Couch Doggie Portfolio

I think he looks a bit like Barton Biggs, but I cannot find a profile of Biggs to demonstrate that.

Started in Summer, 2006

The Best of Breed for the Neapolitan Mastiffs, champion 'Ironstone Mafioso', waits to be called for the judging of the working group of dogs at the Westminster Kennel Club show at New York's Madison Square Garden, February 14, 2005. REUTERS/Ray Stubblebine

Scott Burns of the Dallas Morning News has put forward a couch potato portfolio which has done quite well - at least if you do not want too much.  It simply buys a mix of bonds and stocks, and as such has managed to show a profit in good and bad years.  Nothing very good, however.  It is designed for somebody who just sits on the couch, eats snack food, and watches TV all the time.  Of course, such a person will probably die of clogged arteries before he gets to retire on his winnings, but that is another matter.

Scott Burns is the guy who said that the fluctuations of the market were just statistical noise.  Of course, he never defined the term, and when he said it the market, particularly the Nasdaq, had been tanking for a while.  Personally, I think that if those moves were noise, then they were loud enough noise to have made you some good money.

Now the mastiff above looks like he is ready for such a couch potato portfolio.  However, he gets off the couch once in a while, in between naps, and you can perhaps buy one of his descendents, so he gets around in other ways.

This portfolio is designed to get decent returns trading on 2-6 days per year.  Of course, that does not include any additional money I may add to the portfolio.  It will pick good funds in a diversified portfolio including international as well as domestic equities.  This is the stable, base part of the portfolio, although if a particular fund begins to act badly, then I intend to sell it if its long-term prospects are not good.  The other part of the portfolio consists of leveraged index funds.  I originally chose the Direxion Funds, formerly the Potomac Funds, for this part.  However, TDAmeritrade has changed its policy, and now charges a $50 fee for buying and selling those funds, so I will use Rydex or ProFunds for that.  This part of the portfolio will be traded according to market timing signals, long and short, and will provide an augmented hedge for the rest. The goal is to maximize returns while minimizing, so far as possible, the tax liabilities, since this is a taxable portfolio.

I also intend to use margin in this account, and have decided to keep the leverage around 1.3.  The ProFunds are leveraged 2X, so leveraging with margin should add to the return significantly. This is fairly safe, so long as your timing is decent.

We will see what happens.

The funds chosen have relatively low minimum investment limits.  I would not try a portfolio like this with less than $50,000.  

Fund Selection:  The goal is to select a few funds with excellent long-term records.  Here is the initial list for the domestic part of the portfolio:

CGMFX:  Excellent long term results by investing in the proper sectors, or so it says in the profile.

CGMRX:  Real estate, surprisingly consistent performance.

JATTX:  Excellent record, but not long term, since it has only been around for a while.  Sometimes a fund which is still small has an advantage over larger funds.  We will see.

PAGRX:  Just about the only large cap fund that has done well.

VALUX:  Excellent low volatility fund investing in value stocks.  This adds balance to the portfolio, and smoothes out some of the volatility in the other funds.

For the foreign funds:

ARTIX:  General international fund.

EUROX:  Eastern Europe.  A bit more risky than I would like, but an excellent fund.

OBCHX:  China fund which is relatively new, and smaller than most.

PSPFX:  Not exclusively foreign, but most natural resource companies have heavy holdings internationally

UMEMX:  Excellent emerging market fund.

Timing in this Strategy

While I intend to follow the mechanical timing systems mentioned elsewhere on this site, I also will use something more visual as a backup, and also perhaps to scale in and out of positions.  Many of the mechanical systems are geared to making money on the long side only, and are not terribly successful for shorting.

Time Required to Follow this Strategy

Not much.  If you are long and the market goes up, you are doing fine and you need not even download the Fasttrack database.  If you are short and the market goes down, again you do not need to do anything.  Only if the market goes against you, long or short, do you need to look at the charts and timing systems.  Even then, of course, one day does not make a trend.  So this does not take much of your time.  But you do have to pay attention.

Will it Work?

