Strategies for an ‘All-Weather’ Market

02/14/2013 9:15 am EST


Doug Davenport has debuted a new investment newsletter, based on his successful track record as a portfolio manager.

Nancy Zambell: My guest today is Doug Davenport, and he has just joined Weiss Research in an advisory capacity to write a new newsletter. Doug, would you tell us a bit about what this newsletter is about?

Doug Davenport: The newsletter is called Doug Davenport’s All-Weather Investor. This is a new service for Weiss. It follows the model that Sir John Templeton and I put together back in 2006.

It’s an investment strategy that I think is very unique because I only use four securities in the portfolio—oil, gold, the S&P 500, and the euro. And I use only exchange traded funds to purchase the ETFs that represent those four asset classes.

I think even more interesting is the fact that not only can I be long in those securities—meaning we own them for appreciation when the market goes up—I can also short those particular asset classes and make money when the market goes down.

Nancy Zambell: So that’s what you mean by all-weather.

Doug Davenport: That’s right. Sir John Templeton and I felt that since the secular bear market started back in 2000, and it usually lasts about 12 to 17 years, we still have probably three to five years left of what’s called a secular bear market—even though you can have the cyclical bull market returns like we’ve had from 2009 to present.

Most times, people follow a buy-and-hold approach that mutual funds and Wall Street tell them to follow. That works well when the market goes up. But when the market goes down, a lot of people don’t know when to sell. We want to be able to make money when the market goes down, also.

Nancy Zambell: That makes a lot of sense. I understand you’ve been doing this for a while, so I’m sure you have a great track record of returns. Can you talk about the returns?

Doug Davenport: Sure. And I’m more than happy to, because I’m very proud of the fact that by being long and short in those four different asset classes, you can really compound money very well.

The portfolio started on January 1, 2007, so we’ve had six years now for returns. It’s outperformed the S&P 500 by an astounding 57:1. In fact, if you look at the total rate of returns since January 1, it’s up over 830%, versus the return of only 14.5% for the S&P 500.

Now let’s think about dollars. It would have turned $10,000 on January 1, 2007 into over $93,000. Or if you had $100,000 over the period of time, that would have grown into $930,000.

It’s a wonderful return, but also what about down times? In the 24 quarters that this portfolio has been running, I’ve only had one negative quarter. It was very small. It was only a 0.01% decline for a quarterly rate of return. I had 23 positive quarters and one negative quarter.

I think that the beauty of the program is that not only can we produce outstanding returns, but we’ve been able to make sure that any drawdowns or declines have been very minimal. And that’s because of the ability to go short when the trends change.

Think about 2008. There’s a year that was the worst year since the Depression, and we know how the market fell. My portfolio was up over 75% that year. What did I do? I can’t say there is any magic to it, but my mechanical model that uses technical analysis said to go short the very beginning of July for the S&P 500 and oil.

I had no idea that Lehman Brothers would fall in 2008, but the model said to sell the long position and go short. I make no forecast, no predictions about what the market is going to do, because this is a purely mechanical model using technical analysis. It tells me when to make the trade—as opposed to me thinking things don’t look good, or things look bad, and I should sell.

That’s the beauty of the program. It doesn’t rely on me for any type of forecasting. We spent a lot of time and effort at putting together the right model. It will tell me when to be in or to be out of the market. You can produce those kinds of returns and compound money very effectively.

Nancy Zambell: Those are very impressive returns. Can you give us a couple of sectors that you like?
Doug Davenport: I wish I could say that I follow the sectors, but I don’t, because I buy the S&P 500 index fund, so I’m really not concerned with a sector inside the S&P. I do have my thoughts about it, but it doesn’t affect whether I buy or sell the S&P 500 Index.

If you do look at a particular sector in there, obviously, technology will continue to do well, even though Apple has not done well. I chart Apple (AAPL), and my indicator said to sell Apple at $680 a share, and I’ve been short Apple all that time.

But as I say, I don’t really follow individual sectors, so I don’t know if I feel confident enough to say which ones I think would do well.

Nancy Zambell: Well, fair enough, that makes sense. Why do you use ETFs instead of mutual funds? Is that because the trading is easier?

Doug Davenport: I like that, of course. I used to run a mutual fund, so I know how they are run. They do have a cost structure that is far greater than what most ETFs. So, you save on expenses, and I’m looking for broad asset class exposure.

With oil, it’s very hard to find an oil mutual fund, so, I’m actually buying into an ETF that buys into the futures market to track the price of oil.

ETFs, I find, are a far better investment vehicle for most individuals. I notice last year that the amount of sales of mutual funds declined and has been declining, while the purchase of ETFs has been going up. It’s just a more cost-effective way for broad asset class exposure.

Nancy Zambell: Now back to your newsletter for just one moment. In order for investors to participate in the newsletters, would they just go into Weiss Group’s website?

Doug Davenport: Yes, that’s correct. We’re still in a sign-up period right now, so there have been no trade recommendations made. They would call Weiss to inquire about the All-Weather Investor.

There are special pricing models right now for people who sign up before we actually go live with the management of the portfolio. Please call Weiss if people do have an interest, and they will take care of everything for you.

Nancy Zambell: Wonderful. Thank you so much for joining me, Doug. It’s been a pleasure talking with you.

Doug Davenport: Thank you, too, Nancy.

For more information on Doug Davenport's All-Weather Investor, click here...

Related Articles:

A Global Basket Full of Commodities

Goldwatcher: $2,400? $5,479? $46,000?

S&P Hits 1,500: Where to Next?

  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on STRATEGIES