OTHER INVESTMENT MODELS --> | SuperMODEL | Long-Bond Yield Curve | The Big Mac |

This investment timing model is one of a suite of 3 econometric JSE timing models. The other two are the Composite SuperModel and the Long-Bond Yield Curve models.

The model compares the valuation of equities by measuring JSE ALSH Index’s’ Earnings Yield (inverse of P/E) less Inflation, to interest you can earn in cash (a competing asset class) through the ratio R=(EY-CPI)/CASH RATE.

Ratios above 0 imply equities are favourable over cash and other fixed interest assets and ratios below zero imply fixed interest assets are favourable over equities. The idea is that as P/E ratios fall (thus raising Earnings Yields), either through strong earnings growth or a correction, and inflation drops, then equities become favourable over cash. As interest rates and/or P/E ratios rise and inflation rises, then cash becomes favourable to equities.

The ratio is shown in red below since 1997 together with blue shaded areas where a timing model would have us in equities (when ratio is >0) or white areas when we are in cash earning prime less 4 (when ratio < 0)

The ratio also indicates the relative attractiveness of either asset class – when it is high equities should be overweight and when it is very low, cash should be overweight. As you can see the ratio is now above +0.2 implying equities are more favourable over competing fixed interest asset classes.

The timing model has two powerful growth impacts – first it keeps you out the majority of the bear markets, and second, it leverages high interest rates when in cash. Its performance over the last 15 years (12 trades) astonishes (just over 7 times the JSE buy+hold) and is shown below:

This model is less about predicting recessions and more about keeping you in the asset class showing most favourable long term likely returns. Prior to 1997 the model has worked less well, possibly due to artificial levels of earnings and/or interest rates due to sanctions and our closed economy in the pre-democracy era.

The 15 year "trade performance" of the Cash/Equity valuation Investment Timing Model from Jan 1997 to April 2012 is shown below together with its "investment cousins":

Trades = The amount of trades concluded during the period

Wins = How many trades resulted in a profit

Losses = How many trades resulted in a loss

Win% = What percentage of all trades were winners

Avg Trade = Average gain of all the trades (winners & losers) together

Avg Win = Average size of winning trades

Avg Loss = Average size of losing trades

Max Loss = maximum loss encountered

Avg drawdn = average peak-to-trough drawdown per trade

Max drawdn = maximum draw-down achieved across all trades

Pts up = percentage points accumulated in winning trades

Pts dn = percentage points lost in the losing trades

Net points = Pts up less Pts down

Gain/Loss = Pts up divided by points down

14yr TRI = total return of R1 re-invested in each trade over the entire period

CAGR = Compound annual growth rate achieved over the entire period

%Vested = how long the model kept you invested in the JSE

Sterling Ratio = compound growth divided by average draw-down (risk/reward measurement)

Tri Power = out performance of the JSE for the same measure of risk (1 = same as JSE)

The most important items we look at are the Win%, the Avg drawdn, the Gain/Loss ratio, the Sterling Ratio and the Tri Power. A high Win% is good for psychological reasons. Most non-professionals cannot stomach losses, especially strings of losses. The average draw-down is also important as large draw-downs cause discomfort during the course of the trade and are likely to trigger you into cutting the trade short in panic. Draw-downs can be viewed as the volatility or riskiness of the strategy. The gain/loss ratio shows how much more the system accumulates winning points than losing points - any value over 4 is deemed acceptable as then you claw back 4 points on your winning trades for each point you shed on the losing trades. The Sterling ratio is used by Hedge Funds to calculate risk adjusted return. High returns with gut-wrenching draw-downs will yield lower numbers than moderate returns with low draw-downs. Higher Sterling ratios are better than lower ones.

Finally the Tri-power is the total return achieved by the system divided by how long the system has been in the market (%Vested), then multiplied by 100 to compare returns similar to a fully vested buy+hold JSE strategy. We then divide this by the total returns (TRI) of the buy+hold over the same period. A number of 1 means the strategy achieved identical return for the same risk as a buy+hold. A value of 3 means the strategy achieved 3 times the buy+hold performance for the same risk. The higher this value the more the timing systems out-performs the buy+hold.

