MarketWatch featured an interesting story a few days ago with the intriguing title “Getting it right and still losing.” Let’s look at some highlights:

Sometimes you can’t win for losing.

The answer, as I see it, has to do with how difficult it is to forecast when a collapse will actually take place. It’s one thing to know that the financial system is shaky, and quite another to forecast when it actually will crumble. And these advisers would have lost even more over the last several decades had they bet aggressively on a collapse every time they thought that one was imminent.
…
In fact, it turns out to be surprisingly tricky to construct a portfolio to profit from an anticipated collapse. You can’t just own securities that will skyrocket during such a collapse, for example, since they will lose huge amounts during the months and years you wait around for that collapse to occur.

There are several things wrong with the approach these advisors have taken. While it’s fine to question conventional wisdom’s trust in the soundness of the financial system, that does not mean that, when a disaster strikes in that area, the bias you have towards gold and precious metals will be the answer.

Actually, I think it’s very shortsighted to be convinced that a certain asset class will benefit from a financial collapse no matter what the circumstances. With that kind of a narrow view, it’s not surprising to see YTD losses ranging from 64.9% to 70%. I fail to understand how investment newsletter writers with 30 years experience can lose that kind of money unless, as I mentioned many times before, a sell stop discipline is something they have never heard of.

The next point is that of forecasting many reporters focus on. Forecasting, while being a well paid job on Wall Street, is issuing an educated guess at best. It’s downright silly to use such a guess as a foundation for making any investment decision. Sure, I have a personal view of the future as well, but in no way does it influence my trend tracking decision making process.

To me, it’s simply incomprehensible how people in the investment newsletter business can suggest putting money on the line based on forecasts without any sound principles designed to protect capital in case the forecast is wrong. Advisors with such a big ego need a dose of humility, which was dished out big time this year—let’s hope the message got through.

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

High volatility along with all around bad economic news pushed the major indexes to October lows.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -16.84% thereby confirming the current bear market trend.



The international index now remains -27.97% below its own trend line, keeping us on the sidelines.



For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

Bad news all the way around sent the major indexes on a downward slide yesterday. It was pretty much a continuation from the prior day with weak consumer spending, continued retail worries as well as changes to the $700 billion bailout plan leading the news.

We are now getting close to the October lows, which many technicians watch very closely. If the lows hold (which I doubt), and the market rallies from here, this will constitute a potential double bottom, which is considered to be bullish.

How close are we to the lows from 4 weeks ago? MSN Money featured the following chart:

The markets could not find much of a footing yesterday as nothing but negative news flashed across the computer screens. While it could have been worse (the Dow was down 300 points at one time), the rebound was not enough to calm traders’ nerves.

Even oil dropping below $60/barrel had no supporting effect, because it is a sign that all global economies are slowing down sharply and quickly. GM was the weakest of the Dow stocks as the debate continued as to whether they will be able to make it through this year.

Going back to the ever growing cookie jar was AIG. Many had guessed a few months ago that the opening $80 billion rescue package was just that: an opening number. Good guess, because now they are dipping back in for another $50 billion or so.

Then the news focused on the loan modifications. Lead by Fannie and Freddie, other banks like Citigroup, BofA and JP Morgan Chase jumped on the band wagon by trying to contact millions of borrowers and offering them anything from halting foreclosure, extending mortgage terms and/or reducing rates.

If you think this is done primarily to help borrowers, you could not be more wrong. This is strictly a self serving act of survival, because a loan that somehow performs is still an asset, while a non-performer is a liability. Banks are inundated with bad loans, so anything that can be done to stop the flood of new foreclosures, is a balance sheet enhancing endeavor.

On it went to lousy earnings and hedge fund issues. The latter is interesting in that volatility may increase quite a bit towards the end of this week because of increased selling. Why? Hedge Funds typically offer investors four windows a year to redeem their holdings. This Friday is the last one for this year and may lead to more unloading of assets if redemptions all of a sudden soar.

The bear continues to be alive and well, and being out of the market is the best place to be.

MarketWatch featured a piece called “Bottom Fishing.” The story mentions one mutual fund that for one brief shining moment last week showed a positive return for the year:

It’s best not to judge fund managers on short-term results, but in this harrowing market climate, anyone who can even approach breakeven is probably worth a closer look.

Perhaps Forester’s best opportunity this year came because of what he didn’t own: financial stocks. He sidestepped the big landmines in that troubled sector, while investing heavily in defensive consumer-staples and pharmaceutical stocks to support the portfolio.

[emphasis added]

I did not think that I would ever hear those words from a fund manager. Since you never know what a new year will bring, you always need to be prepared. This fund manager may have been simply lucky, or maybe he realized that the use of sell stops and subsequent clearly defined exit points have a place when managing money.

This is not to say that you should jump in and buy this fund, after all, we’re still in a bear market. I am merely pointing out that there was one individual who beat all of his peers by a big margin, and I applaud him for that.

Have you ever come across something that made you laugh because it hit the nail on the head, and no other words were necessary?

This happened to me when a client emailed me this picture, which exactly resembles how Main Street feels about Wall Street these days. Out of sensitivity, I deleted the obscenity, but I think you get the picture…

MarketWatch featured a story titled “Hedge Fund Managers ‘funereal’ in midst of crisis.” It elaborates on the problems and losses hedge funds have had this year, which some have called unprecedented. I guess many funds forgot that, by definition, they are supposed to be hedging in some form and not having outright positions without protection, which translates to using sell stops or offsetting trades.

It’s an interesting read, but one paragraph called “Buffett bashing” especially caught my attention:

“Be careful buying ANYTHING today,” Kyle Bass, managing partner of Hayman Advisors, warned in an Oct. 17 letter to investors.

“Mr. Buffett has enough money to be able to have his holdings drop 50% and still fly in his jets and live the way in which he has become accustomed,” Bass wrote. “Do you have enough capital to take what you have left, cut it in half, and continue to live the way you have for the past few years? I don’t.”

[emphasis added]

That too hits the nail right on the head. There have been armies of followers trying to imitate what Buffett has been doing with his investments, and many have failed miserably. Why? Read that last paragraph again—there is your answer why Buy-and-Hold for the average investor is a losing proposition.