Atkeson & Houghton, Win By Not Losing

Nicholas Atkeson and Andrew Houghton, founding partners of Delta Investment Management, have written what, in the words of the lengthy subtitle, is a disciplined approach to building and protecting your wealth in the stock market by managing your risk. Win By Not Losing (McGraw-Hill, 2013) is a mix of stories about some not-so-famous investors (in fact, a few are identified simply by their first names) and an introduction to tactical investing.

The authors contend that “stock prices are influenced by oddities in human behavior that often cause security pricing to be predictable.” (p. 120) They support their contention by sharing some of their observations from the trading floor of an investment bank. Earnings momentum, for instance, can be both predictable and profitable: “the cycle of exceeding analysts’ estimates is often predictable in light of the pressures on analysts to be overly conservative.” (p. 121) And one study found that “over the 60 trading days after an earnings announcement, a long position in stocks with unexpected earnings in the highest decile, combined with a short position in stocks in the lowest decile, yields an annualized ‘abnormal’ return of about 25 percent before transaction costs.” (p. 122)

It’s all very well and good to analyze individual stocks, but the overall market environment should be of paramount concern to the investor. The authors suggest that a person should be a tactical equity investor if he believes that “there is a reasonable probability the stock market will experience a period of severe depreciation during your investment horizon” and/or “there is a reasonable probability the stock market will not experience sufficient appreciation during your investment horizon to meet your investment objectives.” (p. 177)

The authors note that the risk-conscious tactical investor has a fairly narrow window in which to make decisions because “evaluations of market risk levels tend to be most accurate over a week to a month.” (p. 180) They recommend entering the stock market when “the perceived market risk is moderate and declining.” (p. 196) Their own favorite indicator is the 75-day simple moving average applied to a group of roughly 3,600 stocks. “When the majority of stocks in the market are trading above their 75-day moving average, the market is bullish. When the majority of stocks are trading under this level, the market is bearish.” (p. 199) (They publish a free weekly Market Sentiment Indicator report on their website; it also appears in Barron’s.)

One of the authors’ recommendations is that an investor should be aggressive when participating in up markets. One way to accomplish this is to boost the beta of the portfolio. If investors “were willing to accept portfolio volatility equal to the market, they could then increase their expected volatility during times they are invested in equities, as the higher in-the-market volatility would be offset by the lower out-of-the equity market volatility. These investors could raise the in-the-market portfolio beta to a level at which the average of in-the-market and out-of-the-market volatility is equal to the market volatility on its own.” (p. 206)

Winning By Not Losing is not for the rank novice, but anyone with some experience in the stock market, especially the person who wants to move beyond a buy and hold strategy, can find useful tidbits in this book.