Market stats are now available for free.
View this email in your browser
The Goldilocks Investing NewsletterNo. 3Nov. 1, 2015
An update on the Mama Bear Portfolio

Welcome to our occasional newsletter! Today's issue is designed for people who attended a Goldilocks Investing seminar in Boston or Seattle in the past few months.

Please do not forward this newsletter to others. Our book on investing is in stealth mode, and people who did not attend a seminar would be baffled by the following discussion. Please do not share this information until the book is released in 2016.

Market stats are now available for free

Brian LivingstonBy Brian Livingston

In one of my seminars that you may have attended, I gave you a link to a free PerfCharts function at That link enabled you to see which exchange-traded funds (ETFs) in Goldilocks Investing's Mama Bear menu should be held in any given month.

That StockCharts page is nice, but it shows only end-of-day closing prices. I'm excited to report that my colleagues and I have developed a Web technology that updates the information every 10 minutes during market hours — free of charge.

Figure 1 is an example of the Mama Bear statistics as of the last trading day of October:

Click to open stats page
Figure 1. Stats are updated every 10 minutes during market hours, free of charge. Click the image to go to the stats Web page or use this link.

Having fresh stats for each ETF in the Mama Bear menu is a big advance. One of the benefits of buying ETFs rather than mutual funds is that you can check an ETF's price around 3 p.m. Eastern and decide right then whether to buy it before the market closes. With a PerfChart, you can only make decisions using yesterday's closing prices.
Don’t trade more often than once a month

The model portfolios that will be revealed in the book actually deliver lower performance if you reallocate your portfolio more often than monthly. This is because you would be buying and selling based on random blips in price, not long-term trends. Studies that demonstrate this effect will be described in detail in the book.

The frequent updating of the stats page is intended to let you choose any reallocation day of the month that's convenient for you. It's not a drug to abuse. Don't try to guess what the market will do. That eats up your gains with unneeded switches and higher trading costs.

I maintain a Mama Bear tracking portfolio with real money at (see next section). But my policy will always be not to trade any account until an hour or two after the market opens on the day after a newsletter goes out.

Here's the good news: with intraday stats, you no longer need to worry about me trading in front of your order. You can front-run me! Simply choose a day other than the first trading day of the month to reallocate your portfolio. (Use your birthday, if that'll help you remember to check every month.)

The strategy rules for the Mama Bear Portfolio are shown on the stats page. The strategies for two other model portfolios, the Papa Bear and the Baby Bear, will be described in the book and on their own Web pages in the future.

The near-real-time data on the stats page is provided by This site offers you free backtesting with five years of ETF data. More than 10 years of data and many additional features are available in a premium account for $15.95 per month. This is described on the site's welcome page.

My thanks also to Thom Heileson, a Web designer who's made the stats page function well despite the quirks of WordPress, which hosts the site. If you're a WordPress expert who can help, please let me know.

I've created a special email address for you to send feedback directly to me. I encourage you to tell me your experience after you've visited the Mama Bear stats page during market hours on a weekday:

MaxGaines (at) BrianLivingston (dot) com or click here to email me.
How’s the Mama Bear done since it was revealed?

I disclosed the full details of the Mama Bear to a standing-room-only crowd of 200 at AAII Boston on Nov. 21, 2014. (Smaller trial seminars were held in Seattle after that.)

Figure 2 shows the performance since Nov. 21, 2014. A real-money account at was reallocated during market hours on the first trading day of each month, whenever a change in the Mama Bear was signaled (only about seven times per year).

Mama Bear performance
Figure 2. The Mama Bear surpassed the S&P 500 in November–April, then lagged in May–October. Source:

The real-money portfolio surprisingly outperformed the S&P 500 for the first five months. This is unusual, because the portfolio is designed for diversification and safety, with "gentle shadowing" of the index during rallies.

Please recall the takeaway from my seminar. A portfolio that gains only 2/3 as much as the S&P 500 during up months, then loses only 1/2 as much during down months, far outperforms the index over complete bear-bull market cycles. Keeping your losses small is key to outperforming over each full period.

