Q: How would you describe your investment philosophy?

A: Our philosophy is based on the fact that the stock market trends. There are up trends, there are down trends, and there are periods when the market doesn’t trend. Fortunately, the markets trend considerably more than they don’t, and you can always get into short, medium, or long-term trends.

We believe that investors have a 15 to 20 year period in their life when they can accumulate their retirement wealth. Those are the years after the bulk of the house bills have been paid and after college education for the children has been secured, or the period after one reaches 40 years. And while many proponents like to analyze 80-year averages, there are many 15 to 20 year periods where you wouldn’t have made a cent. If you started in 1929, it would take 25 years to break even, and breaking even is not exactly a good strategy.

You don’t control when you’re born, when you reach your early forties, and when you start to accumulate your retirement wealth. If you reached the age of 40 in 1980-1981, you were in a very good position to make money. The people who started their retirement wealth accumulation in the late 90s would be very unhappy today, especially if they are buy-and-hold investors or index investors.

We believe that by trend following, we can participate in most of the up moves and avoid most of the down moves. Occasionally, we do get a whipsaw, but that’s the cost of doing business that way. The important part is that preservation of capital, while striving to get returns, is a very worthy goal. That’s what we aim to do.

Q: What do you consider a trend? How would you define it?

A: I believe in supply-and-demand. I believe that buyers, on the demand side, want to buy a stock at a certain price, while sellers want to sell it at a certain price. For a transaction to happen, they do have to agree on a price. That agreement determines whether the seller made a profit or a loss. It isn’t the earnings; it is the price. It is the ebb and flow of buyers and sellers, or the supply and demand that causes the markets to move.

Therefore, I believe that it is the human nature that causes the markets to trend. We try to measure the buying enthusiasm, the speculation, and the excitement. This is what causes both the up and the down trends. Of course, there are periods when there are no trends, and those periods are typically volatile. For trend followers, these aren’t good times, but they are relatively rare.

It’s hard to know why investors act in a certain way. Noise, obviously, affects the markets because it affects some investors, who make buy and sell decisions. But I don’t think that it is worthwhile to follow, track, and fine tune it. That’s why trend following works well for us.

Q: Could you give more understanding of your strategy? How do you implement this thinking into a day-to-day process?

A: We have a technical model, which consists of a number of price-based components, market breadth indicators, and an interest rate measure. Together, all these indicators provide a away to evidence trends. Each indicator carries its own weight, which is assigned based upon past performance since the 1970s. Our combined weight of the evidence measure moves been zero and 100. Whether the price, the relative strength, or the breadth kick in, our weight of the evidence starts building. It doesn’t matter which of our measures is building; they all carry a certain number of points.

The evidence measure has to reach a certain level before we start committing assets. We have broken it into four color coded levels - red, orange, yellow, and green. In our more aggressive strategies, we move in with about 20% during the early moves of the evidence measure. As the weight of the evidence increases, we start adding equity exposure. We also have growth and moderate strategies that come later in the trend.

Q: What are the asset classes that you invest in? When and how do you keep switching between cash and other assets?

A: In our mutual funds and separate accounts, we only invest in ETFs or cash. Of course, the ETFs are equities, but they allow participation in all the styles, including internationally. There are precious metals, oil, agricultural, and commodity-related products. There are interest rate and the credit products.

So, the ETFs provide access to all the asset classes. We typically stick to the major styles, and the bulk of our investments is in equity-related ETFs, but our model allows us to take advantage of gold, for example, if the gold ETF is surfacing in our ranking formula.

We don’t buy bond ETFs, because bonds are much more volatile than stocks. Many people have the misconception that bonds are a location for safety, but they are not, especially in a low-rate environment.

Q: Do you stick to certain buy and sell rules?

A: We have a set of requirements that the ETFs have to meet, including a ranking system. We have rules that refer to price performance, relative performance, volatility, and trend measures. In other words, we try to rank the ETFs based upon their very recent past and our expectations for the future. We want to invest in ETFs that have started a good uptrend and are leading the pack.

As we go up through the levels, our buy rules loosen, and we open the field to a broader selection of ETFs with looser stops. When our weight of the evidence has just started to move up, we have unbelievably tight stops because we want to be sure we are right. We are just starting to test the waters.