Archive for the Stadion Category

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. (http://www.theprivateadvisorygroup.com/currentcommentary/category/investment-management/investment-managers/).

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

Winning by Not Losing–Implementing their approach

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I thought you’d have interest in this reallocation alert issued by Stadion, one of our managers.

Soon after the start of June, we noticed a change in market dynamics. The succession of higher highs, higher lows and the climb of support through resistance changed its tune. Our indicators, which had been steadily increasing in a positive level, started a descent toward a negative reading. All of our equity exposures were removed following their respective stop loss thresholds being met during this pullback.

Our first reduction in equity exposure came on June 19, as XLB (Materials Select Sector SPDR) hit its stop loss level. A further reduction in equity exposure occurred a few days later on June 23 when our large cap market holdings of SPY (SPDR S&P 500) and DIA (Diamonds Trust) hit their respective stops loss levels. As the market continued its negative trend for the month of June, the remaining equity exposure was removed with the sale of XLP (Consumer Staples Select Sector SPDR) on June 26 as it hit its stop loss level.

Current market action calls for a position of safety which will either be rewarded by further declines, or turn into a “whipsaw.” While whipsaws are frustrating, we have no reservations about re-initiating equity exposure if dictated by our Model. Making money during the good times is nice, but only if you can protect it in the bad times.” Etc. Etc.

As of today they are 100% in cash waiting for the right time to get back in.

It is always great to see them actually do what they said they were going to do. And, given the fact the S&P is down 4.5% since Stadion decided to go back to cash, they are definitely winning by not losing!

Winning By Not Losing–A Disciplined Approach

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It’s true that no one can predict the stock market, but it is possible to know when conditions are favorable for making money—and
when they’re not.

Stadion’s three-part management approach allows us to do just that.

First, we use our quantitative investment model to assess the market’s risk level at any given time. Our model is built on several proprietary indicators that use internal market data and price trends to determine when we have an edge or when we need to be defensive. This weight-ofthe-evidence approach determines how much exposure Stadion investors will have to equities at any given time.

The second step in our tactical asset allocation process is making sure our portfolios are overweighted in the asset classes that are doing well and underweighted in asset classes that are out of favor.

The final step in the process is our objective, well-defined sell strategy. We do not hesitate to shift our portfolios to more defensive positions when market
internals weaken and intermediate price trends turn negative. Our safety measures may occasionally cause us to miss some market gains, but they are critical in helping us avoid devastating losses.

Debunking the Buy-and-Hold Myth

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Debunking the Buy-and-Hold Myth

Debunking the Buy-and-Hold Myth

Our active management approach radically differs from the typical “buy-and-hold” strategies often used by investors. Buy-and-hold means
staying invested in the market at all times, theoretically achieving the same results as the market.

Investors are sometimes misled by very long-term graphs that “prove” the value of this investment strategy. In reality, charts containing 80 years or more of data are simply irrelevant since the typical investor has only 15 to 20 years to build their retirement nest egg. History shows us there have been many periods of that length when a buy-and-hold approach would have been quite disappointing—or worse.

With buy-and-hold, average stock market investors spend two-thirds of their time working to break even—trying to recover from the cyclical downturns. At Stadion, we believe the best way to break even is to avoid big losses in the first place.

Winning by Not Losing

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winning-by-not-losingStadion’s investment method is called ”winning by not losing.” Their focus is on keeping returns as “real” as possible. To achieve this, they work hard to capture most of the market’s good times and miss most of its bad times. Losing less when the market goes down, means you have less to make up to get to a place where your returns are real, not just “relative”.

It is an approach that resonates with investors who want to earn a decent return over time, without worrying about suffering big losses in tough times.

Stadion’s winning-by-not-losing investment strategy has achieved solid long-term results without account damaging, confidence shattering drops along the way. During the Tech Bust, many investors watched in horror as their portfolios lost 25% to 50% of their value. Those investors subsequently needed returns of 33% to 100% just to break even. But because our investors didn’t suffer such severe losses, much of the return we captured in the market recovery was adding to our clients’ retirement wealth, not just recovering what had been lost.

More recently, the bear market that began in 2007 has stripped investors of the gains made during the post-Tech Bust upturn. In fact, by the end of 2008, buy-and-hold investors had experienced what was ultimately termed “The Lost Decade,” a 10-year period of little or no true gains.

Conversely, Stadion clients are protected from staggering losses during these types of bear markets. In fact, during that same lost decade (1999 – 2008), Stadion Managed Strategy investors saw their account values nearly double. We sometimes underperform the market during the up years (capture most of the good times) and then outperform it during the tough years (miss most of the bad times). The net result is what matters. Had you been invested
in Stadion over the past ten years, you would have a portfolio value significantly higher than if you had been in the S&P 500—and with much less volatility.

Their model not only creates a smoother ride, but it can also stabilize your account as you begin to take money out to live on postretirement. Market losses coupled with withdrawals can lead to account depletion that can never be recovered. But with Stadion, the first of these two dangers is drastically reduced.