I spied this little piece from the NY Times which had the accompanying headline and graphic.
The recent pullback in the US quite naturally took a lot of the high flyers with it. What caught my eye was not that these stocks had fallen but that their drop was seized on by many commentators as a reasons as to why you should allow a professional to manage your money. I am not entirely certain how that would help since the record of professional ( I use the term loosely) money managers is not all that stellar and in moments such as this I tend to defer to the humorist Dave Barry who whilst writing on the Enron scandal had this to say about stock analysts –
Q. Why didn’t Wall Street realize that Enron was a fraud?
a. Because Wall Street relies on “stock analysts.” These are people who do research on companies and then, no matter what they find, even if the company has burned to the ground, enthusiastically recommend that investors buy the stock. They are just a bunch of cockeyed optimists, those stock analysts. When the Titanic was in its death throes, with the propellers sticking straight up into the air, there was a stock analyst clinging to a railing, asking people around him where he could buy a ticket for the return trip.
Part of the reasoning as to why the fall in the tech heavyweights had been a problem was that people had concentration portfolio;s – that is their portfolio consisted of only these stocks. No one mentioned that many hedge funds also only had these stocks. I have no problem with concentration portfolios if the risks within them are managed correctly. To give you an idea of this there is actually a FAANG index which I have shown below.
On the chart I have marked the resistance boundary in 2016, the first valid signal beyond this is shown in blue and from this point I have applied a 3ATR stop. The exit is a close below the stop. As you can see this very simple idea trends nicely, generating a total RIO of about 65% and an annualised ROI of 38.7%. This nothing special of magical about this simply buying new highs beyond resistance, applying a logical stop and then simply sitting and waiting. You are probably not surprised o discover that the same approach keeps you in all the FAANG stocks as they rise and then tips you out as they begin to fall.
Definitely no need for professional money managers, sun spots, astrology or lines all over the damend chart.