Judgement required to step aside

Even with a great market-timing system, you must know when to step aside. Like now. The market is a smoking value for the long term, but short term is tough. We are testing and breaking new lows every week.

I will be standing by until I see some support somewhere. I'd like to see an important support level tested, and bounced, and maybe successfully tested again.

Also, everyone is liquidating and deleveraging, which doesn't help.

The bottom has got to be very, very close. Keep your powder dry and wait, I say. Catching the bottom is very difficult. I'll wait until I see one already formed.

Buying today's weakness

I felt comfortable with this week's strength and bought in to today's weakness. 65% stocks/35% cash.

Market doesn't feel right

I sold the positions I had last Friday, and I didn't have it in me to buy into this week's extreme weakness.

Disconnect: A news and advertising diet

A couple years ago, I realized that one of the nicest things about taking a vacation is disconnecting from TV, advertisements, and news. I voluntarily cut back on TV. Later, I was forced to cut WAY back on TV when my kids were born.

Last year, I took this idea to the next level after reading Tim Ferriss' Four Hour Workweek. I got the idea of a total 'news diet' from him.

I later found that Henry David Thoreau wrote about the silliness of keeping up with the news in 'Walden':

Hardly a man takes a half hour's nap after dinner, but when he wakes he holds up his head and asks, "What's the news?" as if the rest of mankind had stood his sentinels.

To a philosopher all news, as it is called, is gossip, and they who edit and read it are old women over their tea.

Here's how I disconnected:
- Cable TV was cut back to basic analog. No digital crap, no 800 channels.
- I turned off public radio, CNN, news websites, even local radio
- I unsubscribed to mind-cluttering blogs & emails
- No newspapers
- Junk mail goes straight in the trash

And here's how I reconnected:
- Netflix mails us ad-free films to watch on our schedule
- Sirius radio and Pandora.com provide ad-free music
- The library provides a feast of great books and audiobooks
- I've subscribed to blogs with infrequent posts and great ideas

Here's my results after fasting from news (and advertisements) over the last year:

- More time for life, entertainment, people, ideas, and music
- My mind is less cluttered with useless trivia and fears
- Since I'm not influenced by advertisements, I don't feel compelled to buy things
- I'm blissfully unaware of the latest fear-mongering by the news networks
- If something important happens, someone will tell me

So here's a list of things I missed:
- Election stories, commentaries, attacks, ads
- "The great Depression is back!"
- Tons of mind-cluttering trivia, ads, and fear-mongering
- Hmm, I can't think of anything else. Maybe that's a good thing...

Positive swan investments

I just finished "The Black Swan" by Taleb. What a great book! I would recommend it to anyone in the markets.

I really liked his 'barbell' investing strategy, where you place a large portion of your assets in extremely safe investments such as Tbills. Then, you set aside a small portion for investments with a huge upside - positive swan investments. (Think lottery tickets without the fixed odds)

Here are some ideas I'm thinking about:

Safe investments:
TBills
CD's
Diversified high quality bond fund
Real estate

Positive swan investments:
Call options on individual stocks
A scalable business

Any more ideas for the latter?

Looking back on 2008

- Trading accounts are up 3%
- Invested heavily in time with my kids & wife
- Implemented Tim Ferriss principles:
---- Cut out news, talk radio, TV
---- Started a 'muse'
---- *** Major life refocus ***
---- Traded time wasting activities for enjoyable activities
- Lost 18 lbs of fat
- Learned to swim
- Started business (no sales yet, though)
- Vacationed in Disneyworld, beach, camping
- Bike ride 12 miles & run 3 miles in 1:20:00 (Tri training)
- Finished a $7 million hotel renovation at work
- Built playhouse for the kids
- Watched 50+ movies
- Read 30+ books

I will provide details in upcoming posts.

Blog overhaul

I'm overhauling my blog. No more dull posts about what stocks I'm buying. No more adsense. New layout. Cool pics. New varied content.

I will now write about pretty much anything that pops in my head. I apologize in advance to both readers that are following this blog. :)

My application of fuzzy logic to a market timing signal

I've had good success with applying the concept of my last post. Here's what I'm doing in a nutshell: When the market shows weakness, I increase allocation. When it shows strength, I decrease allocation.

Example: Look at RSI-3 for the S&P 500. It varies between 0 and 100. Instead of thinking. "Buy when it's below 20 and sell when its above 80", think "This number tells me what percent cash I should have"

My indicator is not RSI, but rather a custom one I came up with.

The problem with this method (or any swing system) is that it will buy down into large declines and sell prematurely into big rallies.

Ideas to improve buying into large declines:
- Hold OTM puts to cover a portion of the account, say 60%
- When long term timing model says sell, go to cash

I'm still thinking of how to improve performance on a hard rally, like 1999, 2003, (and possibly soon?)