One of the saddest parts of any personal service business is having a long-term client pass away. Last year, I lost one of my longest and most loyal clients, and I'd like to share some of his wisdom with you. Don (for the sake of privacy, I'll just use his first name) had been a client of mine for over 20 years. He had been very successful in his career as an engineer, and had a sizable and well-diversified investment portfolio.
I first met Don at an investment conference in the early 1980s. We quickly became kindred spirits because Don shared my views about investing and avoiding large losses, not to mention the fact that we were both political conservatives. While I have clients in all 50 states, many of whom I have never met, I had several meetings with Don and his wife at conferences, and on one occasion in his home.
While Don had several different investments sponsored by my company as well as others, his portfolio tended to lean toward the aggressive side. When Don retired, I had several discussions with him regarding whether or not he should restructure his investment portfolio to be more conservative. Since Don still had a sizable income, even in retirement, and had a diversified investment portfolio, he did not feel it was a time to scale back his investments and become much more conservative. Given his circumstances, I could not disagree.
Several years ago, my company discovered a new money manager who would go both long and short in the equity markets using specialized mutual funds that employed leverage (more on this money manager below). Don was particularly attracted to this money manager, even though I might not normally recommend such a program for someone who was retired. So I suggested that this new, aggressive long/short program probably may not be suitable for him. He then asked me a question that I'll never forget, and inspired the title of this week's E-Letter:
Gary, would you buy a car without a reverse gear?
His implication was clear. Don did not view a program that could go both long and short as being too aggressive for his highly diversified portfolio. In fact, he saw the ability to go short in a down market as an advantage that many other investments simply didn't have. Sure, he realized that no money manager can guarantee they will always be successful, but his overall portfolio was widely diversified, so a small allocation to an aggressive strategy made sense to him.
While a case study of Don's portfolio may or may not be similar to your financial situation, I do think it highlights the merits of mixing strategies with various risk categories within an overall portfolio to reach important investment goals.
In January of this year, I wrote an E-Letter discussing how you can access sophisticated investment strategies like those found in hedge funds, without having to be wealthy to do so. However, the activity reports I receive for each of my E-Letters showed that the January 30 issue was opened and read by only about one-half of the typical weekly audience. Why?
I fear that, by using the term "hedge funds" in the title of that E-Letter, I may have caused many of my readers to tune out that issue, thinking that the E-Letter was directed toward only high net worth readers. Actually, just the opposite is true. As I think about Don's comment about investments with a "reverse gear," I think it's important that I revisit the use of aggressive investments again this week, especially now that one of our best "reverse gear" programs is now more accessible than ever before (more about that below).
Access potential gains from surging oil prices without the instability of the Middle East.
With the Petrol Index CD from EverBank®
, you can access a mix of currencies from three of the largest oil-producing nations outside of the Middle East-- namely Norway (krone), Great Britain (pound), and Mexico (peso). Learn more about the Petrol Index CD today.
The Case For Aggressive Investments
In my January 30 E-Letter, I wrote about hedge fund strategies because these investments have a certain mystique to many investors. It's as if investors who cannot qualify to invest in hedge funds can only wonder what special advantages wealthy investors gain from including these private and often aggressive investments in their portfolios.
It may surprise you to find out that lots of wealthy investors have no different investment goals than you do. They want capital growth to meet their investment goals, but without taking on too much risk. Yes, there are some wealthy investors who gravitate toward the most risky of hedge fund strategies, but I have found these to be fairly rare, and even those that do include these strategies (like my client, Don) usually limit them to only a small part of their overall portfolios.
One of the most important things to remember is that, as a general rule, sophisticated investors do not always have chasing returns on their minds when they invest. As I discussed in my Absolute Return Special Report, many wealthy individuals are primarily interested in reasonable returns, but with a strong emphasis on risk management. The reason is that many have become wealthy by selling a business or through an inheritance, and they don't want to take a big chance on losing it.
Many of these same individuals will include aggressive strategies as part of their overall portfolio, which seems to go against their absolute return goal. However, this is not necessarily true. Sophisticated investors know that diversification is an important part of prudent investing, and historically, futures funds, hedge funds and alternative investments provided them the ability to diversify beyond the stocks, bonds and mutual funds available to most investors.
