Investing 'Systems' Take the Guesswork Out of Making Money

TheStreet.com

NEW YORK (TheStreet) -- When it comes to investing ideas that sound too good to be true, they're usually unverifiable. Yet hundreds of thousands of investors and traders are always looking for the next "never-before-offered, one-of-a-kind system" that will beat the investment markets most of the time.

If you're fully invested in the hottest sectors and you don't own shares of Apple or precious metals stocks, you're most likely not going to be as interested in this topic.

On a day like April 3, wouldn't it have been great to be the owner of a few hundred shares of Astex Pharmceuticals , which popped almost 10% when the company announced that 13 of its abstracts have been accepted for presentation at the American Association of Cancer Research, which begins April 6 in Washington, D.C.


Or perhaps, like myself, you'd be satisfied to own shares of iShares Japan Index ETF , which, as the following chart shows us, has had an impressive year preceded by a few dismal ones.

EWJ Chart
EWJ data by YCharts

An investing system that tells you when to get in and out of a stock holds a great deal of appeal, of course. For instance, the "Seasonal Investing Strategy," as spelled out by two professors at Pepperdine University's Graziadio School of Business and Management, found that, "... if a seasonality strategy had been adopted and coupled with the DJIA, returns would have been five times greater than the buy-and-hold strategy. Risk would have been reduced by more than half."

That was pointed out in an article written at a most auspicious point in market history: April 2009. It was the culmination of a test of the market over the preceding 38 years, and its results are amazing.

For the Pepperdine University study, the authors chose two seasonality strategies; one took an approach of investing in the DJIA during a six-month favorable period (November-April of the following year) and then remaining in money markets or commercial paper for the next six-month unfavorable period (May-October).

The other took a different tact of investing in the DJIA only during the third year of a presidential period (this is called the "political cycle year strategy") and then remaining in money markets or commercial paper "... for three years until the next political cycle year to reinvest in the DJIA once again."

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.

Those investment strategies (aka, "systems") help an investor know when to be exposed to the 30 stocks that make up the Dow Jones Industrial Average (DJIA). Yet they don't delve into other indices, international stock markets or the thousands of other stocks that hold rich potential for investors.


You may have heard about a "$900,000 Web site" developed by Dr. Steve Sjuggerud, the editor of Stansberry Research's DailyWealth. Sjuggerud has been working with a doctor in mathematics, Richard Smith, to develop a computer program to unlock an almost unimaginable amount of market data into what they called "useful and profitable trading systems."

The goal was to provide investors with the kind of technical, proprietary data analysis large hedge funds use to consistently outperform the market. Those strategies, which they call "True Wealth Systems," claim to be able to "... scan a vast array of market data and yield buy/sell signals."

Yes, I was quite skeptical when I first read about it so I interviewed Sjuggerud and Smith during the past three months to learn more. What they've developed combines the decades of Sjuggerud's financial knowledge and Smith's mathematical insights.

Using computer models and programs that have nothing to do with human emotions, the system studies decades of data to find dependable and repeatable systems individual investors can supposedly use to improve their trading outcomes.

As an example, the system in December 2011 recommended that investors jump into housing and home-construction stocks, which were in the dog house. They recommended buying the iShares Home Construction ETF , which at the time was trading at around $11.82 a share.

The following chart shows how ITB performed over the past five years and why those who acted on the system have profits of 100% or more.

ITB Chart
ITB data by YCharts

In my interview, I asked some hard questions to challenge the authors of "True Wealth Systems" and to help our readers gain some useful insight. 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?"

The answers may surprise you, and I'm going to present them in a follow-up article. I've hopefully whet your appetite to learn more about investment strategies and systems. Whether it's based on seasonality or on the kind of computer programs used by hedge funds, each offers food for thought and the hope of better returns on our own investing activities. Stay tuned for the sequel.

Disclosure: As of the time of publication the author is only long shares of AAPL and EWJ and not the other companies or ETFs mentioned in this article.

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

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