OTHER INVESTMENT MODELS --> | SuperMODEL | Long-Bond Yield Curve |The Big Mac |

This investment timing model is one of a suite of 3 econometric JSE timing models. The other two are the Composite SuperModel and the Long-Bond Yield Curve models.

The model compares the valuation of equities by measuring JSE ALSH Index’s’ Earnings Yield (inverse of P/E) less Inflation, to interest you can earn in cash (a competing asset class) through the ratio R=(EY-CPI)/CASH RATE.

Ratios above 0 imply equities are favourable over cash and other fixed interest assets and ratios below zero imply fixed interest assets are favourable over equities. The idea is that as P/E ratios fall (thus raising Earnings Yields), either through strong earnings growth or a correction, and inflation drops, then equities become favourable over cash. As interest rates and/or P/E ratios rise and inflation rises, then cash becomes favourable to equities.

The ratio is shown in red below since 1997 together with blue shaded areas where a timing model would have us in equities (when ratio is >0) or white areas when we are in cash earning prime less 4 (when ratio < 0)

The ratio also indicates the relative attractiveness of either asset class – when it is high equities should be overweight and when it is very low, cash should be overweight. As you can see the ratio is now above +0.2 implying equities are more favourable over competing fixed interest asset classes.

The timing model has two powerful growth impacts – first it keeps you out the majority of the bear markets, and second, it leverages high interest rates when in cash. Its performance over the last 15 years (12 trades) astonishes (just over 7 times the JSE buy+hold) and is shown below:

This model is less about predicting recessions and more about keeping you in the asset class showing most favourable long term likely returns. Prior to 1997 the model has worked less well, possibly due to artificial levels of earnings and/or interest rates due to sanctions and our closed economy in the pre-democracy era.

The 15 year "trade performance" of the Cash/Equity valuation Investment Timing Model from Jan 1997 to April 2012 is shown below together with its "investment cousins":

Trades = The amount of trades concluded during the period

Wins = How many trades resulted in a profit

Losses = How many trades resulted in a loss

Win% = What percentage of all trades were winners

Avg Trade = Average gain of all the trades (winners & losers) together

Avg Win = Average size of winning trades

Avg Loss = Average size of losing trades

Max Loss = maximum loss encountered

Avg drawdn = average peak-to-trough drawdown per trade

Max drawdn = maximum draw-down achieved across all trades

Pts up = percentage points accumulated in winning trades

Pts dn = percentage points lost in the losing trades

Net points = Pts up less Pts down

Gain/Loss = Pts up divided by points down

14yr TRI = total return of R1 re-invested in each trade over the entire period

CAGR = Compound annual growth rate achieved over the entire period

%Vested = how long the model kept you invested in the JSE

Sterling Ratio = compound growth divided by average draw-down (risk/reward measurement)

Tri Power = out performance of the JSE for the same measure of risk (1 = same as JSE)

The most important items we look at are the Win%, the Avg drawdn, the Gain/Loss ratio, the Sterling Ratio and the Tri Power. A high Win% is good for psychological reasons. Most non-professionals cannot stomach losses, especially strings of losses. The average draw-down is also important as large draw-downs cause discomfort during the course of the trade and are likely to trigger you into cutting the trade short in panic. Draw-downs can be viewed as the volatility or riskiness of the strategy. The gain/loss ratio shows how much more the system accumulates winning points than losing points - any value over 4 is deemed acceptable as then you claw back 4 points on your winning trades for each point you shed on the losing trades. The Sterling ratio is used by Hedge Funds to calculate risk adjusted return. High returns with gut-wrenching draw-downs will yield lower numbers than moderate returns with low draw-downs. Higher Sterling ratios are better than lower ones.

Finally the Tri-power is the total return achieved by the system divided by how long the system has been in the market (%Vested), then multiplied by 100 to compare returns similar to a fully vested buy+hold JSE strategy. We then divide this by the total returns (TRI) of the buy+hold over the same period. A number of 1 means the strategy achieved identical return for the same risk as a buy+hold. A value of 3 means the strategy achieved 3 times the buy+hold performance for the same risk. The higher this value the more the timing systems out-performs the buy+hold.

OTHER INVESTMENT MODELS --> | SuperMODEL | Long-Bond Yield Curve |The Big Mac |