Muscular Investing

Brian Livingston
About the author: is the author of Muscular Portfolios (2018), which reveals the 21st century's best-performing long-term trading strategies, and coauthor of 11 Windows Secrets books (1991-2007). He has been assistant IT manager of UBS Securities, a consultant to Morgan Guaranty Trust (now JPMorgan Chase), and technology adviser to Lazard Ltd., all in New York City. His columns appear in the Muscular Investing blog most Tuesday and Thursday mornings. Learn More

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Muscular Investing

Given Two Lemons, You Can Make a Profitable Lemonade Stand

by Brian Livingston

Diversification works in mysterious ways. But does that mean diversifying a portfolio is a hard thing to do? No! It’s actually quite simple. • The problem is that it’s not obvious exactly HOW diversification improves a portfolio’s return. It’s not rocket science. It’s simple math. But many people have never learned the ways diversification can turn a pig’s ear into a profitable silk purse. • Part 2 of a series. Part 1 appeared on Mar. 19, 2019. • As we saw in Part 1, the human mind is not ideally suited to guess the best asset allocation for a portfolio. That’s true Read More 

Muscular Investing

Why Use Diversification? To Make More Profit.

by Brian Livingston

We often hear that we should diversify, diversify. Why should we do so? For greater gains. But the way to do this is seldom laid out clearly. • The secrets of diversification are not obvious. The truth is that it’s possible to earn MORE MONEY from a properly managed, diversified account than the simple average of the different asset classes that are used in the account. • More than 100 million households in the US, Canada, and other countries hold 401(k), IRA, and similar savings accounts. The vast majority of 401(k) participants cannot buy individual stocks — only index funds — and can Read More 

Muscular Investing

Why Is It So Hard to Find Indicators That Always Work?

by Brian Livingston

It’s often assumed that stock markets follow a ‘normal distribution’ — a bell curve — but there’s nothing normal about the way stocks behave. • In any securities exchange, where the sum of the greed and fear of all traders’ opinions determines the prices, there are a few big winners and many big losers in what’s known as the ‘free-market distribution.’ Figure 1. Indicators work until they don’t. Photo by Standret/Shutterstock. • Part 4 of a series. Parts 1, 2, and 3 appeared on Mar. 5, 7, and 12, 2019. • We saw at Read More 

Muscular Investing

After Almost 40,000 Backtests, One Strategy Stands Out

by Brian Livingston

In a monumental achievement, backtests of 39,832 trading rules by researchers at Columbia University and Academia Sinica resulted in a big discovery. • None of the gains were statistically significant in ‘mature’ markets such as the Dow Jones Industrial Average and the S&P 500. But further mathematical analysis revealed a winner. Figure 1. Many are tested, but few are chosen. Illustration by MicroOne/Shutterstock. • Part 3 of a series. Parts 1 and 2 appeared on Mar. 5 and 7, 2019. • As we saw in the previous part, the author of Read More 

Muscular Investing

How Do You Know Your Strategy Will Work in the Future?

by Brian Livingston

When you find an investment strategy that has worked in the past, how do you know it will work in the future? We may just be overconfident. • Traders tend to select strategies that have had a ‘hot streak’ recently, but those formulas may have a ‘cold streak’ for the next few years. Simple strategies are likely to perform better over the long run than complex strategies that are ‘curve fit.’ Figure 1. When we backtest hundreds of strategies, some will show great returns and others poor returns — with most in the middle — completely at random, resulting in Read More 

Muscular Investing

What You See in the Market Is Not Always What You Get

by Brian Livingston

We can look and look at data and wind up perfectly comfortable with our observations. But how can we be sure we really understand what we’re seeing? • The human mind has its own way of presenting the external world to us, just when we think we have everything figured out. Compensating for the conclusions we jump to is essential for our investing success. • More than 100 million households in the US, Canada, and other countries hold 401(k), IRA, and similar savings accounts. The vast majority of 401(k) participants cannot buy individual stocks — only index funds — and can make no more Read More 

Muscular Investing

The Top Six Investment Advisers All Have Major Tracking Error

by Brian Livingston

Examining the top gurus of the last 18½ years reveals numerous periods — 1, 2, and 3 years long — when they badly lagged the market. Could you wait? • Every superior investing strategy enhibits ‘cold streaks’ as well as ‘hot streaks.’ Beating the market requires doing something the market isn’t. Understanding tracking error gives us the only way of standing it. Figure 1. The Sound Advice Newsletter outperformed the S&P 500 in both of the last two market cycles. But in the latest regime, you might have felt like the strategy had “stopped working” if Read More 

Muscular Investing

Tracking Error is the Challenge All Investors Must Meet - part 4

by Brian Livingston

Beating the market in every up AND down month is a ‘yeti portfolio’ — a myth, a dream. Today’s computerized traders would overgraze any such system. • Every strategy that outperforms the S&P 500 over complete bear-bull market cycles MUST have years of underperformance. Impatient investors think these formulas ‘don’t work,’ which keeps the strategies from becoming overused and worn out. • Parts 1, 2, and 3 of this column appeared on Feb. 5, 7, and 12, 2019. • Why can’t someone invent a strategy that goes up more than the S&P 500 every time the index goes up? Read More 

Muscular Investing

Tracking Error is the Challenge All Investors Must Meet - part 3

by Brian Livingston

The Dow Jones Industrial Average has beaten the S&P 500 for decades. But people love the S&P. Why? Because they don’t know how to use tracking error. • Over the past 21 years, the DJIA has delivered 32% more gain than SPY. But traders shun the Dow. (SPY has 22 times the trading volume of DIA, the ETF that mirrors the Dow.) Mastering tracking error enables you to put more money in your pocket. • Parts 1 and 2 of this column appeared on Feb. 5 and 7, 2019. • As we saw in Part 2 of this column, virtually every US investment Read More 

Muscular Investing

Tracking Error is the Challenge All Investors Must Meet - part 2

by Brian Livingston

When does a tortoise beat a hare? When it’s an investing strategy that lags the market for months or years but keeps chugging along and wins in the end. • Separate studies by the Hulbert Financial Digest and the Vanguard Group reveal that market-beating funds underperform the S&P 500 for five years or more. Tracking error can make you give up on a winning formula — unless you know the secret. Figure 1. Like a tortoise, a winning formula can fall behind the S&P 500 for years at a time but produce superior gains over the long term. Photo Read More 

Muscular Investing

Tracking Error is the Challenge All Investors Must Meet

by Brian Livingston

When your system lags behind the S&P 500, what do you do? Jump to something else? Staying the course with a working long-term system is a better plan. • Every mechanical investing formula has tracking error: times when it underperforms whatever index you care to use. The systems with the best long-term performance all lag their benchmarks for five years or more. Most people bail out. Will you? Figure 1. The S&P 500 is more overbought than in 1929, at the beginning of the Great Depression, and almost as overvalued as in December 1999, before the global financial crisis Read More 

Muscular Investing

Jack Bogle Reveals Investing Secrets in Tell-All Book - part 4

by Brian Livingston

Would you like to know how to have an extra 1 trillion dollars in your pockets? Bogle did it — and you can benefit. • By some estimates, the Vanguard Group lowered fees so much that its shareholders alone saved a cool $559 billion. In addition, the ‘Vanguard Effect’ forced competing fund providers to collectively lower their fees an equal amount. Fees you don’t pay compound in your account. • Parts 1, 2, and 3 of this column appeared on Jan. 15, 17, and 22, 2019. In his personal life, Bogle was incredibly frugal. Maybe it was because he was born in the Great Read More 

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