Saturday, July 18, 2009

Shipman, Big Money Little Effort

I’m not a fan of get rich quick schemes or of books that tout them. At first blush Mark Shipman’s Big Money Little Effort: A Winning Strategy for Profitable Long-term Investment (Kogan Page, 2008) would seem to be just such a book, especially if you ignore the subtitle. But in fact, it offers a simple get rich slow technical system predicated on the hypothesis that the stock market will rise over time.

Shipman, previously a hedge fund manager in London, advocates market timing in the form of systematic trend following. “Participating in . . . major price movements should be the goal of every long-term investor because it’s the only way for a conservative individual to attain serious profits without taking excessive risk.” (p. 46) He argues that a buy and hold strategy is extremely dangerous and offers an analogy. “Imagine you had to fly in a make of aircraft that had a reputation for having the odd crash, maybe only once in every 10 years or so, but still the history for this make of plane wasn’t flawless. Now if you were offered a parachute, would you accept or decline the offer? Of course, you’d be mad not to take the parachute and have some form of escape if things went wrong.” (p. 48)

Shipman spends some time walking the reader through the pitfalls of investing in long-only mutual funds and explaining why most investors get things wrong. There is much sound advice here and I’m doing the book a disservice by ignoring these pages. But I’m going to cut to the chase and outline the get rich slow system, one that in its general form is familiar to anyone with even a rudimentary knowledge of technical analysis so I don’t think I’m revealing any “secret sauce.” The rules of Shipman’s system are painfully simple. Choose an ETF that tracks a stock market index (for instance, SPY). Buy when the 30-week moving average (SMA) is greater than the 50-week moving average. Sell when the 50-week moving average is greater than the 30-week moving average. This is a binary, long-only system in which the investor is either “all in” or, when the system signals a sell, goes to cash, “deposited in the highest interest-bearing instant access savings account available at the time.” (p. 95)

Over the last 56 years this system applied to the S&P 500 has triggered only 21 buy signals. There were 15 profitable positions, with an average profit of 34.76% and a maximum profit of 178.78% (1995 to 2001). Of the losing trades the largest loss was 9.95% (1957) and the average loss was 5.48%. The ratio of average profit to average loss was 6.3/1. The last date in the system test was June 6, 2007.

Shipman didn’t compare buy and hold profits to the profits of his system, but according to my calculations the market timing system would have earned around 1600 S&P points plus the interest accrued when the system was in a “sell” mode. A buy and hold strategy would have earned around 1495 S&P points, with no interest. By the way, Shipman’s system issued a sell signal in early 2008 when the S&P was trading in the 1400 area; there has been no subsequent buy signal. Friday’s close was 940.

This weekly moving average crossover system is just one among many systems that the author trades personally. For those investors interested in developing their own systems, Shipman suggests that this system might be useful as a filter.

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