| The System in Practice | | | | USAA High-Yield OpportunitiesUSHYX |
| 1. Market professionals have no more advantage than | | | | USAA GrowthUSAAX |
| any other investor when it comes to their personal | | | | USAA InternationalUSIFX |
| investments. | | | | USAA Small Cap StockUSCAX |
| 2. The system was rational, systematic, and instilled | | | | USAA S&P 500 Index RewardUSPRX |
| comfort and confidence when making investment | | | | USAA Capital GrowthUSCGX |
| moves. | | | | USAA Income StockUSISX |
| 3. Investing requires decisions under conditions of | | | | December 1, 2008 - I have created a spreadsheet |
| imperfect information. Funds and individual securities | | | | and loaded 15 USAA funds. After generating ranking |
| have hundreds of thousands of people following their | | | | values and sorting them. The system tells me to buy |
| every tick. Why reinvent the wheel and fire, when | | | | USAIX - USAA Income, and USGNX - USAA GNMA. |
| most of that work (and bias) can be found in the | | | | This is not surprising, 2.5 months after Lehman had |
| price RELATIVE TO OTHER INSTRUMENTS. | | | | gone bankrupt, there was intense anxiety in the |
| My background is as an equity dealer and prop trader. | | | | markets. If we had known then what we know now |
| I have worked for major global investment banks, | | | | - that the other banks were in peril in early October, |
| where billions of dollars in risk positions were thrown | | | | the market may well have been 30-40% lower. The |
| around on a weekly or even daily basis. Much of this | | | | system said all equity was a bad investment. Ginnie |
| activity was to manage the exposure to products | | | | Maes - backed by the US Government, and yielding |
| that had been sold to clients - so the true notional | | | | 300bps over treasuries - seemed like a good bet, as |
| size of these positions was staggering. The actual | | | | did high grade corporates and treasuries. |
| goals and returns of these products related to | | | | March 14, 2009 - Sell USAIX, Buy Metals USAGX. The |
| various arbitrage, as well as risk management. The | | | | absolute bottom of the market. Metals stocks, which |
| vast majority of trading that occurs is for the | | | | had been pummeled for 18 months, started to show |
| purpose of risk management for the bank. | | | | some life. This was not surprising. With the exception |
| When it came to managing my own investments, | | | | of housing, they were the most battered stocks, and |
| however, the same style - trading intra-day, | | | | had bottomed out well before the rest of the |
| managing gamma exposure, parceling out interest | | | | market collapsed. Therefore any sign of life would |
| rate, foreign exchange, credit and market risk - was | | | | surely be noticed. I put 50% in. |
| well beyond the scope of anything possible. I had to | | | | April 27, 2009 - Sell USGNX, Buy Emerging Markets |
| choose some funds, or if I was feeling ambitious, | | | | USEMX. All Emerging Markets began to rally. Their |
| some individual stocks, and hope for the best. | | | | financial positions (China, India) and natural resources |
| My results were in line w/ most indices. Like most | | | | (Brazil, Russia) all indicated they would have the |
| people, securities market professionals have no | | | | means to finance their own recovery. It is interesting |
| advantage when it comes to managing their own | | | | to note that many started to call for a market |
| money. They are just at sea as everybody else - | | | | correction at this stage. All indices had rallied to |
| probably more so, as they suffer from | | | | sharply. But the IRP system continued to recommend |
| overconfidence brought about by their own | | | | staying in the market. So I did, with my remaining |
| professional success. I have never met a securities | | | | 50%. |
| market professional who made significant money | | | | July 31, 2009- SELL USAGX, BUY USNQX. Buy tech. |
| from trading his own portfolio, aside from the | | | | If things were going to recover in the US, this would |
| apocryphal individual who bet the ranch on a small | | | | be a place where it would happen. Metals had stalled |
| cap stock and saw it increase 100x (junior mining | | | | out. |
| stocks in '09, internet stocks in '99, etc.) | | | | August 21, 2009- SELL USNQX, BUY USIFX. Buy |
| There are numerous mechanical systems available, | | | | international stocks, sell tech. The US Peso began to |
| but they have so many "moving parts" that the | | | | crumble, and non-US stocks began to show more |
| number of signals generated becomes impractical for | | | | and more appeal. While stocks began to stall out, |
| all but the professional trader. However, systematic | | | | international stocks gained, at least from a US dollar |
| mechanical methods can yield superior returns. This | | | | perspective. |
| was my belief when I left the traditional financial | | | | November 11, 2009 - SELL USIFX, BUY USAGX. Back |
| world in 2006, and continued to develop my own | | | | to metals. The sharp rally after a consolidation |
| portfolio systems. | | | | indicated that there was strong buying and a base of |
| December 1, 2008 I decided to put my system to | | | | support. Regardless of your thoughts on the direction |
| the test. I chose a universe of funds offered by | | | | of the price of metals, increased demand and brutal |
| USAA. Not the best fund manager, not the worst. | | | | cost cutting at miners had made them leaner and |
| Not every asset class under the sun, but enough to | | | | meaner. Any incremental increase in spot prices would |
| make the exercise realistic. Below is an account of | | | | translate directly to the bottom line. |
| each trade, and the market circumstances at the | | | | Gains for the year (12/1/2008 - 12/1/2009) were |
| time. | | | | 48.4%. 5 trades. In each instance, the signal to switch |
| USAA Aggressive GrowthUSAUX | | | | seemed rational, given the market action. I was very |
| USAA GNMAUSGNX | | | | confident in making each move, and by looking at the |
| USAA Emerging MarketsUSEMX | | | | rankings on a daily basis, came to anticipate switches |
| USAA Tax Exempt Long-TermUSTEX | | | | easily. They were not bolts from the blue. In addition, |
| USAA NASDAQ-100 IndexUSNQX | | | | if I read, "Dividend Stocks to Make a Comeback", I |
| USAA Precious Metals and MineralsUSAGX | | | | knew that, relative to other investments, they had |
| USAA World GrowthUSAWX | | | | to attract a lot more attention. |
| USAA IncomeUSAIX | | | | |