This hedging is as good as the timing used.  There are people who believe that it is impossible to time the market properly.  So I should just buy index funds, and accept the huge drawdowns (more than 40% for the S&P 500, with dividends reinvested), since that is the best that anybody can do.  Then there are people like John Boggle, who say "we are all average in the long run" and hence one should just buy an index fund or two and hold them forever. I think it must be comforting for such people to believe that no matter how badly the market treats them, they are doing the best they can possibly do - in fact the best that anybody can do in the long run.  I, on the other hand, agonize over my skill or the lack of it when I make a mistake.

The fact is, of course, that market timing is the reason I have done well enough to be retired for the last several years.  Not that I have done it perfectly, but I have certainly done better than just buying and holding an S&P 500 index fund.

Risk

Talk of margin and leverage makes some people think that this approach is extremely risky.  Risk is one of those things that is really impossible to calculate.  Some people like to think of risk as volatility, as measured by the standard deviation.  Others calculate the ulcer index, which calculates the downside movements of a trading strategy.  I would like to see the probability of losing X% for N days, but nobody knows how to calculate that.  There is, however, another aspect to risk:  the skill of the trader.  In this case it comes down to timing and selection - how good a job of timing and selection I will do.  Finding good mutual funds in the Fasttrack database is very easy:  rank charts over different periods of time and pick the best performers.  Timing is a bit more difficult, but not that difficult.  

So in any case there is the inherent risk of the overall strategy:  selection of good mutual funds, and timing.  Then there is the skill level of the one doing the work.  For example, the acrobatics displayed at Cirque du Soleil are inherently risky.  The overwhelming majority of people cannot perform those acrobatics, and even after much training they would fail.  Yet I have heard of no accidents at Cirque.  Therefore, for those participants the acrobatics are not terribly risky.  I just hope they do not get over confident.

Similarly, I think that anybody who follows the timing schemes outlined on this site and uses a bit of common sense can do quite well.  I bet it is easier than the acrobatics.  

The main risk is an exogenous event, such as a terrorist attack.  No amount of skill can help there.

Funding and Taxes

The funding for this portfolio comes initially from a small inheritance.  It is a taxable account, and the hope is to avoid paying much in taxes while still making some money. That is the reason for the hedging instead of just buying and selling funds.  Of course, the timing police are also a reason, but if I did not care about taxes, I would be buying and selling ETFs if I wanted to be in mutual funds.

October 6, 2006

Finally got the money deposited and invested.  Because of some delays, we missed one very good day in the market, which is annoying.  Because  CGMFX and PSPFX look bad, I decided to put the money into some leveraged ProFunds, domestic and foreign.  Later, if those funds begin to look better, I will invest in them.  I really do expect commodities to turn around, although probably not dramatically.  No margin yet, since it takes 30 days for a fund to be marginable.

November 10, 2006

Margined a slight amount to buy two new funds, PSPFX  and IZZYX.  CGMFX is still not doing all that well, and the other candidate in that category, FAIRX, is currently uninspiring also.  I also got a check from United Health Care for $68.96.  This is from a class action suit about which I know nothing.  Might as well deposit the money in this account.  IZZYX is an excellent small cap fund, which is actually smaller than JATTX, but has been around for a much longer time - since 1998.  JATTX was started in 2005.

November 15, 2006

Well, the tax efficiency thing is not working too well.  IZZYX had a better than 20% distribution, mostly long term cap gains, the day after I bought it.  Looking at the fund's history, its distributions have varied from zero to something like this.  Well, it has been a good fund, but I wish I had waited a day to buy it.  Portfolio is doing well - up better than 8% since inception.

November 16, 2006

Added a few more ProFunds - enough to bring the leverage to about 1.3, which is the goal.  I still need to increase the size of the hedge/augment.  This will happen after Jan 1.

December 19, 2006

The small caps and the Nasdaq 100 have been lagging the Dow and the S&P recently.  So I sold half my positions in UAPIX and UOPIX to buy ULPIX and UDPIX.  Also a terrible day that ended fairly well, considering that there was a currency crisis in Thailand.