Diversification into alternative investment strategies offered by hedge funds may seem to go against conventional risk management wisdom, but studies have shown effective investment diversification can actually result in lower overall volatility, even when some of the investments in the portfolio might be deemed "aggressive."
Most wealthy investors also know that the key to successful diversification is to structure a portfolio so that the individual parts are not highly "correlated" with each other. Correlation is generally defined as the measure of the relationship between two variables. For example, you might say that there is a high degree of correlation between rain and the presence of clouds. In an investment context, correlation seeks to determine the extent to which investments move up and down in relation to each other.
As you might suspect, there are different kinds of correlation. You can have positive correlation, where two investments generally tend to move up and down at the same time. You can also have negative correlation where one asset tends to move up when another moves down and vice versa. Most interesting to us, however, are those that have no (or low) correlation. This means that the two investments' returns appear to be independent of each other.
Assets that have little or no correlation to the overall stock markets tend to be desirable if other factors such as the level of risk and performance are acceptable to the investor. That's because the performance of the uncorrelated asset is generally independent of what happens in the stock markets. This is why, for example, hedge funds and managed futures programs have been so popular among sophisticated investors, as they generally have had little or no correlation to the overall stock and bond markets in the past.
Thus, one reason wealthy investors have been including aggressive investments in their portfolios is because many of these strategies have not been highly correlated to their other stock and bond investments in the past. Another way to say it is that these sophisticated investors deem carefully selected hedge funds and other alternative investments to be a prudent addition to their portfolios based on their risk tolerance and mix of other investments.
In the past, wealthy investors tended to invest in hedge funds and other alternative investments because, as a general rule, this was the only place they could get such sophisticated strategies. Only in recent years have investment products been developed that allowed money managers the flexibility to include leverage and long/short trading in mutual fund portfolios. Mutual fund products offered by Rydex, ProFunds and Direxion families of mutual funds have definitely leveled the playing field, allowing many more investors to have the option of leverage and long/short strategies in their portfolios.
Though the playing field is now level, I continue to believe that you should leave investment management in the hands of professionals. As a practical matter, you can go directly to these specialized funds and trade them yourself. However, that could be a recipe for disaster. Without the benefit of a tested strategy, it would be easy to get "whipsawed" by volatile markets, possibly decimating the value of your nest egg.
The $1,773,246 Stock Secret
One proven stock-picking system turned $10,000 into $1,773,246 since 1988. Beating the S&P 500's profits by 2,395%. That's no typo. Discover now how you can get free stock picks from this market-beating system every trading day. Learn more now.
Revisiting Third Day Advisors, LLC
In September of last year, I once again wrote about the Third Day Aggressive Program and suggested that it might be an investment you should consider for your portfolio. Many readers responded to that suggestion and requested more information on this program. It's not hard to see why. Below is a quick performance summary of this program as of the end of April 2007:
As you can see, Third Day had another outstanding year in 2006, once again beating the S&P 500 and Nasdaq 100 Indexes - net of all fees and expenses. But the real story on Third Day is not that it has outperformed the S&P 500 on the upside. No, the real story is that Third Day has done it with only a fraction of the losses the S&P and Nasdaq Indexes incurred during down periods in the market. Notice that Third Day's "Worst Drawdown" is only -12.2%. Now that's impressive!
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
BE SURE TO READ THE IMPORTANT NOTES AND DISCLOSURES BELOW.
Third Day’s Hedge-Like Qualities
Third Day has been successful in delivering these actual past results by employing two investment strategies often employed by hedge funds:
1. Using leverage to amplify gains or losses; and
2. Trading both "long" and "short" positions.
Let me explain each of these strategies briefly below.
Leverage simply refers to the ability to multiply gains (or losses) on an investment position. In a typical investment, each dollar invested receives a gain or loss allocation based only on the total amount invested. In a leveraged account, however, the same dollar amount invested would receive a gain or loss allocation as if it were a larger amount. For example, in an account that is 50% leveraged, an investment of $10,000 would be traded as if it were $15,000, and be allocated gains and losses accordingly.
