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The Investor's Survival Kit
Peter Lynch, ubiquitous pitchman for Fidelity Investment’s family of funds, and the highly respected former manager of Fidelity's flagship Magellan Fund, made it known not long ago that, during his watch, upwards of 50% of investors in the Magellan Fund actually lost money. How, we wonder, could this be possible, given the fact that, under Lynch's tutelage, Magellan evolved into one of the world’s most successful funds. The answer can be found in the writings of Jack Schwager, author of the Wall Street classic "Market Wizards." Schwager, in alluding to managed investing, concluded "We've met the enemy and it is us." His quote, in fact, could double as a fitting universal motto for investors. Schwager wrote: "In our experience, investors are truly their own worst enemies. The natural instincts of many lead them to do precisely the wrong thing at the wrong time--with uncanny persistence! Managed futures investors are no different. At the heart of many a typical investor’s blunder is his or her tendency to commit to an investment right after it has done very well and to liquidate an investment right after it has done poorly. The problem is that many investors first wait for the CTA in whom they’ve expressed interest to prove himself before jumping on the bandwagon. Compounding this error, they then abandon ship during the first rough period, even if the account hasn’t yet reached the originally intended bail out point." Over twenty years of observing investors has led us to believe the wisdom in the words of both Peter Lynch and Jack Schwager. The Investor’s Survival Kit should help you survive the inevitable drawdown periods that all investors invariably experience and help you to avoid becoming your own worst enemy! By reading the attached two articles, "Secrets To Successful Investing" and "We Have Met The Enemy," and then reciting the "Investor’s Oath" (see below), you will be able to employ logic and reason in helping triumph over your emotions. In the process, you can potentially enhance your chances of becoming a more successful investor!
The Investor’s Oath Risk and volatility is the price I must pay for riches and opportunity. I don't want to lose my investment, but the capital I've invested is risk capital I don't need to live on, and my lifestyle wouldn’t be affected if I did lose.
I will have realistic expectations. Even the best of traders are only human, and can look their worst when losing. I don't expect to have only winning trades, and realize that losing trades are just as integral a part of my CTA's performance as are the winners.
The drawdown my CTA is experiencing is in line with all other drawdowns he has experienced, during which time he recovered to make new highs in equity. I know that past performance is not necessarily indicative of future results. The risk of loss exists in futures trading.
I realize that an investor's emotions can be his own greatest enemy during drawdown periods. I will not allow myself to be victimized by my emotions like so many other investors. I refuse to be part of the herd!
I will think with my head and not my heart! I will stick to my original investment game plan that I agreed to when I opened my account. I will have patience, think long term, and stay tough! I'm not a fair weather investor. I will stay with my CTA through thick and thin, as long as my account doesn't fall 50% below my initial investment!
Past performance is not necessarily indicative of future results.
The risk of loss exists in futures trading.
Secrets To
Successful Investing
"The advisor has such a great record, but since I opened an account one year ago, I am down 20%. This advisor is never going to make money; I'm closing my account."
Sound familiar? Is it wise to judge a Commodity Trading Advisor (CTA) on the basis of only a few months or even one year of flat performance if the CTA with whom you have an account has demonstrated prior above-average returns for three years or more? We strongly believe the answer should be a resounding no! Over the years, we have reviewed the performance records of a multitude of CTAs. After observing many millions of dollars made and lost, we have come to this conclusion: We believe that many people who are unsuccessful in futures could improve their results by changing not only the way they make investment decisions but also their time-frame perspective in futures investments. Being a successful futures investor isn't easy. It sometimes seems an uphill fight, battling your emotions just to be able to cope with drawdowns and those non-productive periods in the life of your account. Unfortunately, drawdowns are an inescapable part of futures trading. For the unsophisticated, uninformed, or overly sensitive investor, drawdowns can be the "gremlin" that inflicts such emotional distress that one's patience is worn to the breaking point. The result: The investor "throws in the towel," often suffering losses which might have been reversed and possibly turned into profits with just a bit more patience. Needless to say, a number of stock and futures investors who experienced large drawdowns and "threw in the towel," only to suffer losses, probably missed the boat. This point is exemplified by a comment made by Peter Lynch, the highly-respected former manager of Fidelity's Magellan Fund. Under Mr. Lynch, the Magellan Fund grew to be one of the most successful funds ever. However, Mr. Lynch related that he believed as much as 50% of the fund's investors lost money. How could this be possible? The answer is offered in a comment made by the manager of the Z Seven Fund: "I have noticed with my own portfolio management business that most clients are eager to start at a market top based upon recent excellent performance and many are quickly shaken out at the next bottom, feeling disillusioned and even hopeless. Few investors will hold patiently through market cycles. Even fewer will add to their investment when it is a bargain. The battle won by the successful investor is a battle with the one who is potentially his worst enemy: Himself! To win this struggle against greed, fear, complacency, disillusionment, anger, and ego, one must be insulated from outside influences (the media, friends, family, etc.) and stick steadfastly to a sensible, predetermined game plan. In a word: DISCIPLINE."
Past performance is not necessarily indicative of future results.