Table Legend

Most of the entries are self-explanatory.  The Investment Approximate % Change is calculated to adjust for deposits and withdrawals by weighing them according to the number of market days after the deposit or withdrawal happened.  The Total Return is calculated by giving each month equal weight (which is technically wrong, of course). The Total Price does not include re-invested distributions.  Leverage is the sum of all the funds in the account divided by the account value.  So a leverage of 1.3 means that for every dollar of my own I have borrowed 30 cents.

SUMMARY FOR 2006




















MONTHLY




















Month Deposits Withdrawals Closeout Net Value Amount Investment Investment Leverage




Date Closeout Change Approx % Approx %


 
    Date
Change Total









Return













  82,593.12   10/04/06 82,593.12      


October 0.00 0.000 10/31/06 86,801.04 4,207.92 5.09 5.09 1.00

November 68.96 0.000 11/30/06 92,513.29 5,712.25 6.53 11.95 1.29

December 0.00 0.000 12/28/06 95,190.78 2,677.49 2.89 15.19 1.28












2006 YEAR TOTALS




















Investment Total Total ST Total LT Interest Total Invest. Total Margin Total Change Estimated

Approx % Dividends Cap Gains Cap Gains
Income Interest in Account Federal

Total




Paid Value Taxes

Return




















15.19 991.259 1,933.18 5,832.87 13.66 8,770.97 335.55 12,597.66 1,479.47












2006 CLOSED POSITIONS




















Fund Purchase Purchase No. Price/ Total Original Sale Date Sale Price/ Value Result % Result

Date Type Shrs Share Cost
Share













UAPIX 10/09/06 Buy 112.000 28.79 3,224.48 12/19/06 31.64 3,543.68 319.20 9.90
UOPIX 10/09/06 Buy 134.000 25.14 3,368.76 12/19/06 26.61 3,565.74 196.98 5.85
















6,593.24

7,109.42 516.18 7.83

December 30, 2006

Couch Doggie did very well this year.  The market during December was slowing down a bit, but still overall a decent return for slightly less than three months.  If the market still looks good in January, I will add some money to the account.  

I am, however, very concerned about the amount of taxes I will have to pay on this money.  The fund distributions were extremely high this year.  That part of this scheme did not work out so well.  

CURRENT POSITIONS




















CASH/MARGIN






Value




















-26,748.38












BASE FUNDS




















Fund Purchase Purchase No. Price/ Purchase Total Original Current Value Result % Result

Date Type Shrs Share Price Cost Share Price













ARTIX 10/05/06 Buy 282.564 29.02 8,200.00




ARTIX 12/20/06 Dividend 4.279 28.71 122.86




ARTIX 12/20/06 LT Cap Gain 22.91 28.71 657.75




ARTIX
Total 309.753

8,200.00 28.99 8,979.74 779.74 9.51
CGMRX 10/05/06 Buy 255.531 29.02 8,200.00




CGMRX 10/26/06 Dividend 1.526 33.49 51.11




CGMRX 12/29/06 ST Cap Gain 3.525 26.98 95.11




CGMRX 12/29/06 LT Cap Gain 67.456 26.98 1,819.96




CGMRX
Total 328.038

8,200.00 27.06 8,876.71 676.71 8.25
EUROX 10/05/06 Buy 192.624 42.57 8,200.00




EUROX 12/22/06 Dividend 3.807 44.58 169.70




EUROX 12/22/06 ST Cap Gain 15.002 44.58 668.79




EUROX 12/22/06 LT Cap Gain 10.716 44.58 477.71




EUROX
Total 222.149

8,200.00 45.48 10,103.33 1,903.33 23.21
IZZYX 11/10/06 Buy 480.602 17.27 8,300.00




