The Traders Journal

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Charts I'm Stalking: Action Practice #17

This is all about your fiscal fitness and future financial fate.  Pay attention!

I’ve written before about the indisputable number of academic studies proving asset allocation is the highest leverage activity that individual investors can focus on.  Although this blog will touch upon this, it will be focused instead on the principles of CORE & EXPLORE investing.  Though popularized and championed by Vanguard’s founder John Bogle, its origins actually date back to published research done by Schwab in 2000.

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The Albert Einstein Approach to Stock Market Investing

Albert Einstein famously said, “If I had one hour to save the world, I would spend 55 minutes defining the problem and five minutes implementing the solution.”   If you were in a life threatening situation and had only one hour before it proved fatal, what would you do?   Einstein said he’d spend his time wisely asking probing questions to understand the problem in depth.  Having done that, he’d only need 5 minutes to address the issue. 

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Paul Merriman's Essential Investor Challenge Questions: The Answers by Gatis Roze

At a May 20th presentation to the Seattle chapter of the AAII, Paul Merriman confirmed to me his standing as a respected elder of investment management.  Since selling his multi-billion dollar advisory firm in 2012, he has been running a financial education foundation.  His motto  “knowledge is power” is an accurate portrayal of his mission, and parallels my own efforts to educate and empower individual investors these past 20 years.

What makes Merriman’s motto so unique is that it’s backed up by a depth of experience few have attained and delivered honestly in a philanthropic voice that says “this is what’s best for individual investors.”  My intention here is not to paraphrase his AAII presentation but to highlight two indispensable points he made that day.

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Essential Rules to Share with Your Friends: The Financial Simpletons

I had a shock recently.  I met a couple who was in the midst of what I considered to be a personal financial coronary, yet they were totally oblivious to the perils facing them. Both husband and wife were professionals with advanced graduate degrees. Despite their intelligence and educations, neither of them had ever taken the slightest interest in any kind of financial education or investing. They’d led successful careers, yet they were absolute simpletons when it came to anything financial. For the sake of this analogy, I’ll call them Fred and Wilma — a nod to the Flintstones.  

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Charts I'm Stalking: Action Practice #16

So you’ve heard about Exchange Traded Funds (ETFs).  You’ve heard that they are cheap. You’ve heard that mutual fund managers cannot outperform ETFs. You’ve decided that a chunk of your nest egg should be in Healthcare. A friend suggested XPH because it holds stocks like Eli Lilly, Merck and Johnson & Johnson — companies  you’ve heard of. Buy, Buy, Buy!!  Whoa — slow down, partner.

Action Practice #15 was about exactly this scenario. I presented you with six options from which to choose. Yes, these six are all Healthcare ETFs, but a closer examination will point out that they are vastly different creatures.

The six candidates were XLV, IXJ, IYH, XBI, XPH and VHT. There are infinite ways to research these ETFs.  Here’s the step-by-step process that I suggest.

STEP ONE: is a free website that offers detailed summaries. Start here.

  • Historically, XLV is the dominant ETF in the Health Care segment.  If you start with XLV,  their data sheet will also list “top competing ETFs”. Explore other options. Not all ETFs are created equal even when their names imply they are the same.
  • Draw up a simple matrix of these six candidates. When you do, certain facts will jump out at you.
  • Expenses range from .10%  up to .47% (lower is better for you).
  • Asset size ranges from $16 Billion down to $445 Million (bigger is generally better — lower fees and easier liquidity).
  • Daily volume, average bid/ask spreads and median premium/discount to Net Asset Value could all cost you money, so consider these in your comparison.
  • Consider the concentration of assets in the top 10 equities. Most of these six ETFs are in the 40-50% range.
  • Ask yourself if you are more comfortable with 38 total holdings (XPH) or 357 equities (VHT) in the ETF you buy.
  • Did you want just North American equities? Or are you comfortable with global exposure? Over 30% of IXJ equities lie outside of North America.
  • Check out the underlying index that each ETF follows. They are all different. Also, most all use a market cap weighting scheme. XBI uses an equal weighting scheme — know which you prefer.
  • Don’t forget to consider dividend yields. XLV = 1.51% annually.  XBI = 0.16% annually. Are you looking for some income?
  • Note that the majority of these ETFS have over 75% invested in giant and large healthcare corporations, whereas XBI has only 20% there and over 60% in medium and small caps. (Personal note:  this makes sense since XBI is a biotech fund which should be focused in this portion of the market. I own it specifically for that reason.)