The risk of loss exists in futures trading.It may be human nature to want immediate gratification and profits without experiencing drawdowns or any losing trades; but in the long run, this is fantasy, not the real world of commodity or stock investing. The best traders, in both futures and stocks, exhibit periods of flat to poor performance. Realistically, losses as well as profits are an integral part of all track records! Overcoming Your Emotions
The biggest problem, as we see it, is overcoming one's emotions--frustration and lack of patience--even with top performing CTAs during their inevitable drawdowns and flat performance periods. It's not easy to go against human nature. It's a natural reaction to be frustrated and impatient with losses or flat performance. But that’s why, as can be inferred by Peter Lynch’s previously described experience with the Magellan Fund, many investors wind up losing, even with top performing investments. When investing with a CTA, we believe one can overcome the anxiety associated with drawdowns and stagnant performance periods, and improve his or her chances of being successful, by thinking with the head and not the heart. Unfortunately, from what we have observed, many investors make their investment decisions for all the wrong reasons: emotional gut feelings, hopes, wishes, dreams, and the opinions of others to name a few. We believe being swayed by these factors just perpetuates investors' bad luck and makes losses a self-fulfilling prophecy. Instead, we recommend a realistic understanding of the inevitability of drawdowns and flat performance periods coupled with an INVESTMENT GAME PLAN based on what we term Justifiable Confidence. Selecting a CTA
In our opinion, the most important (and logical) criteria for selecting a CTA should relate to the actual track record of performance of the CTA, not the "emotional feelings" for a CTA exhibited by the investor, his friends, or relatives. We feel an investor should place his trust in a CTA that has a record of superior performance. Selecting a CTA can be compared to choosing an employee. An employer probably wouldn't rely so much on what the prospective employee tells him but what his resume or track record documents. When scrutinizing a CTA's performance record, look for the following key ingredients: 1. A minimum of one million dollars under management.
2. Drawdowns held under 50% over the entire performance record. This means a $100,000 investment dropping no further than $50,000.
3. Recovery from all drawdowns with respective new highs achieved in equity within a 18-month period.
4. An average return of at least 20% per year after all fees and commissions based on a cumulative three-year period.
Past performance is not necessarily indicative of future results.
The risk of loss exists in futures trading.Justifiable Confidence
Wouldn't an investor feel more comfortable during a losing period if he or she knew that over any 18-month period a CTA never suffered losses so large that the CTA didn't subsequently recover and make new highs in equity while averaging at least 20% per year for at least a three-year period? Moreover, wouldn't the investor feel even more comfortable if he knew the drawdowns he was currently experiencing were in line with the historical drawdowns evidenced in the performance record which was subsequently erased by profitable returns? Investors should be aware that there is a possibility that the CTA will not always recover from a drawdown. This is the foundation and reason for having what we call "Justifiable Confidence." Justifiable Confidence in a CTA should provide the inner fortitude to weather the inevitable drawdown periods that all CTAs experience. We believe if you don’t have "Justifiable Confidence" in a CTA, you shouldn’t invest with that money manager! The Investment Game Plan
We believe the Investment Game Plan should consist of the following: 1. Most importantly, only risk capital should be utilized. Risk capital is defined as those funds which, if you lost them, would not affect your lifestyle. Funds marked for a down payment on a house, a child’s education, or core retirement funds should not be used.
2. Envision a drawdown cutoff point of 50%. Close the managed account only if that level is reached. If an investor isn't prepared to adhere to this guideline, we believe he is not suitable for a managed account. The 50% cutoff may not limit the loss to the amount intended. Certain market conditions may make it difficult or impossible to close out the account with only a 50% loss.
3. Have realistic expectations. The average performance for the Dow over approximately the past century has been around 10%. A CTA who can provide you average annual returns above 20% per year over a three-year period is outperforming the Dow's average approximately twofold! However, that CTA has an ever present risk that he or she could potentially lose all of your investment and you would be called upon to make up any deficiency.
4. Accept drawdowns and flat performance periods as inescapable parts of speculation in futures.
Past performance is not necessarily indicative of future results.
The risk of loss exists in futures trading.5. As long as predetermined cutoff points aren't reached, think positive and stay with the CTA through "thick and thin."
6. Look at the big picture, not the meaningless episodes. Evaluate performance over a three-year average (big picture) not week to week or month to month(meaningless episodes).
Now that CTA or group of CTAs has been chosen by the investor, not on emotion but rather on JUSTIFIABLE CONFIDENCE with a specific INVESTMENT GAME PLAN, he should be psychologically prepared to weather the losses that are inherent in commodity investments. The Investor Pact
We believe the proper attitude should be: "Potential risk of loss is the price I must pay for opportunity. I don't want to lose, but the capital I have invested is risk capital that I don't need to live on and wouldn't in any way change my style of living if I did lose. I understand that the past is not an indicator of the future. Even so, I believe that over time my investment should do well because the CTA I have chosen has an excellent performance record, and has demonstrated recovery from every drawdown to achieve new highs in equity! Being human, I realize that my CTA will have losing as well as winning trades. This is part of futures trading. I will not lose confidence or fall prey to my emotions during drawdown periods. I will stay tough and hang in there! I will have patience and, as long as my account doesn't fall below 50% of my initial investment, I will give the CTA three years to perform." In Conclusion
We don't profess to be an oracle on futures investing; but, from over 20-years of experience, we are firmly convinced the beliefs and suggestions we have presented in this report can alleviate the anxiety, second guessing, and loss of confidence associated with drawdown periods. Following the suggestions in this report will by no means assure an investor's success in a managed account but, in our opinion, will increase the probability of success! We hope we have been informative and wish you the best of luck in your investment endeavors! *Studies have shown that professional CTAs do experience returns greater than the individual investor. Nevertheless, the risk of loss exists in futures trading and past results are not necessarily indicative of future results, regardless of who is managing your money. Contents of this report were prepared by Vision.
Past performance is not necessarily indicative of future results.
The risk of loss exists in futures trading.
Commodity Futures Options Trading
The risk of loss exists in futures and options trading.
Past performance is not necessarily indicative of future results.
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