Suicidal Investment Strategy?

bugbyte_2

What do you think of this strategy?

On a fund evaluator like Fidelity, If you order the funds by their percentage increase in 2011, you will notice more often than not that if the fund had a very good year, it is likely to have a mediocre / poor next year. In fact, if you order the funds by how well they did in 2011, all of the top performers on the first page - bar 1 - only managed between -2 and 3% growth in 2012.

Similarly, if you order the funds by the worst performers in 2011, 8 on the first page had double digit growth, 4 had good single digit growth, and 3 continued to fall.

So knowing this, as a strategy, should I pick the worst performing funds in 2012 for investment in 2013?

Linton

In my view it is not a sensible strategy. The point is that particularly at the moment, all equity funds everywhere are affected in the same way by global economic events. So the poor performance mid 2011 to mid 2012 was pretty universal as is the good performance since.

A related factor is that higher risk funds will tend to do very well in good years and more poorly than average in bad years. They get a long term performance advantage by there being more good years than bad. But it's not much help if you are investing on a year by year basis as you dont know in advance whether next year is going to be globally good or bad.

The answer with funds is to stop thinking on a short term basis. If you want very good returns in my view you need to look at high volatility funds which invest in things you have a rational reason for believing in. You then have to accept that at times, which you will only see in retrospect, performance is going to be relatively poor compared with investments in other sectors.

jimjames

bugbyte wrote: »

What do you think of this strategy?

On a fund evaluator like Fidelity, If you order the funds by their percentage increase in 2011, you will notice more often than not that if the fund had a very good year, it is likely to have a mediocre / poor next year. In fact, if you order the funds by how well they did in 2011, all of the top performers on the first page - bar 1 - only managed between -2 and 3% growth in 2012.

Similarly, if you order the funds by the worst performers in 2011, 8 on the first page had double digit growth, 4 had good single digit growth, and 3 continued to fall.

So knowing this, as a strategy, should I pick the worst performing funds in 2012 for investment in 2013?

Maybe doing it across all funds would be a bad idea. Doing it by sector might make more sense.

So pick the worst performing sector and then the best rated fund within that sector - rather than the worst fund in the sector.

Jegersmart

bugbyte wrote: »

What do you think of this strategy?

On a fund evaluator like Fidelity, If you order the funds by their percentage increase in 2011, you will notice more often than not that if the fund had a very good year, it is likely to have a mediocre / poor next year. In fact, if you order the funds by how well they did in 2011, all of the top performers on the first page - bar 1 - only managed between -2 and 3% growth in 2012.

Similarly, if you order the funds by the worst performers in 2011, 8 on the first page had double digit growth, 4 had good single digit growth, and 3 continued to fall.

So knowing this, as a strategy, should I pick the worst performing funds in 2012 for investment in 2013?

Funds have different focii and operate in different sectors and geographies. The key thing to understand is the cyclical nature of different sectors and markets, and developments in the investment process overall. One example is for example gold miners, which is a sector that has been hammered and continues to have some issues. This means that pretty much ALL funds in that sector will have bad performance over that period, even they differ in comparison to each other. Physical gold prices seem to be going through a basing process at the moment, and the equities of the companies involved in mining and production may start to do the same now that valuations are far cheaper than they were say 18 months ago. Personally I like to look at sectors or geographies that are and have been out of favour and monitor changes in that trend. That is why for example I have taken some initial positions in gold mining funds over the last few days and am keeping a close eye on those with a potential view to add more. I can see some promise there because I think that the market has overreacted to the downside in terms of price. If I consider other markets, do I think that adding to US or UK equities at this point after the recent strong performance has more upside potential over the next 6 months than a sector that is possibly been beaten down to far?

Only time will tell, but it is too simplistic to just take the bottom performers across all markets and just go with those, one has to look at the bigger picture of cycles and price action to see what can be gleaned. I was lucky enough as posted here to have gone very heavy into Japan and China and these have paid off handsomely but they were markets that had been hammered for some time. Of course, markets can continue in a certain fashion for longer than you think so care has to be taken, and that is why initial allocations are modest when I choose to enter a new sector/market or whatever.

For the last 20 years or so where I have actively managed investments, traded and hedged my own portfolios I have never found any easy shortcuts that have worked for a longer period of time. Money management and hard graft in researching and learning are the only ways I know that work indefinitely.

all imho

J

bigfreddiel

this is known as dogs strategy - dogs generally bounce back but its not for the faint hearted - try some back testing by using historical data

try it with the ftse100 shares, and the ftse250 and 350

let us know the results

cheers

fj

bugbyte_2

2008 MARKET CRASH:

Biggest drop in 2008 -60% had gain of +100% in 2009.

Biggest climber in 2008 +85% had gain of +5% in 2009.

Rest of the page followed suit.

2009 MARKET RECOVERY:

Biggest drop in 2009 -25% had gain of +13% in 2010.

Biggest climber in 2009 +151% had gain of +34% in 2010.

Rest of the page followed suit.

2010 CONTINUED MARKET RECOVERY:

Biggest drop in 2010 -14% had gain of -10% in 2011.

Biggest climber in 2010 +76% had gain of +0% in 2011.

Rest of the page mixed bag with wide spread of - to +. No real pattern.

2011 MEH:

Biggest drop in 2011 -34% had gain of +16% in 2012.

Biggest climber in 2011 +27% had gain of +8% in 2012.

Rest of the page followed suit.



Kind of proves the dogs theory right, esp. after a crash. Shows strong performers often get overvalued then cool off, and poor performers undersell then recover. Interestingly, the strongest performers in one year do not often become strong performers in subsequent years.

My next foray into funds will be to look for a good performer over 5 years with the capacity to look for value shares, although the bulk of my investments will remain in passive trackers.

jimjames

Interesting numbers especially in 2009 & 2010 when you'd be better off putting money into the biggest climber for the following year (34% vs +13% and 0% vs -10%) but overall for these numbers it does work better with the dogs.

There was something the Motley Fool did a while back based on the Dogs of the Dow strategy and for a while I think it did well.

redbuzzard

If you look at the best, or worst, performing funds in a particular year, you are looking at extremes.

Given the majority of funds are somewhere in the middle, intuitively the top performing fund is likely to get worse the following year, and the worst performing fund better.

Of course you have to be careful about exactly what you are predicting. If you take the worst 10% say in any year, it's virtually certain that the average relative performance of that group will improve the following year - for that not to be the case, the same funds would need to be in the bottom 10% again, and how likely is that? If you're not careful, you end up stating the obvious without realising it.

See Regression to the Mean

Jegersmart

Too simplistic as per my previous post, because you are just looking at generic equities. All equities are affected by sentiment to some degree, but the various sectors are affected differently by many factors that relate more closely to what they do, produce, where and how they make money.

Obviously there is no point repeating what I have said above, I can only hope that you have (another) look at some point.

Good luck!

J

donniej

The general consensus is that simplistic (sorry!) quant-based strategies tend to fail in the long run. So it may work for a bit, but will likely bite at some point (usually just at the point where you start investing more money in the strategy because it seems to be working!)

This being said, the idea of investing when prices are low (i.e. things have gone badly) is at the core of value investing (Warren Buffett does this.) The key to that, though, is understanding what you are investing in; and that's easier said than done.