Hi Chris (PepeLePew),
Your experience was very similar to mine, except that I had been doing it far longer. I started working as a professional in the industry in 1981 for firms such as Goldman, Drexel Burnham, Merrill Lynch, and others before launching a hedge fund (Orion Capital) in the 1990s.
I saw the benefit of quantitative investing from the beginning and was inputting paper-based stock data ValueLine into an IMB-PC clone in the early '80s, doing rudimentary value investing. It was like picking cherries in the early years and worked great for a couple of decades. After selling my portion of the hedge fund and taking a 2-year vacation, I got bored and started a web-based quant site on the 'net. In fact, I think may have created the first rules-based stock-investing site on the internet with IntelligentValue.com in 1998.
I joined P123 in 2004 when there were few other options, and value investing worked great until about 2007 or so when I saw a distinct decline in results. The only thing I can attribute this to was the growing popularity of data-based, computerized investing, making trades ever more crowded. I stuck with it, but I was forced to get more creative to get decent returns. In other words, I had to go where everybody else wasn’t to find good returns.
I had added ETF strategies to the product mix starting in 2000, but there were very few ETFs to choose from back in the early days. After the explosion of new ETFs in the mid-'00s, I built and offered several more strategies to the public. They worked great to avoid the Financial Crisis by switching at the right time to defensive ETFs. As time went on, I found that the ETF-based strategies were far more reliable and steady than the stock-based strategies, and they were attracting an ever-increasing share of my customers. The ETF market has been growing by 20% to 25% per year since the mid-1990s and is the fastest-growing financial product in history. There are good reasons they are attracting more than a trillion new $ every year (and growing).
I assessed that individual company stocks suffered greatly from idiosyncratic risk, while (of course) ETFs instantly eliminate that risk. You could create a system that picked the best stocks in the world, but invariably something would happen that your rules couldn’t discern, and the stock would blow up. An individual company might file a poor earnings report after the market closed, and by the time the shares opened the next morning, a small company’s price could be down by -50% or -75%.
Other times there would be an out-of-the-blue news story that would sink the shares, such as a class-action lawsuit, an FDA or SEC investigation announced, a key CEO pilfered by a competitor, and a plethora of other reasons. Because of this idiosyncratic risk, the shares might take a terrible percentage decline faster than you could react, and this risk couldn’t be eliminated or reduced with algorithmic investing. By 2017, I could see the writing on the wall and made a big decision to change my website’s name to ETFOptimize.com, eliminating the individual-stock portfolios and strictly offering ETF models.
However, as we all know, life is never without challenges, and the Covid Crash combined with Fed’s mind-boggling market manipulation totally upended all the macroeconomic and fundamental rules that had been a big part of my ETF Strategy’s ranking systems and buy/sell rules. Most of them didn’t work to identify the approaching risk in time, and after the Fed poured $3 trillion into the financial system, they were extremely slow to get back in for the rally (while the country was still in a terrible recession).
The last two years have been a real psychologically turbulent period because after my models scored returns of 90%-100% in 2019, they were rotten in 2020. Just when you think you’ve got it figured out, the market will punch you in the mouth (to paraphrase Mike Tyson).
However, I revised the ETF-based models over the last year, eliminating most of the macroeconomic measures, and developed some highly sophisticated (yet simple) technical indicators to identify periods of increased risk. I figure that technical measures can never go bad because… well… because they are based on price, which is the aspect of investing performance that we are trying to maximize anyway. Price never lies.
By using ETFs with rules-based investing, I find that I have far more accurate and reliable results. Several stocks crashing every day on bad news doesn’t make a difference because you have several hundred other companies in your ETFs that don’t. Plus, I screen the ETF universes to eliminate the ones that are illiquid (hint: daily trading volume doesn’t work for this). The only way an ETF could ever drop -75% is if there were a nuclear war that wiped out 75% of American commerce. That gives you peace of mind that’s hard to find elsewhere. As a result, my ETF models have a record of 100% profitable years - collectively, that’s 92 of 92 years of consecutive profits across my model lineup.
While their average return of 30% isn’t going to set the world on fire, the combination of steady profits of 30% year after year until retirement can make you very wealthy. Moreover, you can sleep at night - which is priceless.