Investing Strategies Take the Guesswork Out of Making Money - Part 2

TheStreet.com

NEW YORK (TheStreet) -- Thursday, I started a two-part series about investment "systems" and why they are receiving a considerable amounts of attention.

As we continue I want to remind you that Americans need to make progress in preparing for retirement or we'll have to keep working much longer than planned.

One comedic writer, when asked, "What's the best way to have sufficient money for retirement?", had the following unorthodox answer: "There are basically two ways to have enough money for retirement -- save a lot more money or die younger. The easier one by far is getting people to die younger."

My hope is I can help us take the more challenging choice, to save more and to get a better rate of return on our investment capital. With that in mind I recently interviewed a PhD in Finance and a PhD in Applied Mathematics who've developed an investment "system" that's made quite a name for itself.



In my interview I asked Dr. Steve Sjuggerud and Dr. Richard Smith some hard questions to challenge these authors of "True Wealth Systems" and to help our readers gain some useful investing insights. One question I asked was, "With the major U.S. stock indices hitting new all-time highs, isn't it dangerous for investors to own stocks right now?"

I requested the answers be based on the computer models and criteria that their "systems" are founded upon. Dr. Sjuggerud, who is the editor of DailyWealth and co-authors "True Wealth Systems" each month tried to keep his answers as down to earth and uncomplicated as possible.

Sjuggerud explained, "We tested which strategy works better: Buying near 52-week lows... or buying at 52-week highs. We looked at nearly 100 years of weekly data on the S&P 500 Index, not counting dividends. Here's what we discovered that has surprised so many investors.

"After the stock market hits a 52-week high, the compound annual gain over the next year is 9.6%. That is a phenomenal outperformance over the long-term "buy and hold" return, which was 5.6% a year. On the flip side, buying when the stock market is at or near new lows leads to terrible performance over the next 12 months. Specifically, buying any time stocks are within 6% of their 52-week lows leads to a compound annual gain of 0%. That's correct, no gain at all 12 months later."

He shared the following information to illustrate his points:

1950 to 2012

  • All periods: 7.2%
  • New Highs: 8.5%
  • New Lows: 6.0%

This is further illustrated when we see comparative five-year price charts for the S&P 500 as illustrated by SPDR S&P 500 ETF and the stocks that make up the Dow Jones U.S. Select Dividend Index .

SPY Chart
SPY data by YCharts

Sjuggerud pointed out that when buying investments at new highs many investors "feels risky." But when it comes to the broader markets, "...history shows you'll do better than average. Or you might want to "catch a falling knife" and buy when stocks are at new lows. But if you do, realize you are fighting against more than 220 years of historical precedent."

Instead of fighting these facts he encourages us to embrace them.



You may remember the old bromide when it comes to investing that "the trend is your friend." I asked both Sjuggerud and Smith whether that is really true and also about some of the latest finding of the "System" they've developed.

"Over the past few months, we've focused our research on one of the most important -- yet difficult to analyze -- tools in investing. We've concluded and results show the "trend" is the most important tool for making investment decisions.

"Based on history, finding the trend and sticking with it has been the best way to make money. And the trend is easy to quantify. Our "True Wealth Systems" databases are some of the best in the world. And we have decades' worth of data to determine when a stock or sector is in an uptrend."

They went on to discuss how to determine "value" in relation to the trend. "We also have plenty of data for determining value. Our databases give us just about any value measure we would need. History shows that buying a cheap country or sector when it's in an uptrend is almost always a good idea.

Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust- enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements.

After recently having purchased shares of Newmont Mining and Barrick Gold I swallowed hard, wishing I had utilized this system of theirs before making my investment decision.

Smith had also pointed out to me that this system utilizes various sentiment indicators as well as studying the stocks and sectors that are in an established uptrend. As they both confidently explained, "Since 1984, a buy-and-hold strategy on the S&P 500 led to 8.2% annualized returns. Our simple trend system was able to up that gain to 9.8%. And we stayed invested 73% of the time.

"Our new sentiment system demolished those results. It returns 17% annualized gains. And it was only in "buy" mode 45% of the time. The other 55% of the time when our system said to stay on the sidelines it led to just 1.6% annualized returns.

Said another way, this system claims to get investors into a trade during the optimum times and keeps them out when the market is either flat or down. Incredibly, the results were even better as they studied this more carefully and dug deeper.

"The system produced 17 trades over our 29-year test. Fourteen of them were winners. That's an 82% win-rate and that crushes our trend strategies win rate of just 39%." They clarified that their trend strategy does a good job making money, but it has too many false signals. These result in small losses and lowered their odds of entering a winning trade.

No investment system or trading strategy is perfect and there are extenuating circumstances when all of them can fall flat on their faces. Yet, anything that improves our chances of entering money-making trades and avoiding the losers can help us make headway towards our retirement savings goals.

To learn more about "True Wealth Systems" I'd suggest that you begin here and do your own careful due diligence. If you can, compare it with the track record and claims of other investment strategies and proprietary systems that are ubiquitous on the worldwide web and see what you can find.

Make sure they've been tested and back-tested, and see how many variables they use to come up with their conclusions. The more reliable ones like "True Wealth Systems" cost hundreds of thousands of dollars to develop and test. There's no sure things but let's do what we can to stack the odds in our favor.

At the time of publication the author was long NEM and ABX.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Make smarter trading decisions and provide investment ideas that could help make you richer. Bryan Ashenberg does the dirty work so you don't have to!

It's Official: Action Alerts PLUS beats the S&P 500 with Dividends Reinvested! Cramer and Link were up 16.72% in 2012. Were you? See what they are trading for 14-days FREE.

View Comments (0)