IZZYX 11/13/06 LT Cap Gain 144.714 13.19 1,908.78




IZZYX 11/13/06 ST Cap Gain 4.892 13.19 64.53




IZZYX
Total 630.208

8,300.00 13.45 8,476.30 176.30 2.12
JATTX 10/05/06 Buy 666.125 12.31 8,200.00




JATTX 10/18/06 Dividend 1.320 13.64 18.00




JATTX 10/18/06 LT Cap Gain 7.348 13.64 100.23




JATTX
Total 674.793

8,200.00 13.46 9,082.71 882.71 10.76
OBCHX 10/05/06 Buy 519.975 15.77 8,200.00 8,200.00 19.53 10,155.11 1,955.11 23.84
PAGRX 10/05/06 Buy 75.576 108.50 8,200.00




PAGRX 12/06/06 Dividend 0.089 85.06 7.56




PAGRX 12/06/06 LT Cap Gain 28.370 85.06 2,413.14




PAGRX
Total 104.035

8,200.00 83.74 8,711.89 511.89 6.24
PSPFX 11/10/06 Buy 493.754 16.81 8,300.00




PSPFX 12/22/06 Dividend 29.545 14.64 432.53




PSPFX 12/22/06 ST Cap Gain 40.236 14.64 589.05




PSPFX 12/22/06 LT Cap Gain 17.402 14.64 254.78




PSPFX
Total 580.937

8,300.00 14.84 8,621.11 321.11 3.87
UMEMX 10/05/06 Buy 643.137 12.75 8,200.00




UMEMX 12/14/06 ST Cap Gain 0.966 13.63 13.17




UMEMX 12/14/06 LT Cap Gain 31.667 13.63 431.62




UMEMX 12/22/06 Dividend 1.887 13.68 25.81




UMEMX
Total 677.657

8,200.00 14.16 9,595.62 1,395.62 17.02
VALUX 10/05/06 Buy 261.146 29.02 8,200.00




VALUX 12/12/06 LT Cap Gain 5.525 32.95 182.04




VALUX
Total 266.671

8,200.00 32.84 8,757.48 557.48 6.80











TOTAL




82,200.00
91,359.99 9,159.99 11.14











HEDGE/AUGMENT




















Fund Purchase Purchase No. Price/ Purchase Total Original Current Value Result % Result

Date Type Shrs Share Price Cost Share Price













UAPIX 10/09/06 Buy 35.169 28.79 1,012.52




UAPIX 11/16/06 Buy 76.640 32.62 2,500.00




UAPIX 12/29/06 Dividend 0.162 31.93 5.27




UAPIX
Total 111.971

3,512.52 31.93 3,575.24 62.72 1.79
UDPIX 12/20/06 Buy 85.283 41.04 3,500.01




UDPIX 12/29/06 Dividend 0.571 40.75 9.62




UDPIX
Total 85.854

3,500.01 40.75 3,498.55 -1.46 -0.04
ULPIX 12/20/06 Buy 48.979 71.46 3,500.03




ULPIX 12/29/06 Dividend 0.032 70.82 2.28




ULPIX
Total 49.011

3,500.03 70.82 3,470.96 -29.08 -0.83
UNPIX 10/09/06 Buy 146.609 28.90 4,237.00




UNPIX 11/16/06 Buy 79.796 31.33 2,500.00




UNPIX 12/29/06 Dividend 2.113 33.81 71.48




UNPIX 12/29/06 ST Cap Gain 1.505 33.81 50.88




UNPIX
Total 230.023

6,737.00 33.81 7,777.07 1,040.07 15.44
UOPIX 10/09/06 Buy 42.175 25.14 1,060.28




UOPIX 11/16/06 Buy 91.609 27.29 2,500.00




UOPIX
Total 133.784

3,560.28 25.74 3,443.59 -116.69 -3.28
UUPIX 10/09/06 Buy 168.536 29.02 4,237.00




UUPIX 11/16/06 Buy 84.688 29.52 2,500.00




UUPIX 12/29/06 Dividend 2.173 34.51 75.04




UUPIX
Total 255.397

6,737.00 34.51 8,813.76 2,076.76 30.83











TOTAL




27,546.84
30,579.17 3,032.32 11.01











OVERALL TOTAL






95,190.78

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