.

If anything, Tom is following his own "system" and not allowing emotions to dictate any moves. If he did, he would have pulled the trigger in Jan.

Your question is still suspect though, since you made a thread of it.
You could have simply sent Tom a PM or at least pose the question here:

http://www.tsptalk.com/mb/forumdisplay.php?f=62

In the meantime, it will moved it to its proper place.

**weatherweenie** · 02-15-2007, 03:19 AM

To play devil's advocate, if an investor got out of the SP500 after it dropped to 1300 in early September, and stayed out through today, they would have missed roughly a 150pt or 11.5% gain. That's a pretty significant move.

Granted that's 20-20 hindsight, but there has to be a point where the investor has to be willing to suck it up and get back in the game, if that's within their comfort level.

There's no telling whether the next stop for the sp500 is 1600+, or 1300-.

For me, I'm willing to gamble some since I have a long time until retirement.

Originally Posted by tsptalk

I didn't want to sound rude, I'm just a little tired of the question. Since my daily commentary is obviously not read by all (how could anyone not know why I'm out

) I found this by John Hussman who runs one of the most succesful mutual funds out there. Just one of the many investment people I respect who is now in defensive mode.

Source www.hussmanfunds.com:

See above post........

**Birchtree** · 02-15-2007, 03:57 AM

And when one gets to retirement don't stop investing - you'll just be warming up with multiple years of experience to help make the serious dough. At least that's my plan. Tom is simply an individual on his own merits and that is what makes a market.

**Spaf** · 02-15-2007, 05:04 AM

Originally Posted by titan3d

Not ridicule but amazement. If you are going to try to time the market to avoid losses, you have to follow a system and stick with that system no matter what.

Who is trying to time the market?

Do you know the difference between market timing and market trading?

There is an implication that a system was not being used. Not the case!

I can't understand what kind of system would stay out of a rising market for 7 months. Even a simple system using moving average crossover should have gotten back into the market when the 50 and 200 DMA crossed to the upside back in mid September 06. A moving average system will never pick the absolute market top or bottom, but you will still catch most of the uptrend trend and avoid much of the downtrend.

Where did you come up with "being out of the market for 7 month"? In rechecking the 2006 -2007 data. I can't find any evidence to support that allegation.

And, a person can sellect the F-fund [AGG] which the last time I looked, was part of the market.

**weatherweenie** · 02-15-2007, 05:10 AM

Originally Posted by Spaf

Where did you come up with "being out of the market for 7 month"? In rechecking the 2006 -2007 data. I can't find any evidence to support that allegation.

I haven't gone through the specifics, but hasn't Tom pretty much admitted that he's been out of the market through the bulk of its climb in the last 7 months?