THEY SAY THIS CAN'T BE DONE

The so-called experts from the financial services industry say that what we do in our investing system can’t be done. They base this opinion on the findings related to an investment strategy called market timing.

Market timing has proved to be impossible for anyone that has ever attempted it. We totally agree with that assessment. Market timing means that the investor attempts to sell at every market peak and buy at every market bottom. The stock market is too volatile and unpredictable for anyone to succeed with this approach.

These “experts” are confusing what we do with market timing. We don’t attempt to sell at tops and buy at bottoms. Our model is only on the lookout for one thing: the dreaded bear market. We don’t attempt to trade minor market corrections of 10%, for example. Because markets are so volatile and unpredictable, there’s simply not enough of a spread in a 10% correction to get out near the top and to get back in near the bottom. Our system is not that good. Nobody’s system is that good.

We simply look out for major bear market corrections, where the stock market falls by 37% on average but often as much as 50% or more. There’s a large enough spread in those market drops and subsequent recoveries to “trade the crash.”

Look at the charts for the S&P 500 in both the 2000 dot-com crash and the 2008 financial crash. Between 2000 and 2002, the S&P 500 dropped by 48%. That drop is highlighted in the graph. We knew there had to be a way to attempt to trade a huge spread like 48% to outperform the “Buy & Hold” gold standard. One does not need to be perfect or even that good to profit off this kind of volatility.

The 2008 financial collapse was even more dramatic, with the S&P 500 falling by more than 55% in less than 18 months. There’s a lot of room for error in attempting to trade a 55% move.

Our model is 100% focused on getting out as early as possible when the risk of a major bear market decline is imminent. On the flip side, our model includes another set of algorithms to get back in as early as possible when markets inevitably recover, as they did in both 2003 and 2009 (see charts above).

And because we’re continuously protected by our algorithms against a collapse, we can go “all in” when our model flashes a signal of low risk. There’s no reason not to invest aggressively when you’re protected against big losses. We’re also very comfortable going “all in” on the market when risk is low, because the long-term direction of the market is always higher.

It would take a complete breakdown of our political and economic system for the long-term direction of the stock market to be negative. And if that ever happens, every investing method except ours would be in trouble. In that extreme situation, the BB&H system would get out of the market before the worst of the damage is done. It’s the only strategy that protects your money in this way.

We’re no better at predicting the short-term direction of the stock market than anyone else. We don’t even attempt to predict short-term trends. We simply react to the risk assessments of our model based on what is happening in the markets. Bear market collapses typically last a long time—roughly 11 months from peak to trough. Markets tend to move gradually downward and gradually upward. There’s plenty of time to read and react to these trends and price moves.

Happy Investing,

Phil

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Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.