Long/Short trading, in a nutshell, is the ability to either invest with or against the market. When a position is "long," it generally has a positive correlation to the market, so when the market goes up, the investment should also go up. When an investment "shorts" the market, its movement is the inverse of the market's direction, so if the market goes down, a short position should go up in value. This ability to short the market is what Don considered to be his "reverse gear."
The combination of these two strategies provides an investment program with the potential to not only have more "bang for the buck" through the use of leverage, but also the potential to produce gains when the market is actually falling. The key to success, however, is positioning trades on the right side of the market's direction. Ken Whitley, owner and founder of Third Day Advisors, has developed a systematic approach to trading the volatile equity market using specialized mutual funds that can be long, short or neutral (cash).
Third Day's Aggressive Strategy is a proprietary blend of momentum, trend-following and overbought/oversold indicators. There are nine basic indicators that Ken uses to analyze the market, with a number of sub-indicators that also factor into each trading decision. Each indicator "votes" each day on whether to be long, short, or neutral in the market. The relative strength of each indicator then determines to what extent the Third Day program will be invested in the market. The model is 100% "mechanical" (ie - systematic) though Ken does reserve the right to override his system's signals in the case of something on the order of a national emergency.
Third Day uses the Rydex family of mutual funds because they have specialized funds that produce a result equal to double the daily gain or loss of the Nasdaq 100 Index, without having to borrow money on margin. How Rydex can provide this level of performance is perhaps a subject for a future E-Letter, but the net effect is the ability to provide hedge-like strategies to investors other than just the wealthy. Click on the following link to get more detailed information on the Third Day Aggressive Program.
One area where Third Day departs from its hedge fund counterparts is in the area of fees. It is not uncommon in hedge funds to pay a flat 2% or 3% annual management fee PLUS an incentive fee that may be 20% or more of profits.
Third Day, on the other hand, charges an annual fee equal to a constant percentage of assets starting at 2.5%, billed quarterly in advance. Also, unlike many managed account programs, when fee breakpoints are reached at the $100,000 and $1 million investment levels, the entire account receives the lower fee, not just that part that exceeds the breakpoint. And don't forget that all of the performance information I have provided about Third Day's Aggressive Program is net of all fees and expenses.
As the name suggests, Third Day's strategy is aggressive, and therefore it is not suitable for all investors. Yet, Third Day may be a good consideration for the aggressive portion of a well-diversified portfolio. Sophisticated investors know that, in the hands of a seasoned professional money manager, a leveraged long/short strategy has the potential to produce favorable results, even though it involves considerable risk. There are no guarantees, of course.
For those of you who may be more aggressive in your investment approach, Third Day also has another strategy called the Ultra Aggressive Program. As a general rule, I consider this to be suitable only for the most aggressive of investors. If you fall into that category, you can learn more about this program by going to our online Advisor Profile, or by calling one of our Investment Consultants at 800-348-3601.
A Non-Correlated Alternative
I have mentioned Third Day's Aggressive Program a number of times in the last two years, and my readers have responded accordingly. However, I know that human nature is such that many of those who requested information did so simply because of Third Day's impressive annual returns and its ability to take both long and short positions.
Rather than focusing only on the annual returns, I think it is important to also consider Third Day's historical drawdown and correlation to the overall stock markets. Fortunately, Third Day's track record in regard to these two statistics has also been impressive.
As I have noted in my past discussions about Third Day's Aggressive Program, its worst-ever month-end drawdown is -12.2%. This represents the worst losing streak this program has endured since its inception in November of 2001. This compares very favorably to the S&P 500 Index's drawdown in excess of -28% and the Nasdaq 100 Index's worst loss of over -47% over the same period of time.
In addition, Third Day's Aggressive Program has actually made money in each of the past five calendar years, which is no small feat when you consider that its track record includes calendar year 2002 when the S&P 500 Index fell over -22% and the Nasdaq 100 Index fell over -37%. Past performance is not necessarily indicative of future results.
Beyond that, a statistical analysis of the Third Day Aggressive Program shows that it has had a zero historical correlation (R-Squared) to both the S&P 500 and Nasdaq 100 Indexes. This means that its returns have tended to be independent of the movements of the overall stock markets in the past.
