To: [email protected]
Subject: Re: Further to our conversation
Date: Wed, 2 Jun 1999 17:02:24 -0400
Dear Stu: (Editors Note - Letter was sent to this marketing division representative of JAS MTS, Inc. The only part edited is the sender's email address for anonymity)
When we spoke on the phone the following is what I had in my mind. Feel free to use it if it helps. Edit it how you want.
When I first became acquainted with JAS MTS I had a fairly jaundiced view of services offering investment advice. Over the years, like everyone else, I have encountered many. Among those I took the time to investigate all made extravagant claims about their track records. In real time, however, they seemed to be at their most bullish at the top and most bearish near the bottom.
In one case a major bank advertised an outside service asserting it had a historical return of 30%, even in relatively quiet markets. My interest aroused, I called the bank and asked them if they had verified the advertised track record. I was unable to locate anyone prepared to admit they knew anything about it.
Of course I was skeptical, but if this really was for real it would be stupid on my part to ignore it. Periodically in these matters I have to refresh my memory about the difference between gullibility and open-mindedness. So, I contacted the principals involved and suggested that if they really were capable of sustaining a 30% return they ought to start a "hedge" fund and charge a performance fee. I further indicated that I would be happy to help them with that if they wanted including putting the data on their previous recommendations together in a form that could be marketed.
They happily sent me the data and I went back through hundreds of trades to verify the accuracy of the claimed performance record. In particular I checked every transaction with a daily stock chart to verify that each trade really could have been executed at the price claimed. Unfortunately, the rate of return turned out to be 2% per year before commissions, during a period where the market return had been between 8% and 9%!
Then I found another service claiming a similar 30% performance. I made the same suggestion to these people. Their data showed that all their superior performance had occurred in the 1970s (for which they could no longer provide supporting evidence) and since that time had performed pretty much in line with the market (not bad I suppose since 85% of professional money managers under perform the market!). They later started a mutual fund.
Then a friend recommended I subscribe to a market letter from New York that he said had a tremendous track record - it also boasted a 30% rate of return (what is it about 30% that everyone seems to think they have to use that particular number?) This time I actually paid to subscribe to it, and then asked for the background data. This time the kink was different. If you believed the prices at which he said he bought and sold, certainly he had a track record of 30% before commissions. But when I checked the prices at which the stocks had traded on the Monday following his weekend telephone updates I discovered his claimed entry prices were fictitious. It appeared that usually he waited for some large stock to rise at least ten percent on a Friday then he recommended it be bought on his Sunday telephone hotline. But the price recorded as his purchase price was usually the LOW price on Friday, while the stock had closed at least 10% higher than its low. If you looked at a weekly or monthly chart you often could be persuaded to believe he really could have bought at the price indicated. But not if you looked at a daily chart. Since he had a policy of using a 10% trailing stop, recording his buying price at least 10% below Friday's close meant that he would never RECORD a losing trade!
Later I analyzed an investment service that claimed to have an 80% success rate in its trading recommendations. After managing to get historical data on this service, it turned out to be so complicated that I had to write some software to do my analysis. I determined that the advertised 80% success rate was actually quite close to being true. Nevertheless, because of the ingenious way they did their trading, believe it or not, despite the 80% success rate an investor would still have gradually lost money year by year by year using the service - even before commissions! (Even with the market rising at 25% a year, lately!) I paid a subscription for that service too!
All the above services were advertised, incidentally, in reputable media. So it was in the above context that I came to hear about JAS MTS! You might say I felt a twinge of skepticism when I heard Jim's extravagant claim that he had a model that would have caught every bear market within 5% of the top, and got back in not far from the bottom. Notwithstanding my skepticism I investigated further in the interests of open-mindedness, and with a clear understanding of the enormous profit potential of correctly predicting the timing of the peak of just one good bear market! Many things appeared different about this service. First, Jim had constructed a model. I have much modelling experience and know that if you work long enough at it occasionally one can figure out a technique which enables one to forecast things no one else can. Second, Jim was well versed in the history of market excesses and understood we were in the middle of what may perhaps be the greatest excess in all of history. Third, Jim was aware of the potential of trading options in down markets. Fourth, Jim had evidence that suggested he really had predicted the 1987 crash. All this indicated Jim should be taken seriously, and just might, therefore, possess the elixir of bear markets! For me, if Jim really did possess a technique for predicting the timing of market tops it would be the one final stone I would need to complete my bridge. Indeed, it is the keystone. Without a good call for the top of the market most of the profit potential in a bear market could be lost.
But still I was skeptical. So I subscribed and I listened. I have been surprised by the accuracy of Jim's short term market predictions. He has predicted a number of corrections with an accuracy that has startled me. In two recent minor panics - the original Asian panic in 1997 and in the correction that accompanied the Russian default - Jim steadfastly maintained this was definitely NOT the start of the bear market while many better known market oracles predicted disaster (and a couple of my friends bought index puts near the bottom).
On one occasion the correction turned out to be larger than Jim had predicted and suddenly he came out with a buy signal. Within a few trading days the market hit its low and (despite the market's already hypoxic altitude) then rose 30% in a few months. Human nature being what it is, displays of shear guts like this are unlikely to originate with someone who does not have a very firm guidepost to hold on to.
For quite some time in early in 1999 Jim had been warning that 8th May (1999) would likely be the next short term peak. Within four trading days of that date the market peaked and is still falling today as I write. But now, as the market falls Jim is predicting another sizeable rise. This is so diametrically different from the rest of the market timers. They all get more bullish the more the market rises and more pessimistic the further it falls. But not only is The Shepherd Investment Strategist different - most of the time, not a minor detail, it is correct as well.
There is one other factor that impresses me about Jim's approach. I have found in life that there is often much more CONTENT contained in HOW a person says something than in WHAT they have said!
To give an example from every day life: Suppose you have a box of fertilizer in the garage and are not sure whether you should apply it to your rhododendrons or not. You might decide to call the local garden supply centre and ask them. The problem is that you do not know whether the person they put you through to will know anything about fertilizing rhododendrons or not. Unfortunately you also know that whether they know anything about rhododendrons or not they are going to give you an answer. If they know nothing about rhododendrons the appropriate answer would be "I don't know". But of course it is rare to find an employee who is prepared to admit there is something they do not know.
So what is the solution to this problem? Simple, 99% of the time you can tell whether you should listen to their advice not by what they say but by THE WAY THEY SAY IT. Many clues are to be found in the manner an answer is given. The tone of voice; the degree of conviction; indications of sincerity; additional information offered which would not be known by someone who doesn't know what they are talking about; and others also.
The relevance of this to The Shepherd Investment Strategist is this. Listen to Jim's commentaries for a few months and see whether you think he knows what he is talking about. I am a repeat subscriber!
Foreign subscriber consulted by a previous U.S. administration on economic policy matters
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March 13, 2001