WEIMERandWIRTH Performance History
and
WEIMERandWIRTH System Description
The table and chart below show the Annual and Total Returns of WEIMERandWIRTH, the S&P 500, the NASDAQ 100 (QQQQ), the Russell Micro Cap Index and the Vanguard Small Cap Index. The Description of the WEIMERandWIRTH system is shown below the chart. So far, the performance of WEIMERandWIRTH has been absolutely amazing!
WEIMERandWIRTH posted returns and selections online after June 30, 2001. The returns shown above are the returns of complete years, and they will be updated at the end of each year. If you would like a more complete performance history, then write to Henry.Wirth@yahoo.com
WEIMERandWIRTH System Description
Table of Contents
1. Introduction
2. What do you get when you subscribe?
3. Taxes
4. Getting Started
5. Risk
6. Transaction Costs
7. How to Beat the Market
8. Encouragement
1. Introduction
Doug Weimer and Henry Wirth posted a model portfolio on the American Association of Individual Investors (AAII) Rochester, New York website on June 30, 2001. After about one year it was moved to HenryWirth.com.
The explicit intention of www.aaiirochester.com was to determine the best way to invest i.e., how can the best risk-adjusted and tax-adjusted return be achieved? We believe we have found "The Best Way to Invest", and that is the raison d'être of this website. If you know of a better way to invest, then please bring it to our attention.
Initially the portfolio on www.aaiirochester.com started as an academic exercise. After about one year we transferred the model portfolio to HenryWirth.com and began e-mailing our stock selections on request. We did this primarily because it gave us pleasure to ask the countless amateur and professional investors who claimed to be out-performing an index to do as we do i.e., show the world what you are doing. Unfortunately, we discovered it took a considerable amount of time and money to maintain our e-mailing service and website. In June 2005, we began to ask our subscribers for money to help defray the cost of software, web hosting, bookkeeping and other expenses.
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2. What do you get when you subscribe?
If you are one of our subscribers, Doug Weimer will e-mail approximately sixty stocks that have passed our proprietary filters to you every quarter. Doug will send you a brief note once a week. It will be e-mailed on Wednesday or Thursday evening and it will generally contain some comments that pertain to Growth and Momentum investing. It will also contain our latest stock picks. During some weeks there may be no new picks, but you will still receive a note from Doug stating that there are no new picks this week. The average number of picks you can expect to receive each week is five, however, during the Earnings Season you may receive as many as 25 new picks per week, but no more than 60 per quarter.
Our proprietary filters are continuously being improved to enable them to work as well in the future as they have in the past. The cost of research for filter creation and improvement is approximately $300,000 per year. The dollar amount was determined by adding the time my colleagues and I spend on investing research, and multiplying it by the billing rates that clients are normally charged for our services. As one of our subscribers, you are a beneficiary of this research. One of our subscribers expressed concern that all the work we have accomplished will be lost when we are no longer able to work. Let me assure you that there is at least one considerably younger colleague as capable as Doug or I, willing and able to step into our shoes when that time arrives.
If you are one of our subscribers, you will receive an e-mailed report every Friday evening or Saturday morning that monitors the stocks that Doug e-mails. A model portfolio showing all our picks has been created in this report. The oldest stocks in the model portfolio are sold as new picks are acquired. The value of the new position is determined by dividing the model portfolio's net worth by sixty. If sixty stocks are too much for you, then you could purchase every second or third stock Doug recommends. However, the chance of out or under-performing the model portfolio increases as fewer stocks are purchased. If you want to duplicate the performance of the model portfolio, then you should probably hold at least thirty stocks.
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I love to pay income taxes. Unlike most other taxes, you only have to pay income taxes when you have an income. However, there is no doubt that it would be more tax efficient to invest in a tax-deferred account. About half my Growth and Momentum portfolio is in a taxable account so that means I have to pay income taxes, but only when I have an income. The other half is not, but if I were to withdraw the money from my IRA, then I would have to pay income taxes at normal income tax rates. That means the only taxes I avoided were the income taxes I did not have to pay when I contributed to the IRA and the income taxes I avoided paying while my money was growing. Not bad, but if I really had a choice I would
have initially put it into a Roth IRA. However, I didn’t have a choice
when I started, so I don’t really worry about it too much.
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Is it best to dive in or is it best to dollar cost average in? Good question.
