With any new evolutionary change in the way an industry works, especially one that is disruptive of the status-quo, there will be resistance. And the introduction of Dynamic Investment Theory is no exception. As I have described how Dynamic Investments work and the amazing performance they are capable of achieving people are skeptical; and they should be. MPT tells us that none of this is possible.
On this Slide I want to list some of the objections I have heard from the “experts” and my responses.
Objections and Responses
Objection: Returns like you are showing for even the simplest Dynamic Investments is impossible
Response: This is exactly right when using Modern Portfolio Theory (MPT) methods. But Dynamic Investment Theory is an entirely different approach to investing in which 20% + returns are not uncommon.
Objection: DIT embraces a buy-and-sell management strategy. This is unacceptable as it incurs short-term gain taxes.
Response: Yes, you will incur short-term capital gains each time a DI trades an equity held for less than one year. But to reject the DIT approach based on the payment of capital gains tax is like rejecting a higher paying job because it puts you in a higher tax bracket. If the additional gains realized by Dynamic Investments were just a few percentage points then taxes may be a problem. But as you have read in this presentation, the incremental gains are huge – more than enough to cover any additional taxes incurred. Plus, Dynamic Investments held in a tax-deferred retirement plan don’t pay any taxes on gains until you withdraw the money in the future, and then at ordinary tax rates. In addition, some enterprising financial organization will encase DI’s in an ETF format that is structured to defer taxes until that ETF is traded.
Objection: History has shown that people cannot successfully “time the market” with any degree of success
Response: I agree that PEOPLE can’t time the market based on economic analysis or expert forecasts with any reasonable degree of success. But DIT doesn’t ask people to. DIT is based on the theory that the MARKET can time the market with a high degree of success and trading based on price momentum has proven to have predictive power.
Objection: Your time period used to derive performance data encompasses only an unprecedented Bull market - of course results will look good
Response: The backtest time period used in this presentation is from the start of 2008 to the end of 2018. This period includes a major stock market crash in 2008 and two relatively flat years in 2015 and 2018. In the other 8 years stock were strongly trending up. The Alpha DI discussed on Slide 05 earned +57% in 2008 when stocks went down and held its value in the two years when stocks were not trending. Looking at the logic of DIT you will see that the returns of DIs are significantly higher than MPT portfolios when stocks are trending either up or down and they don’t lose money when the market is flat. In contrast MPT portfolios move up and down in value with the tides of the market.
Objection: Momentum investing isn’t new
Response: I discussed this issue in Slide 03, here’s how I addressed it: The NAOI understands that the observation that equity prices are cyclical and that uncorrelated assets move up and down at different times is not a new discovery. Market cycles and momentum investing have been studied and used for years. The significant breakthrough that the NAOI made was the design of a new investment type called Dynamic Investments and a related management strategy that enables average people with money to invest to easily transform cycles and momentum information into profitable investing actions. This is new.
The financial world is profiting quite well today using decades-old MPT methods. Anything that threatens its supremacy will be questioned. I am ready to respond to any objection or criticism that readers of this presentation may have. Send them to LHevner@naoi.org.