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November 30, 2006
Draw-downs in the Snider Investment Method™
I received the following question about our philosophy on account value and draw-downs:
I don't know if you remember me, but I participated in one of your telephone conference calls and enjoyed it very much. I saw your presentation on Kim Kiyosaki's site and was intrigues. I have been
looking for a system that produced regular cash flow from the equity and futures market and yours looks interesting.
Your system, as you relate, is long term (greater than 2 years). My question before and now after reviewing your patent (and that brings another question to mind) is how much draw downs do you see? You said you didn't even have those figures, but it would be very simple given your trades to compute that? Why haven't you done so and made the stats public? Your stats on your site show only closed trades and obviously with a covered option sell strategy you will not see any losses in those. Isn't it a little bit disingenuous to show only closed trades?
To me it makes little sense to get a 1%/month return and afterward have a portfolio that is more than 25% down in value and from what some of your critics who have bought the training and use the system say happens. Does averaging down really protect you that much?
The stats I would like to see are the average drawdown and the max drawdown percentages for different time periods. As you know a lot of investing can be sabotaged by emotional decisions, but
what is nice about all automatic trading systems, yours included, is they take emotion out of the equation. However, if your draw downs are 25-50% then it can be a bit scary to continue even if the system works and drawdown becomes zero over time.
I thought others might be interested in my answer:
We work on four assumptions:
1. There is no way to consistently avoid stocks that decline in value if you want to invest in the stock market;
2. We buy fundamentally sound companies we would be willing to hold forever;
3. We can continue to generate 1% of the amount invested or current market value, whichever is higher;
4. All positions will ultimately rise above our average cost, even if it takes years, and we will hold them until they do.
Given those four assumptions, the only relevance draw downs have is that they are scary. But as to the result we are trying achieve, they are noise.
For example, let's say you owned a $1M portfolio of financially sound companies that had minimal risk of going bankrupt. Let's say, for whatever reason, that portfolio lost 90% of its value so its now worth $100K in market value. Let's imagine it remained at 10% of its original value for ten years.
Suppose over the ten year period it continue to generate $120K in cash flow each and every year. After twelve years, the value of the stocks in that portfolio rose above their cost basis, you sold the stocks at just above break even and you had pocketed the $120K a year for twelve years.
Setting aside the fact that it was scary while you were in it, would you care that the market value was at 90%? Your answer should be, "Only if I needed the principal."
That is fair enough, but I also believe two other things: 1) Everyone should have at least six to twelve months of emergency funds set aside before they start investing; and 2) you never, ever raid your retirement funds - no matter what. They are absolutely sacrosanct. Figure out what you would do if you didn't have those funds and do that instead. Again, making those assumptions, the $120K in cash flow ought to be more than enough to mitigate the risk of having to convert assets while they are depressed in value.
With regard to computing the draw downs, it isn't as easy as you suggest. To figure out draw downs, we would have to collect the daily account value of every single portfolio we manage. That is a lot of data that, to our way of thinking, serves no purpose. We have no way currently to collect that data except to do it by hand.
Second, the report of all positions, which is available on our web site at the bottom of the Fast Facts page, does include open positions as well as closed ones. Although the unrealized losses are only as of a point in time, they will give you an idea of what they might look like.
Finally, I would point out that you said it yourself. Investing is all about controlling emotional responses. The Snider Investment Method™ is a system of logical and probabilistically determined responses to all events. Account value is a short term number that completely ignores the probability of the long-term outcome. I believe you simply cannot focus on it if you want to grow it. The irony is it is only by ignoring it, can you be successful.
Thoughts? Comments? Agree? Disagree? Feel free to leave them below.
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
November 29, 2006
Tropical Views
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
November 28, 2006
Understanding Signal and Noise
Wikipedia tells us the signal-to-noise ratio is an engineering term for the power ratio between a signal (meaningful information) and the background noise. More informally, it is used to describe useful information (signal) and false or irrelevant data (noise).
Michael Mauboussin, Chief Investment Strategist for Legg Mason and author of the book "More Than You Know: Finding Financial Wisdom in Unconventional Places" describes signal and noise this way:
Time horizon is a crucial consideration in any probabilistic field. In these systems, short-term results show mostly noise—the noise-to-signal ratio is very high. Over time, the signal reveals itself, and the noise-to-signal ratio drops. Short-term investors dwell mostly in the world of noise.