More than one hundred years ago J.P. Morgan was asked, “When is a good time to buy stock?”
J.P. Morgan reputedly replied, “When you have some money.” But I suspect that what I am
really being asked is if I know where the market is going in the immediate future.
Strangely enough (or perhaps not) J.P. Morgan was frequently asked that very same thing.
His reputed response was always, "The market will fluctuate".
So, if you think the market is going to head straight up, then you
would be well advised to dive in. However, if you believe that there
is going to be some fluctuation in the immediate future, then it
would probably be a good idea to dollar cost average. If you start
buying when you receive new picks, and if you use one sixtieth of
your portfolio to buy each stock, then you should be fully invested
in one quarter. For whatever it's worth, I take money out whenever
my Growth and Momentum allocation exceeds its pre-determined level,
and I put money in when it falls below its pre-determined level.
I will tell you how I started. I dollar cost averaged, starting with $10,000. Over the next two years, I added another $140,000. I would now have a lot more money if I had NOT dollar cost averaged, but I would probably not have slept as well. And that is one of the reasons this stuff works. In my opinion, very few investors are going to have the intestinal fortitude AND discipline to stick with it. As we all probably know by now, it is fairly easy to buy into a rising market, especially if you had a bit of positive reinforcement. Sometimes you get lucky and the market cooperates by rising some more. The most difficult time to buy is after you have had some very painful losses, but that is also usually the best time to buy. Easy to say; impossible for most to do.
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During the bear market of 2008, the WEIMERandWIRTH model
portfolio lost 41.4% or about as much as all the other indices shown
in the table and chart at the top of this page. Stock market
investing is risky business. NEVER bet more than you can afford to
lose. During the entire period shown in the table and chart above,
WW gained considerably MORE than any of the major indices shown
above.
Those are the facts. So, why isn't everyone doing this? Why isn't everyone getting rich? I really wish I knew the answer to those questions. To be sure, five or ten years is not a long enough time to assess risk. I am fond of saying that one will never know how risky something is until it is much too late to do anything about it. Perhaps I should also address the issue of sustainability i.e., how much longer will we be able to out-perform the market, and will we be able to continue out-performing by the incredible margins to date? Unfortunately, we will not be able to answer either of those questions without the benefit of hindsight, but I will attempt to give you some things to think about.
The Hulbert Financial Digest began monitoring the performance of financial newsletters in 1980. Hulbert’s primary message is that “It is EXTREMELY difficult to beat the market over time, but it can be done.” Hulbert's data show that about 20% of the newsletters he monitors consistently beat the market, and about 20% of the newsletters he has been monitoring have beaten the market. I believe that WEIMERandWIRTH.com will be among the 20% that will beat the market over time; if I did not believe that we could beat the market, then I would not be a participant in this endeavor.
What does it take to beat the market? First, you have to identify some market inefficiencies that existed in the past. That is, you have to develop a strategy that would have out-performed the market based on historical data. That’s the easy part. Then you have to hope that the market inefficiencies you identified (a) won’t be identified by too many others, and (b) will continue to exist in the future. It helps if you’re lucky. In terms of risk adjusted performance, the best newsletter monitored by Hulbert over the 25 years beginning in 1980 had an annualized return of 14.9%. In terms of absolute performance, the best newsletter had a return of 19.0%, but that newsletter also had more than twice the volatility of the US market. The total US stock market had an annualized return of 12.8% over the same period. Doug and I hope to do a lot better than that but, as I said, that question won’t be answered without the benefit of hindsight.
Five or ten years may not be enough time to assess risk properly, but it is enough time to learn one or two things about this style of investing. Buying and selling sixty or so stocks each quarter is not something to which we humans have been conditioned. Most folks are going to reject it for a variety of reasons, but the primary reason for rejection is going to be emotional and intuitive. One of the most important investing lessons I have learned is that if you allow intuition to effect any investing decisions, then you are going to pay a high price. Fear and greed are two extremely powerful emotions that are always lurking in the background, and they frequently erupt. If you play this game, then you are going to experience these emotions on a much larger scale.
What would happen if everyone suddenly started doing this? Right now, WEIMERandWIRTH.com is a tiny organization. If I were to add the dollars Doug and I receive from our subscribers, and divide that by the hours we spend on client and website related work, then I can tell you we are working for considerably less than the minimum wage. So, why are we doing it? Mainly because we are (mostly) enjoying ourselves. So, what happens if we become a household word and Hulbert starts monitoring our performance? I believe we have a long, long way to go before that happens, especially since we have no plans to precipitate attention.
