I like to consider myself a realist: I don’t sugarcoat a bad situation and I don’t over-hype my investment models (at least I don’t think I do). As evidenced by the following chart from Covestor, my personal Canadian holdings beat the broad market by 41% over the past year.
As a realist, I can’t say that it is reasonable for me to expect to beat the market by 40% per year, every year. Out of curiosity, I developed a HXU/Cash model starting in 2003. Since Horizon Beta Pro didn’t introduce HXU until 2007, I constructed a theoretical HXU for the 2003 to 2007 period. The purpose of this exercise was to determine what is a realistic average performance for a HXU/Cash model. (If you go to the Canadian Models page on my web site, you will see a table at the top of the page showing that my HXU models have beat the S&P/TSX composite index by 50.7% per year from September 05, 2007 to present.)
The above chart is a combination of theoretical and actual results as noted above. Here are the numbers that count:
CAGR = compound annual growth rate
The HXU/Cash Model buys HXU at the open the morning after my Canadian stock market timer generates a long signal. The morning after a get-out-of-the-market signal is generated, all HXU units are sold and the proceeds are held in cash until the next long signal. Over the period examined, there were fourteen long signals and, on average, the long signals lasted 76 days. Commissions, taxes and interest earned on the cash are not accounted for. Likewise the performance of the buy-and-hold model is higher than one could achieve in reality since one would have to buy a market ETF such as XIU and pay the built-in management fee.
Based on the above analysis, it appears realistic to expect my Canadian models to beat the broad market by 20% per year. This is the same outperformance that my Long and Short IWM and Long and Short QQQQ models have beat their underlying US indices since 2000. You can check out my US models here.
Of course there may be room for improvement in the relative performance of my Canadian model versus buying-and-holding. Sell stops may improve the performance and a long/short model may provide even better returns.
Based on the correspondence I have received lately, my models are gaining traction and investors are wondering what my future plans are. All I will say is that all options are open and I am receptive to proposals.
FJP
PS I just went to GlobeFund.com and reviewed the 3-year performance of Canadian Equity mutual funds. As of May 31, 2009, only 39 of 583 mutual funds had a postive 3-year return. The highest 3-year return was 5.27%. When I compare that to the performance of my models I have to wonder why I am not running a hedge fund!