Third Day Now More Accessible
When I have written about Third Day in the past, it has always been in conjunction with a minimum investment of $50,000. However, as diversified investors have considered this program for a part of their overall portfolio, it has come to my attention that the $50,000 minimum may be too high an allocation for some portfolios.
After all, if you are a moderate investor, you probably want only a relatively small part of your overall portfolio in an aggressive program like Third Day. That being the case, you'd have to have a large portfolio for the $50,000 minimum to be only a small allocation. Thus, the bar was set pretty high for those who wanted to consider this program.
As a result of investor input, I have negotiated with Third Day and Purcell Advisory Services to drop the minimum investment to $25,000. This will make the program more accessible to those of you who want to include a small aggressive allocation in your overall portfolio. This reduction in the minimum is effective immediately.
In addition to the reduction in the minimum investment, I have also successfully negotiated for a lower fee for accounts in excess of $100,000. In the past, the investment management fee for Third Day was 2.5% up to $500,000, and then 2.25% up to $1 million. The fee has now been changed to 2.5% up to $100,000, then 2.25% up to $1 million. Best of all, the reduced fee applies to the entire account at the breakpoint, and not just the amount in excess of $100,000.
If you have already invested over $100,000 in Third Day's Aggressive or Ultra Aggressive programs, you'll be getting a fee cut effective as of July 1, 2007 and thereafter.
A Word About Recent Performance
I would be remiss if I did not mention the fact that Third Day's Aggressive program has not matched its historical performance so far in 2007. As you will note in the above performance information, as of April 30, 2007, the year-to-date loss for the Third Day Aggressive program was -2.54%, while the S&P 500 Index showed a gain of 5.10%.
Most investment managers would rather not talk about losing periods, so they try to avoid mentioning them. In fact, I recently received an e-mail solicitation in which the last three months of performance were simply omitted. I happened to be familiar with one of the money managers being promoted, so I knew these months had negative performance. The Advisor sponsoring the solicitation appears to have chosen to ignore these losing periods. We don't do that.
I take a different view of negative performance. In all of my discussions about money managers, I stress that there is no guarantee as to future performance, and that many of the actively managed investment programs my firm recommends are capable of volatile positive and negative monthly returns. Third Day's performance so far in 2007 illustrates this point.
I think it is important that you see exactly what kind of investment you're getting into, rather than allowing you to invest based on sketchy performance information only to later on experience volatility first-hand. That's why I have always presented our monthly performance numbers in the investor packets we mail out rather than hide monthly volatility in multi-year averages.
However, as you consider the Third Day Aggressive program for your own portfolio, keep the following important points in mind in relation to its recent performance:
1. The recent lull in performance is not unprecedented in Third Day's track record. As you will note in the above performance summary, its worst-ever drawdown was -12.2% in 2002. The daily drawdown during 2007 reached only -4.66, far less than its worst-ever mark. Thus, our ongoing daily monitoring shows that the Third Day Aggressive program is operating well within its expected historical range.
2. Our daily monitoring has also seen Third Day Aggressive's performance bounce back so far in May. As of the close of business on Friday, May 18, the Aggressive program had a month-to-date gain of 3.00%, bringing its performance to slightly positive for the year. This illustrates Third Day's potential for upward volatility that can erase previous drawdowns. Of course, past performance is no guarantee of future results, and there's also no guarantee that the month-end performance will be as favorable as this mid-month snapshot. Also see other important performance disclosures following my signature below.
3. Finally, and most impressive in my opinion, Ken Whitley has put more of his own money into his program, effectively "buying on the dip." Ken explains that he has always contributed more money to the program whenever it experiences a drawdown. Obviously, this has been a smart move on his part. Of course, there's no guarantee Ken's strategy will turn around and produce reasonable gains, but I think it is significant that Ken believes enough in his system to put his money where his mouth is, so to speak.
|Discount to Fair Value: ||27% |
|5-Year Annual EPS Growth: ||+25% |
|% Below 52-Week Highs: ||-25% |
If you're looking for a great bargain on one of the world's fastest-growing companies, then you need to learn more about our "Undervalued Stock of the Month" for May 2007. Due to short-term market volatility, the shares have pulled back -25% from their 52-week highs. As a result, bargin hunters now have a rare opportunity to pick up one of the world's most dominant companies at a 27% discount below our estimated fair value
. Tell me the name of this stock!