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I should also probably say a few words about transaction costs.
Before 2005, a 1% to buy and 1% to sell transaction cost was included in all returns posted on
our websites. Beginning in 2005, the purchase and sale prices on our
websites were based on the AVERAGE Hi-Lo price of the transaction day, however, the 1% transaction cost
was no longer included.
The primary reason for that change was that transaction costs vary considerably from person to person. If you are a newbie, you may find that your transaction costs are considerably higher than 1%. When I began playing this game my costs were about 1-1/2% to buy and 1-1/2% to sell. After one year, I found my transaction costs were a bit under 1%, and now they are about 0.25%.
I have never been completely satisfied with our decision to eliminate transaction costs from the WW model portfolio because it is NOT easy to buy or sell at the day's average HI-LO price, so transaction costs will again be included after June 2010.
Here is how The Hulbert Financial Digest currently calculates returns:
If the recommendation is made electronically, it is executed at the average of the security’s high and low prices in the day’s session following receipt of the recommendation.
The HFD adjusts that price upwards (when buying) or downwards (when selling) according to an estimate of that security’s bid-asked spread on that day.
I will NOT check the spread on each of the recommended picks because that would require more time and effort than I am willing to contribute. However, I have determined an average spread, and will use that average spread to determine a WW transaction cost. My preliminary conclusion is that a spread of 0.50% is reasonably consistent with what Hulbert would be charging at this point. That rate may change as more data are collected.
The HFD also debits a commission on all transactions, the rate of which is based on average commissions at the nation’s largest discount brokers on average-sized transactions. The rate changes periodically to reflect current conditions. For stocks, the rate is currently 0.1%
Hulbert includes dividends in his audits, but I do not. In order to compensate for the dividends that are not included in my audit, I will NOT debit the additional 0.1% commission that Hulbert currently uses. That too may change as more data are collected.
The bottom line is that I will be using a 0.50% Transaction Cost until my data suggest otherwise.
Please note that if Doug recommends a stock that is currently held in the WW model portfolio, then the portfolio will be rebalanced by selling the stock, and re-purchasing it. Transaction costs will NOT be included when a held stock is sold, and immediately re-purchased.
I currently buy in $10k to $14k lots and I keep accurate records of my transaction costs. My transaction costs, including dividends, average approximately 0.25%. However, I will also emphasize that transaction costs are heavily dependent on many known and unknown variables.
Some folks believe that the commission you're going to pay is the transaction cost. That is partially true, but there are far more important transaction costs to factor into the equation.
There is ONE minor factor and there are TWO major factors used to determine your transaction cost:
The MINOR factor is the discount broker’s commission.
The first MAJOR factor is the size of the transaction.
The second MAJOR factor is your variance from the average Hi-Lo price of the day.
In plain English, the cost of the transaction is the difference between the actual price and the average price.
In mathematical terms, the transaction cost is a function of the true price per share and the average price per share.
Formula for the transaction cost in proportional terms when buying:
Transaction cost = (True cost per share - Average price per share) / Average price per share
Multiply the answer by 100 to convert to it to a percentage
Note that if the "True cost per share" is equal to the "Average price per share", then your transaction cost will be zero (zero divided by a non-zero value is equal to zero). If the "True cost per share" is less than the "Average price per share", then your transaction cost will be negative. Negative transaction costs are highly desirable.
If the "True cost per share" is greater than the "Average price per share", then your transaction cost will be positive. Positive transaction costs are NOT desirable.
Formula for the transaction cost in proportional terms when selling:
Transaction cost = (Avg price per share - True price per share) / Avg price per share
Multiply the answer by 100 to convert to it to a percentage Unfortunately, buying or selling at the average Hi-Lo price of the day is not as easy as it sounds. Many of the stocks that are recommended are volatile, meaning their prices may vary considerably during any day.
If you are buying, and if you are able to buy at the low side of the daily price range, then your transaction costs will probably be negative. If you buy close to the average daily price, then your transaction cost will be low, possibly even negative.
If you buy at the high side of the daily price range, then your transaction costs are likely to be high. The converse is true if you are selling.
