Double Portrait of the 'Switch System'
or of a Fund, or a Stock, Index, or Portfolio
or Anything Tradeable
and the Roll of Rolling Returns
plus
A RIFF ON HYPOTHETICAL--Conclusion
|
Courtship: Love Blossoms
|
Marriage: The Living Partnership
|
|
|
Left::Switch System and components vs SP500 (black)
Right::Switch System (red) vs SP500 (green)
Showing Rolling 52-week Returns
--Click on either to enlarge--
When love blossoms, joy rises. A snapshot to cherish. Marriage is a different state. A motion picture. It is a living partnership. It oscillates. Happy times. Sad times. All things in the Universe oscillate. You inhale-exhale. Sleep-wake. Shiver-sweat. Laugh-cry. Systole-diastole. The pairings are endless.
The two snapshots portray all relationships. The left is the trend--up or down--we see at a glance. The right is the reality we live with day to day. The current day-to-day impact has more power because it is more immediate than the receding memory of how good it looked on first sight many yesterdays ago. We do well to carry both pictures in our wallets.
The former is a trend. The latter is a cycle. We buy trends. We are surprised by cycles, especially when they descend to the bottom part of their passage. Both are ongoing, the trend rising--if the system is doing its job correctly, and the cycle oscillating. All is well.
RIFF ON HYPOTHETICAL
Conclusion
(previous here)
What in the world has this to do with the charming, family double portrait above? Just this: if the stock market is expansionistic, then it would seem there is no limit to what results the Switch system can rise to. Remember the Projected Wealth table from two weeks ago ($73,000,000)? We took a poll. The question was, 'Do you believe the table can happen?' The responses were split almost exactly even, 50.4% Yes; 49.6% No.
If you believed, then you are an expansionist, and anything goes. If you do not believe, you have your reasons. Most disbelief in this matter springs, I have no doubt, from the opinion that nobody has ever done that. The end number is too gigantically large for the beginning number. Now here is a little experiment to prove the possibility of belief in the larger number as an outcome.
PROJECTED WEALTH COMPARISON
Switch System vs
SP500 & Treasury Bills
-- Dollars --
Hypothetical
|
Years |
TBills |
SP500 |
Switch |
|
start |
10,000 |
10,000 |
10,000 |
|
3 mos |
10,054 |
10,088 |
10,864 |
|
6 mos |
10,108 |
10,176 |
11,803 |
|
1 yr |
10,216 |
10,351 |
13,457 |
|
2 |
10,436 |
10,713 |
18,109 |
|
3 |
10,661 |
11,088 |
24,368 |
|
4 |
10,891 |
11,476 |
32,791 |
|
5 |
11,125 |
11,878 |
44,124 |
|
10 |
12,375 |
14,107 |
194,680 |
|
:: |
:: |
:: |
:: |
|
:: |
:: |
:: |
:: |
|
30 |
18,949 |
28,072 |
73,773,746 |
At exactly what level do you stop believing? . . . that the Switch levels shown can no longer happen? Why? There is empirical, factual evidence that these levels have already happened!
Data source: Shiller
Chart: 'Copernicus'
January 1900 through May 2010
Hypothetical? Well, sure. No one invests for 100 years, let alone lives that long. More like--two to four years or less, not to mention those of us who trade--with holding periods of a few weeks or months.
But wait. Not so hypothetical. This is an actual record of real numbers that really happened. They are as valid and factual as any other numbers of recorded history. (It's only when the historian gets into narrative and description that 'hypothetical' enters the room.)
So what is the solution? One must accept with respect to the stock market, that, paradoxically, both are true. In other words, with respect to the $73 million in the table above, the equivalent has actually happened in the real world. With respect to the chart above. The same $10,000 is invested. The actual compounded total return is $508 million. Done. Happened. The initial $10,000 is hypothetical in each case. The results in each are incontrovertibly non-hypothetical.
To be sure, the rates of return and the durations of time are different, but that does not invalidate the authenticity of either. That conclusion is counter-balanced by the validity of 'hypothetical' as far as it pertains to you personally or to anyone else concerned. It is like the yin-yang mandala, a composite of opposites, with both sides being true.
There is--for stocks--a remedy to this apparent mystery, the same as appears above in the chart at the top of the page. It rests in the power of perception that lies within the concept and actuality of rolling returns.
Rolling returns are what you undergo when holding an investment any length of time. They are vitally dynamic and can blow you away if you are not in firm control. There is a continual oscillation between elation and concern or despair . . . and repeat, for as long as you hold the investment. It should help to know this before you start.
To return to the Shiller-Copernicus chart and data above, its 'marriage' portrait is identical in concept and structure with the one at the top of the page. They differ only in magnitude and duration. Here below is what the S&P pair looks like. Note the monthly seismographic violence of the picture on the right, ranging from +124% to -65% real time! (The proper profile return is the average of all the monthly returns--1,320 of them. It equals 9.6% per year.)
|
| Actual Reality
| Perceptual Reality
|
|
|
No one on earth can tell me, or you, what the next number or the last number in the Projected Wealth Table above will be any more than could anyone in 1900 tell what the number would be in 2010 (for the record, the linked S&P 500 was 6.48 then and 1125.06 now).
$73 million is as possible today as $508 million was in 1900.
Q.E.D.
Sometimes, even to me, these kinds of ideas appear to break the boundaries of rigor and lie beyond the realm of practicality. But recall that these pages are "Experimental Notes to Myself".
They increase and deepen my understanding--and perhaps yours-- of how the market works and thus my confidence in the Monday-morning buy-hold-sell pebbles I skitter across the face of the market's surface on the opening.
When I first built systems years ago, I did not have the confidence in successful outcomes and the serenity that I have today . I find, for me, that only if I question deeply each of the established, given methods, policies, and commonly acknowledged standard practices and personally confirm them or correct them for myself, can I then believe in them, accept them, and make profitable use of them.
'Hypothetical' is one such example. It is both true and false. It is false for things that really happened and yet true for all people for whom things have not happened. I can invest more easily knowing that.
Sources
S&P 500 Common Stock Index
Data: Robert J. Shiller, Yale University
Department of Economics
http://www.econ.yale.edu/~shiller/data.htm
Charts
'Copernicus'
The 'Switch System' Method was double tested, validated, and first published as of the market close Friday, May 14, 2010. Real-time returns will be reported from that date forward.
First Posted
5/16/2010 10:25 p.m. EDT
Amended
6/13/2010 12:30 p.m. EDT
|
|
Back
| subscribe--45-day trial Free
|