For myself, the next step in the investigative process is to load the top 5 candidates into Schwab’s “Compare” tool. (Most other brokerages have something  similar in their customer research tool chests.) This produces a wonderful side-by-side comparison of (a) facts and fees; (b) performance; and (c) portfolio holdings.

This also provides an alternative second opinion to my personally-designed matrix which I populated with data from in step one. It confirms and reinforces my observations and produces other useful insights.  Here’s one example. Although XBI (Biotech) has outperformed XLV (SPDR Healthcare) in all timeframes (1-year, 3-years, 5-years and 10-years), the volatility road it took to get there was very bumpy indeed. This makes sense when you understand that these two ETFs are as different as apples and kumquats. Many investors need to understand that they might not have the stomach for such volatility despite the performance numbers. 

The next step is to install all six candidates on a Perf Chart. This sounds straightforward, but I challenge each investor to understand his or her own investment time horizon before getting pulled into conclusions which are not personally appropriate.  

I’m using 10 years in my example.

  • The good news is that all our candidates outperformed the Vanguard Total Market ETF (VTI). This just reinforces my often repeated sermon that asset allocation decisions are worthy of your time and attention.
  • The two industry specific ETFs (XBI and XPH) outperformed the healthcare sector, but again note the volatility and ask yourself if it’s right for you.
  • For a host of reasons, my preference amongst the remaining four candidates is Vanguard Healthcare (VHT).

After that extensive research exercise, I have one more step.  I maintain what I call “Best of Breed” PerfCharts for all the 20 asset classes in which I am personally invested. Step Four seeks to metaphorically place the best ETFs in the ring with the best mutual funds , and then let them fight it out for the “Best of Breed” title. Of course, the fees charged by active mutual funds must be justified by their out performance.  

In some asset classes, I do find these exceptional mutual fund managers, and I own their funds. In other asset classes, I am more comfortable with ETFs. Not so as you can see for my Healthcare Asset Class.

Both my actively managed mutual funds (JAGLX and PRHSX) have outperformed their ETF challengers, and hence these funds get to be crowned as “Best of Breed” for my healthcare asset group. Yes, their expenses are higher than XLV and VHT, but their outperformance justifies this.


  1. The oldest or largest sector ETF is not necessarily your best choice for an asset class you need.
  2. Know what you personally are more comfortable with.  An ETF with 61 equities (XLV)? Or one with a broader assortment of 357 equities (VHT)?
  3. Higher expenses and trading spreads matter. This money comes right out of your pocket.
  4. As I wrote in my May 19, 2017 blog, far too many lethargic investor portfolios today are full of ETFs because these folks prefer lazy investing. This is an approach that will cost them dearly over the years.  If you are a lazy investor, you’ll get lazy performance. You can get away with some lethargic investing tendencies, but I urge you to put in the work upfront. It will be worth it.
  5. I have found that maintaining “Best of Breed” performance charts for all 20 of the asset classes in which I invest makes it super easy to consider and compare new candidates to existing champions. Nothing is cast in concrete or buy and hold forever. I strongly suggest you try this approach yourself.
  6. So after all that analysis, my personal portfolio owns mutual funds for my healthcare asset class — and an ETF (XBI) for my Biotech asset class. Yes, in my portfolio, these are two separate asset classes despite some overlap.

This Week’s Action Practice:
My blog from last week (3-Prong Recipe — May 19, 2017) was reprinted by a number of investment websites, including In it, I described my Core, Explore and Super Explore approach to building a portfolio that is safe, yet also provides outperformance and growth.

The challenge this week is to think in terms of the 3-Prong Recipe and assign the charts below to one of the three portfolios. This should reflect more of your own personal risk tolerances than any “solution” I might present to you.  In other words, it is less about right and wrong. It is more about what is comfortable and personally appropriate for you.

