I personally fund four scholarships/awards for high school students in my province. Yesterday I attended the awards ceremony in Happy Valley-Goose Bay for the graduating students at Mealy Mountain Collegiate. The town has a population of only about 7,600 but the local business community and individuals collectively sponsored over $55,000 in awards.  Congratulations to Alexandre Maheux who was the recipient of the Perseverance Award which I fund.

Next month I will attend the graduating dinner for the Level III students of Exploits Valley High to present the Male Student of the Year Award which I fund.

FJP

In “Hedge Fund Market Wizards”, Jack Schwager interviews Colm O’Shea of Comac Capital. There are some great quotes in the interview and here are some of my favourites:

You need to implement a trade in a way that limits your losses when you are wrong, and you also need to be able to recognize when a trade is wrong.

… what strikes me about really good managers (is that) they don’t get attached to their ideas.

You need a method that suits your personality.

People who like trading because they like gambling are always going to be terrible at it. For these people, the trading books could be greatly shortened to the message: “Don’t trade. You are really bad at this. So just don’t do it.”

Traders who are successful over the long run adapt. If they do use rules, and you meet them 10 years later, they will have broken those rules. Why? Because the world has changed.

Jack: How do you go long a bubble and protect yourself?

Colm: When it starts to go down, you sell it.

Jack: Are there traits that determine who will be a successful trader?

Colm: Perseverance and the emotional resilience to keep coming back are critical because as a trader you get beaten up horribly. Frankly, if you don’t love it, there are much better things to do with your life. You can’t trade because you think it is a way to make a lot of money.

FJP

April was a negative month for me with a 2.30% loss.  I am still ahead of the Newedge CTA Index albeit barely.

I have maintained my Collective2.com score of 996 out of 1000 and my win/loss ratio is 2.44.  Obviously my CAGR is next to nil since I started my trading system on Collective2.  I would love to see a higher return but the past twelve months have been tough for most trend trading investors.

FJP

Read more here.

From Amazon.com:

Hedge Fund Market Wizards is ultimately a search for insights to be drawn from the most successful market practitioners. The last chapter distills the wisdom of the 15 skilled traders interviewed into 40 key market lessons. A sampling is provided below:

1. There Is No Holy Grail in Trading
Many traders mistakenly believe that there is some single solution to defining market behavior. Not only is there no single solution to the markets, but those solutions that do exist are continually changing. The range of the methods used by the traders interviewed in Hedge Fund Market Wizards, some of which are even polar opposites, is a testament to the diversity of possible approaches. There are a multitude of ways to be successful in the markets, albeit they are all hard to find and achieve.

2. Don’t Confuse the Concepts of Winning and Losing Trades with Good and Bad Trades
A good trade can lose money, and a bad trade can make money. Even the best trading processes will lose a certain percentage of the time. There is no way of knowing a priori which individual trade will make money. As long as a trade adhered to a process with a positive edge, it is a good trade, regardless of whether it wins or loses because if similar trades are repeated multiple times, they will come out ahead. Conversely, a trade that is taken as a gamble is a bad trade regardless of whether it wins or loses because over time such trades will lose money.

3. The Road to Success Is Paved with Mistakes
Ray Dalio, the founder of Bridgewater, the world’s largest hedge fund, strongly believes that learning from mistakes is essential to improvement and ultimate success. Each mistake, if recognized and acted upon, provides an opportunity for improving a trading approach. Most traders would benefit by writing down each mistake, the implied lesson, and the intended change in the trading process. Such a trading log can be periodically reviewed for reinforcement. Trading mistakes cannot be avoided, but repeating the same mistakes can be, and doing so is often the difference between success and failure.

4. The Importance of Doing Nothing
For some traders, the discipline and patience to do nothing when the environment is unfavorable or opportunities are lacking is a crucial element in their success. For example, despite making minimal use of short positions, Kevin Daly, the manager of the Five Corners fund, achieved cumulative gross returns in excess of 800% during a 12-year period when the broad equity markets were essentially flat. In part, he accomplished this feat by having the discipline to remain largely in cash during negative environments, which allowed him to sidestep large drawdowns during two major bear markets. The lesson is that if conditions are not right, or the return/risk is not sufficiently favorable, don’t do anything. Beware of taking dubious trades out of impatience.

5. Volatility and Risk Are Not Synonymous
Low volatility does not imply low risk and high volatility does not imply high risk. Investments subject to sporadic large risks may exhibit low volatility if a risk event is not present in the existing track record. For example, the strategy of selling out-of-the-money options can exhibit low volatility if there are no large, abrupt price moves, but is at risk of asymptotically increasing losses in the event of a sudden, steep selloff. On the other hand, traders such as Jamie Mai, the portfolio manager for Cornwall Capital, will exhibit high volatility because of occasional very large gains-not a factor that most investors would associate with risk or even consider undesirable-but will have strictly curtailed risk because of the asymmetric structure of their trades. So some strategies, such as option selling, can have both low volatility and large, open-ended risk, and some strategies, such as Mai’s, can have both high volatility and constrained risk.

As a related point, investors often make the mistake of equating manager performance in a given year with manager skill. Sometimes, more skilled managers will underperform because they refuse to participate in market bubbles. The best performers during such periods are often the most imprudent rather than the most skilled managers. Martin Taylor, the portfolio manager of the Nevsky Fund, underperformed in 1999 because he thought it was ridiculous to buy tech stocks at their inflated price levels. This same investment decision, however, was instrumental to his large outperformance in subsequent years when these stocks witnessed a prolonged, massive decline. In this sense, past performance can sometimes even be an inverse indicator.

After reading this post by Dr. Perry Sadorsky, Associate Professor of Economics at York University, I decided to apply his finding to ETF’s for the Canadian and US equity markets. Dr. Sadorsky claims that you can achieve a higher return in the broad Canadian equity market if you buy and hold the market from November 01 to April 30 and then put your money in 90-day T-bills from May 01 to October 31. Furthermore, this seasonal trade strategy reduces the standard deviation of returns. Of course, this is hardly earth shattering to any  seasoned investor – it’s the “Sell in May and go away” rule.

The chart below is based on buying XIU (iShares S&P/TSX 60) on the first trading day of November and selling it on the first trading day of May.

The above does not include commissions nor does it include what you could earn by putting the funds in a guaranteed investment vehicle (e.g. GIC’s) when not holding XIU.

Now let’s apply this same strategy to SPY (Spider S&P 500) and QQQ (Powershares QQQ) to test the US equity markets.

From the SPY chart, it is clear that the starting point in time has a huge impact on the conclusion one can draw.  If the starting point was 1999, the seasonal trade would provide the higher final value.

I believe in using margin to improve returns so I decided to test the seasonal trade strategy on SPY using 50% margin and a 6% interest rate.

The seasonal trade with margin provides a higher return for the period covered. Another positive is that the maximum drawdown is reduced from 51% for buy and hold to 32% for the seasonal trade strategy.

I am a trend trader so the seasonal strategy is not my style of trading but I suspect it may be of interest to some of you who read this blog.

FJP

PS  Brooke Thackray has written about the seasonality of equity markets in Canada and he notes that “starting with an investment of $10,000 in 1997, investing in the unfavourable six months (May 06 to October 27) produces a loss of $4,362 (ending in 2009) versus investing in the favourable six months (October 28 to May 05) which has produced a gain of $164,551″.

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