Let’s go back to our simple coin-tossing example to demonstrate this point. Exhibit 8’s left panel is the result of a 20-toss trial, and shows that 35 percent of the tosses came up heads. (We simulated these results with a random number generator). The panel on the right continues with the next 80 tosses in the series, and shows that the ratio settles very close to 50 percent over 100 flips. Even though we know the long-term signal is 50 percent, short-term noise can deviate substantially from long-term signal.
Many Snider Investment Method™ practitioners have come up with for ideas to modify the Snider Method. The challenge is that almost all of them are based on emotion, intuition or very tiny data sets. When we deal with small sets of data, as in the case of the first 20 coin flips, we are usually basing our conclusions on noise rather than signal.
Recently, a graduate said to me that he had bought three stocks that declined in price. All of them had a high P/E. He wanted to avoid high P/E stocks thinking this would reduce the likelihood of declining stocks in his portfolio. Of course, three stocks is not sufficient to test the validity of an idea.
In reality, there is no strong correlation, that we have been able to determine, between high P/E and falling stock prices. Excluding the higher P/E stocks would eliminate a number of our better performing stocks without making any meaningful improvement in risk. He was basing his idea on noise, not signal.
It is in everybody's best interest to make improvements to the Snider Method. That is beyond question. The only question is how can we marshal the resources required, which are considerable, to do it properly?
This is the idea behind making the Snider Method "open source" if you will. The key is going to be creating enough data to be able to test ideas across very large sample sets to remove the noise and get to signal. This is no small task and beyond the resources available within the company. Hence, the idea of making the method open source to its users and inviting them to participate, for the collective benefit of everyone, in advancing the method.
What I am hoping to accomplish at the Open Space meeting on February 3rd is to lay the foundation for working as a community toward improvements in the method. The purpose of the Open Space meeting is not to float the ideas themselves, but rather to create some organization among those who are interested.
I am hoping we can eventually use the collective time, wisdom and talents of the many smart people who use the Snider Method to gather enough data, organize it, and create a "test bed" where everyone helps build a sophisticated tool for empirically testing all modifications to the method. It would be up to the community to agree on what constitutes empirical proof and create a process for submitting improvements that have met that proof. Once we have a framework, people can pursue the area that interests (or bugs) them the most -- selection criteria, money management rules, rolling options, etc.
We have already had quite a few people sign up for the Open Space meeting even though it is still pretty far away. You can read more about in the original post. I also sent the post to everyone as an email announcement.
Call the office to register. The number is 214-965-9950 or 866-952-0100. They will take your credit card over the phone.
If you have any thoughts, comments or questions about signal to noise or the open source concept, please feel free to leave them below.
SOURCE:
Michael Mauboussin, "Long Term Investing is a Short Term World" Mauboussin on Strategy, 18 May 2006
http://www.leggmason.com/funds/knowledge/mauboussin/mauboussin.asp#
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
November 22, 2006
Tropical Views
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
November 21, 2006
Thinking Outside the Box
"As an analogy, winter is not a time for farmers to hibernate; rather it's a period to approach crops differently. Today's investors have so many tools and techniques available to them to actively "row" and invest like institutions, thereby seeking relatively consistent returns with a lot less disappointment risk."
- Ed Easterling, author of Unexpected Returns: Understanding Secular Stock Market Cycles and President of an investment management firm. In addition, Ed is a member of the adjunct faculty at SMU's Cox School of Business where he teaches a course on alternative investments and hedge funds for MBA students. Mr. Easterling is most known for publishing provocative research on the financial markets which can be viewed at www.CrestmontResearch.com.
TIP oF THE HAT: To John Mauldin's Outside the Box newsletter for the piece that included this quote.
Watch for our podcast of my latest interview with Ed. It should be posted on the Kimmunications blog on Monday. Excerpts will also be included in this Saturday's radio show on KRLD 1080 AM Dallas Fort Worth at noon Central time.
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
November 20, 2006
Week of 11/19/2006 - Upcoming Events
11/20/06 - Financial Success Coaching Podcast
Monday's podcast is a full-length interview with Dr. Larry Kotlikoff. Larry is a Professor of Economics at Boston University. He is also President of Economic Security Planning, Inc., which has released a financial planning software tool based on the highly advanced concept of consumption smoothing. We will talk with Dr. Kotlikoff about the short-comings of traditional financial planning and how the ESP Planner can help you create a much better financial plan at a fraction of the cost.
You can download the Financial Success Coaching podcast directly from the Kimmunications blog. It is also available on iTunes, Odeo and PodNova.