As noted above, transaction costs vary quite a bit because they are dependent on the skill of the trader and the size of the transaction. There are a few simple rules to follow in order to limit transaction costs. Use a discount broker and NEVER place a market order. I usually check prices at around noon and if I’m buying, I will submit an offer a little lower than the average Hi-Lo price of the day; if I’m selling, then I will submit an offer a little higher. I then wait until 3:30 to determine if the offer executed. If it did not execute, then I will buy or sell using a limit order at the market price. This usually works reasonably well, meaning that most of the time my transaction costs are at or below zero, but frequently they are not. There are innumerable variations to this theme, but their development is probably best left to the individual trader. You are either going to get very good at this game or you are probably going to quit.
Caveat Emptor: If you are a stock trader, you should be aware of your transaction costs and factor them into returns posted on WEIMERandWIRTH.com
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Everyone probably knows, there are three important factors, that determine the value of real estate:
LOCATION, LOCATION, and more LOCATION
Are there equivalent stock market factors?
Mark Hulbert's September 2005, AAII Journal article, reiterates the fact that it is EXTREMELY difficult to beat the market. Hulbert then examines what has worked, and what has not worked, for newsletters over the last twenty-five years.
Hulbert's conclusion was that almost any investing strategy will beat the market. Think about that for a moment. If almost any investment strategy will beat the market, then why is it that only ONE out of FIVE investors beat the market? That's right, ONE out of FIVE are gonna beat the market. FOUR out of FIVE are gonna fail, and some are gonna fail miserably. That's true of the professionals that edit newsletters, it is true of the professionals that manage mutual funds, and it is true of individual investors.
According to Hulbert, the three magic factors required to beat the market are:
DISCIPLINE, DISCIPLINE, and more DISCIPLINE
If you have discipline, then you can make value investing, growth investing, momentum investing, or any of the other innumerable investing strategies work. If you don't have investing discipline, then no investing strategy will work.
You also need patience. You need patience to learn about the strategy you are going to implement, and you need patience to get you through the periods during which your strategy is not going to work. Remember, when it comes to the stock market, most strategies work some of the time, but no single strategy works all the time.
Is the Growth and Momentum strategy, Doug and I have developed, going to work for you?
That depends on your patience and discipline.
I will confess that buying and selling sixty stocks every quarter is not my idea of a good time. That's four hundred eighty transactions every year.
I would much rather be a value investor like Benjamin Graham. In 1948 Graham put $720,000, which was 25% of his portfolio, into GEICO. By 1975 the value received from that investment had passed half a billion dollars! That's an annualized return of more than 27%.
That's what I wannabe: A twenty-seven percent per year, buy and hold, value investor.
At the end of his life, Ben offered this: One lucky break may count for more than a lifetime of effort.
Buying and selling sixty stocks each quarter is not something to which we humans have been conditioned. Even so, it is a relatively easy thing to do when the day-to-day, or week-to-week, net worth of your portfolio is increasing. Almost everyone wants to shovel money into the market when there is exuberance, especially if it's the irrational kind. I have learned that is generally a good time to take some profits.
The real question is: Are you going to have the intestinal fortitude to continue buying after your portfolio's net worth has fallen, month after month, or even worse, year after year?
Those are the periods during which I wish I had never heard of Growth and Momentum investing. There were some periods during the last ten years during which I wished I had never heard of the stock market. But those are the absolute best times to buy, because NOBODY else wants to buy either, so things are cheap.
You need three things to beat the market:
DISCIPLINE, PATIENCE, and… MONEY
You can't do it without money. Always keep some powder dry!
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If you have been playing this game for a while, and if you are thinking of quitting, then perhaps I can offer some encouragement. I began investing in Growth and Momentum stocks in June 2001. Initially things went reasonably well, especially in comparison to the NASDAQ Composite and the Wilshire 5000, but I began to suspect it wasn’t really worth the effort. That was a normal response because most of the time Growth and Momentum’s out-performance is not that dramatic. Indeed, during my first two years I experienced two quarters of under-performance.
The fact that most of the time the out-performance is NOT that dramatic is one of the reasons this works so well i.e., if the out-performance were ALWAYS dramatic, then I can guarantee you that EVERYONE would be following us, and a rapid reversion to the mean would probably occur. However, when you focus your attention on the TOTAL compounded return, rather than quarter to quarter return, a vastly different picture emerges.
Look at the Table and the Chart at the top of this Page.
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