High Probability Investing - aaiirtp.orgaaiirtp.org/wp-content/...Drach_Speaker_Slides.pdfFeb 13,...
Transcript of High Probability Investing - aaiirtp.orgaaiirtp.org/wp-content/...Drach_Speaker_Slides.pdfFeb 13,...
High Probability Investing Robert B. Drach AAII Research Triangle February 13, 2016
Drach Market Research
2
Monetary Infusion Cycles
• Economic Growth • Inflation • Some of the strongest bull
markets in history
Result in:
• Fiscal Stimulus (Legislated) • Monetary Stimulus (Federal
Reserve)
Combination of:
CRISIS
NORMALIZATION
EXPANSION
New Deal and 2nd New Deal
+370% 4 Years 8 Months
4
0
50
100
150
200
250
300
350
9/1929 9/1931 9/1933 9/1935
DJIA
World War II
+129% 4 Years 1 Month
5
80
100
120
140
160
180
200
220
12/1941 4/1943 9/1944 1/1946
DJIA
The 1990s
+295% 7 Years 9 Months
6
20003000400050006000700080009000
10000
8/1989 8/1991 8/1993 8/1995 8/1997
DJIA
+172%
“Irrational Exuberance”
6000
8000
10000
12000
14000
16000
18000
20000
10/2007 10/2009 10/2011 10/2013
DJIA
Financial Crisis
+149% 6+ Years
7
Never Look Back
8
40
400
4000
1929 1943 1957 1970 1984 1998 2011
DJIA
FUNDAMENTALS
Stocks are expensive.
KOMPLET
10 Historical Analogs
Each analog has been followed by a major market crash and depressed long term returns
1929
Decline from peak
-89%
Decline from signal*
-89%
Time to break even
24 years 10 months
Lagged T-Note
20 years 1 month
1964
Decline from peak
-48%
Decline from signal*
-22%
Time to break even
10 years 9 months
Lagged T-Note
10 years 6 months
*Signal is when we first saw record earnings and ~19x P/E ratios in each cycle
KOMPLET
11 Recent History
1996 1999 2004
Decline from peak
-19% -49% -57%
Decline from signal*
N/A -43% -40%
Time to break even
N/A 6 years 4 months
7 years 4 months
*Signal is when we first saw record earnings and ~19x P/E ratios in each cycle
KOMPLET
12 Recent History
One Cycle 1996-2009
Decline from peak
-57%
Decline from signal
-4%
Time to break even
12 years 7 months
Lagged T-Note
16 years 3 months *Signal is when we first saw record earnings
and ~19x P/E ratios in each cycle
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
1996 1998 2000 2002 2004 2006
S&P 500 P/E Ratio
KOMPLET
13 Hope for 1990s
Paying 20x P/E within 12% of earnings highs.
1929 1962 1987 1994 1997 2003
Drawdown -85% -21% -22% -5% -5% -30%
KOMPLET
14 High P/Es and Heading Higher
1991-1993 2009 P/E 22.83 – 25.15 42.12 - 123.73
Earnings 22-37% below 1989 Peak
70-92% below 2007 peak
Price/Max Earnings
15.30 - 17.65 8.92 – 12.57
TECHNICALS
Too far too fast.
-50%
0%
50%
100%
150%
0 200 400 600 800 1000 1200 1400 1600 1800
1928 1937 1987 1997 2014DJIA
What too far too fast looks like. Dow up 158% in just over 5 years.
16
17 The Aftermath
1928 1937 1987 1997
Decline from peak
-89% -51% -36% -54%
Decline from signal*
-84% -50% -21% -21%
Time to break even
> 22 years > 12 years < 2 years
< 12 years
Signal is a 158% gain over ~5 years
Is it different this time?
Probably not.
SELL HIGH
BUY LOW
Retail Wholesale
RULE #1
Know your customer
NOT • Corporate Insiders
• Market Makers
ARE • Those seduced by misinformation/hype/
Wishful thinking/media • Scared
RULE #2
Know your inventory
Construct an investment universe of 60 or more quality names
Basic Application • Buy stocks in your universe when they are down
10% or more over the last 4 weeks.
• Sell those same stocks when they have returned over 10%.
• Sell losing stocks only if they have been eliminated from your universe for quality reasons – not price performance ALWAYS sell into strength.
• Target full investment, but if not enough opportunities, hold cash.
DrachResearch.com “NBR” model portfolio
Initiated 5/5/1995
Closed Positions 559
% Profitable 91%
vs S&P 500 (annualized)
+56% (+0.74%)
Excludes trading costs and Dividends
Not an offer to sell securities. Past returns are not indicative of future returns. Data is provided by past advisors and third parties, and accuracy is not guaranteed.
Increase Probabilities: Add Timing
• Buy when 75% or more of your universe is trading down over the last four weeks. (Technical)
• When public/media sentiment are low (Psychological/Media)
• Specialists & Insiders are long. (Professional Positioning)
• Buy gradually over 4-5 weeks. • Probabilities can be improved by adding ancillary
data sets.
Newsletter: Ancillary data
Look for a majority of the following to confirm a BUY indication: • Technical • Psychological/Sentiment • Professional Positioning • Media • Fundamental • Federal Reserve • Non-Professional Cash Reserves • Structural • Macroeconomic
What to Buy – (Newsletter) Concluded Trades EARNINGS YIELD PRICE
Total Positions 759 759 729
% Profitable 93.54% 92.62% 91.50%
Average Gain 8.27% 5.44% 9.32%
# of Weeks Held 28.69 27.23 29.83
Annualized Return 14.99% 10.39% 16.25%
Sell Discipline
• Sell only if you have a sell indication • 75% of your stocks have advanced over the
last 4 weeks. • When public/media sentiment are positive • When specialists & Insiders are short.
• Can confirm with ancillary data sets.
• Sell gradually – over 4-5 weeks • Lock in biggest winners. Only take losses on
stocks that have been removed from your universe for fundamental reasons.
Time Overlay Portfolios 15 Years
Closed Positions 199*
% Profitable 92%*
vs S&P 500 (annualized)
+56%** (+2.43%)
*Sampled from one account as of 9/30/2015 ** Median return of accounts with a 15 year history that have not
deviated from strategy. Time-weighted. Includes trading and management fees as of 9/30/15
Not an offer to sell securities. Past returns are not indicative of future returns. Data is provided by past advisors and third parties, and accuracy is not guaranteed.
Not an offer to sell securities. Past returns are not indicative of future returns. Data is provided by past advisors and third parties, and accuracy is not guaranteed.