11/20/06 - Ask Kim - A free on-line event
What have you been dying to ask Kim about? Do you want to learn more about the Snider Investment Method™? What are Kim's four steps to financial success? Do you want to know her opinion on something? This is your chance to ask!
Ask Kim is an interactive online event that's strictly Q&A. There are no prepared remarks, and no agenda. Think of it as a nationwide call-in radio show, but on the web.
Kim will stay on the line for as long as it takes to answer your questions. She knows there are a lot of questions out there, and she's more than happy to help you out.
To attend this online session, all you need is your computer's web browser and Windows Media Player 9 or better, available for both PC and Mac.. You can ask Kim questions by phone or by email, and we'll give you that information when you login.
Register now. Best of all, this is free, and you don't even have to leave your house or office!
Registration is required. Register online at http://www.kimsnider.com/free_signup.php
11/23/06 - Financial Success Coaching Podcast
Thursday's podcast covers the subject of risk adjusted returns. Kim explains why you can't look at returns, or risk for that matter, in a vacuum. They must be considered as equal parts in an equation. Only then can you judge the performance of an investment.
You can download the Financial Success Coaching podcast directly from the Kimmunications blog. It is also available on iTunes, Odeo and PodNova.
11/25/2006 - Financial Success Coaching Radio Show
Financial Success Coaching with Kim Snider will feature an interview with Ed Easterling. Ed is the author of "Unexpected Returns", the President of Crestmont Research and an adjunct professor at Southern Methodist University's Cox School of Business. We will be talking about the power of negative numbers and why managing risk is as important as managing returns. As always, Kim will also talk about why she believes cash flow investing is superior to capital appreciation investments. Financial Success Coaching with Kim Snider airs every Saturday at noon on KRLD NewsRadio 1080 AM in Dallas, TX. You can also hear the broadcast streamed live at krld.com.
Through 11/30/2006 - KRLD's Online Investor Workshop
You can watch a ten minute video, featuring yours truly, titled "The Power of a Portfolio Paycheck." It is part of KRLD's Online Investor Workshop. The topic is how to hedge the risk of losing your job, becoming disabled, having your retirement savings wiped out or running out of money before you run out of time on earth. Free registration is required. The Power of a Portfolio Paycheck will be available at krld.com through the end of November.
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
November 16, 2006
Help Us Make the Snider Investment Method Better
Please mark your calendars and plan to attend an all day meeting to explore
How to use the collective knowledge of our user community to make the Snider Investment Method™ better for everyone
Unless you were on the Inaugural Snider Investment Method Alumni Cruise, you have probably never attended a meeting like this one before. The meeting format:
- Lets us design our own agenda and promises that anything that is important to any of us about the theme has the opportunity to be discussed;
- Enables you to connect with others who share your interests at the meeting with an opportunity to continue networking with these people beyond the meeting;
- Acknowledges and works with the wisdom, experience, and expertise that you and others have to work on the theme;
- Provides the opportunity to have meaningful conversation, involvement, and connecting;
- Enables you to move from one discussion to another so that at every moment, you use your personal energy by either learning or contributing;
- Provides a written summary of every session compiled into a book of proceedings for each participant to use beyond the meeting for ongoing work; and
- Supports action planning at the meeting itself and beyond the meeting.
The meeting format is called Open Space Technology and it produces amazing results in a very short time. Meeting details are as follows:
Saturday, February 3, 2007
8:00 AM to 5:00 PM
American Airlines Training & Conference Center
Fort Worth, Texas
Cost: $95 per person
includes lunch and all-day snacks
Our objectives are:
- Identify the issues involved in creating a vibrant community of users working to extend and improve the Snider Investment Method
- Create working groups of people willing to tackle those issues and next steps
- Understand how Kim Snider Financial Communications and Chronim Advisors can best facilitate the efforts of the working groups
- Ultimately, create an ongoing framework for the community to assume ownership of the Snider Method and continually make it better for themselves and everyone else who uses it. Think open source software and you'll kind of get the big idea.
There are some givens, or assumptions, that you should work within during this meeting and all follow-up activities:
- The company will embrace and disseminate any changes that can be empirically proven to improve the Snider Method within the current risk reward profile
- All extensions or improvements to the Snider Method become the intellectual property of the company. Members of the working groups will receive no compensation for their ideas other than the warm and fuzzy feeling that comes from helping other people.
