Winning by Not Losing–A Long Term Approach

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Golf Clubs #1

The Holy Grail in the investing world is a manager who is able to repeatedly time the markets—meaning they are fully invested when the market is moving up and fully in cash while the market is moving down. While many have claimed the ability, thus far no person or team of people have been able to successfully get in at the market lows and get out at the market highs on a repeated basis.

Nevertheless, after extensive research we found an investment team (Stadion) that has a proven track record of capturing most of the market upside while missing most of the market downside. Stadion is introduced in greater detail on the Current Commentary section of our website for those interested. (

Over the past 12 years, Stadion has more than a respectable track record. They have a 68% upside capture with only a 27% downside capture. Despite that high standard of performance, Stadion’s management team clearly acknowledges the following shortcomings, which have been borne out over the same 12 year period:

• They are not able, and do not try, to predict the future
• They are not able, and do not try, to pick market tops or bottoms
• They are not able, and do not try, to beat the market in the short term

Their ability to capture most of the good times, and miss most of the bad times rests in their entirely quantitative process where they use the weight of evidence to determine both market exposure and stop-loss parameters. Each data point in their proprietary matrix consists of multiple, complex indicators, which are run daily.

Essentially, the indicators they use measure the fundamental strength of the market, and based on that perceived strength they make calculated decisions about where and how much to invest. The primary weakness of this process is using quantitative approach to measure a qualitative entity. While medium to long term trends are based on fundamentals, short and especially hyper-short term trends are typically based on emotion or other qualitative parameters. Hence, short-term performance can be a disappointment to investor’s who harbor less than realistic expectations.

By design, Stadion’s approach is void of emotion or other subjective inputs, which means they are not subject to short-term, emotional reactions We see this as a positive and use them precisely for that reason. We want them to make decisions based on their calculated analysis of market fundamentals.

Such a focus on fundamentals can lead to some short-term anxiety as was the case recently on November 9, 2009 when the S&P 500 was up 2.22% and Stadion’s current allocation was 80% cash 20% commodities. At first analysis, it is easy to be frustrated that they missed the rally. However, as noted in the Wall Street Journal’s November 10, 2009 cover story, the November 9th rally was a “skeptics rally—fed by money managers who feel they must make risky bets in order to keep up with the market, but who don’t like what they see.” We hope you are beginning to better appreciate their time-tested wisdom.

While this ‘skeptics rally’ might continue long enough for market fundamentals to sustain it, we are not sure that is going to be the case. Stadion’s rules-driven approach dictates they avoid emotionally driven rallies and directs instead that they remain uninvested until the broader market measures indicate a more substantiated opportunity for growth. Conversely, during times when market fundamentals conclude additional market upside potential even while there may be an impulsive, unsubstantiated market pullback, Stadion would remain invested and might also miss on the short term.

So while we are confident that Stadion’s objective, disciplined research-driven approach will prove successful over a full market cycle, we acknowledge they will often, by design, lose to the market during the short term. This is especially true with repeated emotional, radical swings up or down like those we have recently experienced. For investors who are more interested in meeting or beating the market on a day-to-day basis, Stadion is not a viable option.

Just as a golfer with a bag full of clubs, each designed for a specific application under specific circumstances, we have manager teams that perform well in specific market conditions based on specific time horizons. Stadion is clearly a more defensive ’club’, and might be the right choice for an investor who would rather not “make risky bets” in order to keep up with the market, (even when they) don’t like what they see.

Filed Under: Stadion

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