Muscular Investing

February 2019

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