- The company will do its best to facilitate and support all working groups but the groups are expected to be self-organizing
How to Register
Please call Kim Snider Financial Communications at 214-965-9950 or 866-952-0100 with your credit card handy to register.
What to Expect
- In the morning when you arrive for the Open Space meeting, the meeting room will be set up with a circle of chairs. Pick any chair. Together, we will create the agenda during the first thirty minutes. Through the creation of the agenda, leaders of topics will identify themselves. Each person will be invited to sign up for the topics they are interested in. Participants will then manage their own time and energy, attending sessions of interest. Leaders will be responsible for getting their topic going, ensuring that a report of the proceedings is created for entry into the book of proceedings.
- Company employees will participate in meetings that are of interest to them. They may also convene a meeting like anyone else.
- There will be a break for lunch. We will eat together in the Black Hawk Dining Room. Lunch is provided as part of the price. There will be no formal breaks, however break stations will be set up with snacks and beverages.
- At the end of the day, we will gather again in our circle. We will review the list of topics and the session notes for each meeting and action plans for next steps. We will end at 5 PM.
- More information about the process that we will use for our meeting is available at www.openspaceworld.org.
- Copies of the book of proceedings will be distributed to everyone and posted on the Snider Insider. Next steps will proceed according to "givens" that were noted previously.
Please join me in Open Space. Working together, I know we can make the Snider Method even better than it is today.
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
November 15, 2006
Tropical Views
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
Island Chat
How do I calculate my new average cost after a stock split?
One of the stocks I own just split. How do I calculate my new average cost?
Divide the amount you paid for your shares (Total Extended Amount on your Individual Stock Purchase Record) by the total number of shares you own after the stock split to calculate your new average cost.
A stock split occurs when a company issues additional shares to existing shareholders. A common objective of a stock split is to lower a stock's price to a desirable level. The total value of the company has not changed, so the market adjusts the individual price of the new shares in proportion to the split. You will make the same adjustment for the total number of shares you now own.
For example, assume you own 300 shares of a stock trading at $100. Your average cost is $105 based on three monthly purchases of $110, $105 and $100. The stock splits 2 for 1 and you are issued 2 shares of new stock for each share you owned of the old stock, increasing the total shares you own to 600. Divide the amount you paid for your shares ($11,000 + $10,500 + $10,000 = $31,500) by the total shares you now own (600) to calculate your new average cost of $52.50 (yes, you also could have divided your old average cost of $105 by 2 in keeping with the 2 for 1 stock split).
Do I include the cost of PowerOptions when I compute my Monthly Current Yield?
The Workshop Reference Guide does not seem to address the cost of my stock selection tool when I compute my Monthly Current Yield. Where do I account for the cost of PowerOptions?
You may include the monthly cost of your stock selection tool in the "Margin Interest and Other Deductions" section of your Monthly Current Yield worksheet. Simply subtract any stock selection tool expenses incurred during a given month from your Monthly Current Yield from Positions and any Interest and Dividends earned during the month to calculate your total Monthly Current Yield.
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
November 14, 2006
Even Really Smart People Don't Get Randomness
I talk a lot about having to have discipline if there is any hope of being a successful investor. It is the key. Without it, there is no hope.
The Snider Investment Method™ is really nothing more than forced discipline. It is a process developed on probabilities and logic. The essential ingredient to success with it is to be able to follow it even when our brain tells us to do otherwise.
The curious thing is why that happens. And how often. It happens to all of us. Even me. I am sure it happens to you too. You are happy to follow the rules until they don't feel good and then you want to change them.
Investing is difficult because our brains are not wired properly to make us good investors. In fact, our hard wiring makes us really bad investors. We have all sorts of problems with emotional biases and cognitive dysfunctions that trick us.
Don't feel bad. You are not alone. Even really, really smart people are fooled by randomness and probabilities. For a really great explanation, I recommend this short video (22 minutes) of a talk by Peter Donnelly at TED that explores the common mistakes people make when dealing with randomness, uncertainty, probability and statistics and the devastating outcomes that result..
Peter Donnelly is a Statistics Professor at Oxford University who collaborates with biologists, applying statistical models to genetics, with the hope of shedding more light on evolutionary history and the structure of the human genome.
TED (Technology, Entertainment & Design) is an invitation-only, annual conference held in Monterey, California where leading thinkers gather to share ideas and inspiration.
SOURCE:
1. "Statistician Peter Donnelly on TEDTalks", TEDBlog; 09 Nov 2006
http://tedblog.typepad.com/tedblog/statistics/index.html
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
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