Your first task is to understand the unique nature of the investments in each of the three categories.  John Bogle (founder of Vanguard) calls them “Core & Explore”.  I’ve added a more aggressive third category to seek growth.  

Consider the following six equities as your portfolio and decide which are most appropriate for each of the three categories:  (a) CORE;  (b) EXPLORE; and (c) SUPER EXPLORE.

Trade well; trade with discipline!
- Gatis Roze, MBA, CMT



My 3-Prong Recipe for the Safe Growth & Outperformance of Your Portfolio

There is a seismic generational displacement happening in the investment landscape. Many investors are shifting their assets into indexes and ETFs as they move away from stocks and mutual funds. Due to this shift, a number of investment firms are having to make enormous changes themselves in order to remain relevant and profitable.

I maintain that these investors’ misplaced beliefs that individual investors cannot outperform indexes and that active managers are incapable of outperforming passive managers (after fees) will cost these investors dearly in the long run. Let me label it for what it is. This new mantra for lazy investing by lethargic investors will produce meek unassuming gains in the 6-8% range over the long term.  

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This Investor's 5 Personal Passages

I’d like to paraphrase a fishing analogy.  Show someone how to invest by following a winning trading methodology and he/she will be happy for awhile.  Teach someone how to think effectively about trading and he/she will be profitable for a lifetime. 

All too often as investors, our focus is on indicators, price action and our interpretation of fundamentals.  We enter our trades based on data, but if we see our position move against us and we lose money, what then?  We go back and review our system.  The missing link here is that we must figure out ourselves before we can trade competently.  Lack of that will destroy any trading system.  A true understanding of your personal motivations is more essential than any indicator.

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Where My Best Investments & Trades Came From These Past 25 Years Part 1

Approximately every five years, I dig into my Trading Journal with the specific mandate to unearth and review where I’ve earned my profits and losses.  This is not a small project.  I do it on an ongoing basis with all individual trades, but when taken in the 5-year aggregate, the insights are more profound.  

I breakdown my trades into four groups:

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Charts I'm Stalking: Action Practice #15

When you revisit the Action Practice #14 blog, you’ll recall that I presented four equities chosen from Investor Business Daily’s 20 top-rated Big Cap stocks.  (April 5, 2017 edition.) I asked you to choose the best equity from the following four: Western Digital (WDC), KLA-Tencor (KLAC), Priceline (PCLN), and Facebook (FB).  

I have my own money in Facebook. I’ll step you precisely through my reasoning which is described in more detail on pages 56 — 60 of our book.


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Tensile Trading ChartPack Update (2017-Q1) Updated Charts and the Latest Fidelity Moves

Anywhere you see excellence and mastery happening, you’ll discover the same set of recurring universal truths.  Great athletes achieve excellence and make it look effortless. Great investors make market mastery seem natural and make profits look easy.

I love the line “I worked all my life to become an overnight success.”  For me, this embodies the foundation of excellence and the cornerstone of mastery. It’s all about preparation, discipline and organization.  When that all comes together, it’s magical. Stock market mastery demands that investors weave together a string of powerful habits, profitable methodologies and reproducible routines.  It is these all-important routines that allow you to muzzle the bumper car beasts of bad behavior.  

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How I Deal With Investment Losses (And How Not To)

Financial investment losses are the markets’ way of telling you to make adjustments and to correct your present course of action.  The parallels between how American investors deal with financial pain and how individuals deal with physical pain is illuminating.


According to a recent article in Consumer Reports, 80% of Americans experience persistent pain of some type and spend over $300 Billion on treatments, drugs and care.  All too often, their solution is to throw opiates, such as Percocet or Vicodin, at the problem.  This mentality has obviously caused an explosive drug epidemic instead of a hoped-for cure.

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Charts I'm Stalking: Action Practice #14

My intent with this Action Practice is not to wax on about the importance of understanding what the markets’ current preferences are.  My point is simply that if the markets are favoring growth over value, then as investors, our probabilities are enhanced when we invest with the growth winds at our backs.  If the markets are favoring large cap equities over mid-caps and small caps, our probabilities are likewise enhanced with the large cap winds at our backs.  

Please refer to the six charts that I presented to you in the Action Practice #13 blog

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