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Saturday, June 28, 2014

System 14 - Equiponderator

I realized the need for new System 14 back in early May of 2014, while sitting in 50 Day Box (post link).

System 14 (S14) invests in long weekly-monthly trends, rotating thru major asset classes of stocks and bonds. It is rule based, with simple set of risk controls and filters, and diversified.
The account is held at Vanguard. I can invest in mutual funds only, long only, no margin. Previously referred to as System 1 account, effectively stopped in 2013.

The account is a basic retirement structure, common in 401K / IRA, meaning money grow tax-free and not being withdrawn now, nor in foreseeable future. These are all advantages and accumulate over time to the benefit of shareholder. There is no free lunch on Wall Street , so in accordance with Dow Paradox (post link) there is a price to pay. These type of accounts are limited in what they can hold in general, and this one even more so. Why I give myself even more headache? Diversification! That's why. Don't put all your eggs in one basket, as the old saying goes. I reflected on subject of diversification in winter of 2013 in this post (link).
My #1 Big Thought about investments is : Split your money between different institutions!

Every once in a while Shit Hits the Fan (SHTF) in the Markets, bunch of institutions blow up... and take their clients money with them. The last time it happened in a massive way was in financial crisis of 2008-2009, when several prominent firms went under and lost all or some Assets Under Management (AUM) in a process. Panic was so deep, that even Money Market Funds (virtually risk-free very low interest deposit) where threatened. Some of biggest houses made announcements of guaranty and excess collateral for custodial funds. The first two to step up where Vanguard and Fidelity, proving that I picked right place to do business, as I am client of both. I'll call it luck... many people where much less fortunate.

The case of MFGlobal in October 2011 involved outright fraud and theft of clients funds to the tune of BILLIONS dollars! Granted that most of people eventually got most of their money back, resolution took years and completed just recently. Meanwhile  money where not available for investments, and where effectively shut out of chance to participate in tremendous gains of past couple of years. Not to forget that is was whatever money where left after disastrous bankruptcy and liquidation, that had individual and institutional accounts frozen during full-fledged market meltdown. People where unable to close position during unabated market drop, just looking at accumulated losses, only allowed to sell at the very bottom. It looks small and relatively benign now, on a lower left corner of 3 year chart, but 2011 was a real-deal bear market. I remember that nightmare, as if it was yesterday. I traded thru that shit. In fact, and as evident by Commitment of Traders (COT) report, that experience was so dramatic that it caused many traders to walk away and never to come back. October - November 2011 was a true panic bottom from which this current bull market originated.

So I have this sizable account at one of the best houses on a Street, where its safe (no jinx), enjoys favorable tax treatment, luxury of time and some of lowest costs in industry. I can buy any Vanguard mutual fund with all dividends automatically reinvested, based on rules of what to buy, when to do it, how to add and why to sell. The complete balance of all nessesary information - The Equiponderator.
 The Way of the merchant is always to live by taking profit.
- Miyamoto Musashi, 1645
I really don't know the future. I only see what is now, here, in front of me. I am using my life experience, accumulated knowledge and (stunningly uncommon) common sense to guess where it goes from here, in order to invest into instrument offering greatest potential. I have to do it without relying on forecast, because there is no practical or dependable way to know the future. But I know this: Nothing ever changes in a way of human events, because human nature never changes. Life and markets go thru periods that can not be foretold, but emotions never change. Fear, greed, envy, jealousy, etc, etc.  In order to design The Way to win the battle for market profits I want to learn from the original thinkers of the past, but my actions are here and now.

I was the third brother of five
Doing whatever I had to do to survive
I'm not saying what I did was alright
Trying to break out of the ghetto was a day to day fight

Been down so long, getting up didn't cross my mind
I knew there was a better way of life and I was just trying to find
You don't know what you'll do until you're put under pressure
Across 110th Street is a hell of a tester

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