As the hedge fund industry continues to attract wealthy investors across the world, I hope that I have been able to shed some light on why many of these individuals seek out these riskier investments. The key point that you should take away from this E-Letter is that the rich do not necessarily have different investment needs than you do; they have just been able to access a class of investments not readily available to the general public. Fortunately, such strategies are becoming more accessible to investors other than the super-rich.
Professional money managers like Ken Whitley at Third Day Advisors have brought specialized strategies such as leverage and long/short trading to a far wider audience than was ever possible under the restrictive hedge fund rules. While it is vitally important that such aggressive strategies be blended with other assets inside a portfolio as a part of a diversification strategy, you now have the ability to consider these sophisticated strategies that were once available only to the wealthy.
Third Day's strategy is now available to you at a lower minimum investment than ever before - only $25,000. And, investors with larger accounts will now enjoy a lower management fee. At the same time, I have to caution that Third Day strategies are not suitable for all investors; like hedge funds, they are aggressive investment programs. As always, past performance is not necessarily indicative of future results.
If you would like to learn more about Third Day's aggressive investment strategies and how they may fit within your portfolio, please feel free to give one of our Investment Consultants a call at 800-348-3601. You can also get more information by completing our online request form, or download the Third Day Advisor Profile.
Very best regards,
Gary D. Halbert
Gary Halbert is the president and CEO of ProFutures, Inc. which produces this E-Letter. Mr. Halbert is also president and CEO of Halbert Wealth Management, Inc., an affiliate of ProFutures, Inc. Both firms are located in Austin, Texas. Halbert Wealth Management is a Registered Investment Advisor that offers professional investment management services to a nationwide base of clients, and specializes in risk-managed investments and its recommended programs include mutual funds, managed accounts with professional Investment Advisors and alternative investments. For more information about the programs offered, call 800-348-3601.
The End of Free Trade
The religious vote, for the first time in decades, is up for grabs.
IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM), Third Day Advisors, LLC, and Purcell Advisory Services, LLC (PAS) are Investment Advisors registered with the SEC and/or their respective states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. There is no foolproof way of selecting an Investment Advisor. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from PAS in exchange for introducing client accounts to the Advisors. For more information on HWM or PAS, please consult Form ADV Part II, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.
As benchmarks for comparison, the Standard & Poor's 500 Stock Index (which includes dividends) and the NASDAQ 100 Index represent an unmanaged, passive buy-and-hold approach. The volatility and investment characteristics of these benchmarks cited may differ materially (more or less) from that of the Advisor. The performance of the S & P 500 Stock Index and the NASDAQ 100 is not meant to imply that investors should consider an investment in the Third Day Aggressive Strategy trading program as comparable to an investment in the "blue chip" stocks that comprise the S & P 500 Stock Index or the stocks that comprise the NASDAQ 100. Historical performance data represents actual accounts in a program named Third Day Aggressive Plan, custodied at Rydex Series Trust, and verified by Theta Investment Research, LLC through December 2004. Performance from January 2005 forward is from an actual account in Purcell Advisory Services Third Day Aggressive Program. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in the Third Day Aggressive Program. Purcell Advisory Services utilizes research signals purchased from Third Day Advisors, an unaffiliated investment advisor. The signals are generated by the use of a proprietary model developed by Third Day Advisors. Statistics for "Worst Drawdown" are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Mutual funds carry their own expenses which are outlined in the fund's prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.
When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results. The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; and v) the rate of brokerage commissions and transaction fees charged to an account. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to the Third Day Aggressive Strategy trading program.
In addition, you should be aware that (i) the Third Day Aggressive Strategy trading program is speculative and involves a high degree of risk; (ii) the Third Day Aggressive trading program's performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) Third Day will have trading authority over an investor's account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Third Day Aggressive Strategy trading program's expenses will reduce an investor's trading profits, or increase any trading losses.
Returns illustrated are net of the maximum management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. No adjustment has been made for income tax liability. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.
Copyright © 2007 ProFutures Capital Management, Inc. All Rights Reserved.
"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."
Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.
05-22-2007 4:46 AM
Gary D. Halbert