In June, the S&P 500 caught up with the portfolio. Then, the nasty August 2015 correction took hold. The portfolio rotated out of equities and into an all-Treasury stance on Sept. 1. (Because of a customer-service request I'd initiated at Folio, I could not reallocate the tracking account until Sept. 3. By random chance, this was a better switch date, showing that there is no perfect day of the month.)

Holding all three ETF positions in bonds for the months of September and October was unusual. This was the first case since tracking of a similar 3-of-9 ETF portfolio began in 2006 by

The large Treasury position kept Mama Bear followers safe from a gut-wrenching drop of 6% from Sept. 9 to 16. It looked like the market was going to slice down through its August low and head even lower.

But the market bounced back. As of Oct. 30, the portfolio's switch to Treasurys was a "whipsaw." This means the portfolio did not make as much money as a more aggressive bet on equities would have. But the ability to tilt your portfolio toward asset classes other than US large-caps is a safety net that you'll be very glad to have during market turmoil.

This is a good time to review the principle of "mechnical investing." A period of five or six months is way too short to evaluate any portfolio. Only a complete bear-bull market cycle can reveal meaningful information about an investing strategy.

Did you lose faith in the formula because it underperformed the index for five or six months? Did this seem more significant to you than the five months when the portfolio outperformed the index?

Neither time period is meaningful. For significance, let's look at complete bear-bull market cycles to determine the Mama Bear's theoretical performance over a 42-year time frame.
Crash tests show how the Mama Bear outperforms long-term

Keeping your portfolio's losses small is key to achieving good performance across every bear-bull market cycle. (Recent cycles have averaged about seven years in length.)

At my seminar, we looked at charts of investing genius Warren Buffett's portfolio. He's underperformed the S&P 500's total return during both of the bull markets in the last 15 years. Only because of his small losses — and some actual gains during bear markets — did Buffett enormously beat the S&P 500 since 2000.

Buffett more than doubled the index's annualized total return (9.01% vs. 3.85%, not inflation-adjusted) in the 15¼-year period ending June 30, 2015, while lagging in both bull markets. This will be graphed in my book.

Like Buffett's approach, the Mama Bear is designed to keep losses small in bear markets. The trade-off is that the portfolio rises more gradually than the S&P 500 during rocketing rallies. The large-cap index's weakness is that it is crash-prone. The best way to surpass the index is with asset rotation (not market timing, which is unrealiable).

You can see this in the Mama Bear's theoretical performance against the S&P 500 in "crash tests" over a 42-year period. The tool used here is a quant backtester made available by Mebane Faber (co-author of The Ivy Portfolio) to paying subscribers of his Idea Farm newsletter. The results are shown in Figure 3.

Crash tests, S&P 500 vs. Mama Bear
Figure 3. Asset rotation — holding the top 3 of 9 ETFs each month — would have kept losses small in bear markets, producing good performance in complete cycles. Bear-market returns are emphasized with large numerals in color. Bull-market returns are indicated with smaller gray numerals. Source: Quant backtester.

It's important to note the following points:

The gains shown in backtests should be ignored. Trading costs were much higher in 1973 to 2000 than the near-zero commissions and 1-cent bid-ask spreads we've witnessed in the 21st century. Also, ultra-low-fee ETFs weren't available for every global asset class until just a few years ago.

Use backtests as "crash tests" to expose intolerable losses. Past good performance does not predict future good performance, but past bad performance does tend to predict future bad performance. As we discussed in my seminar, strategies that have crashed in the past will crash again. More evidence of this will be in my book.

In every tested bear, the Mama Bear far outperformed the S&P 500. The test used the fully disclosed Momentum Rule to select the top 3 of 9 ETFs each month. In half of the six bear markets, the Mama Bear Portfolio actually rose. When the S&P 500 was crashing, asset rotation tilted the portfolio away from US equities and toward real estate, bonds, commodities, or non-US equities. (Note: The "Negative Momentum Rule" that is described on the Mama Bear stats page was not used in the crash test. This risk-reduction rule was discovered only a few years ago. For a fair test, the portfolio always held the three asset classes with the strongest relative strength, 1973–2014, even if an asset class had a negative 5-month return.)

In 4 of 6 bull markets, the portfolio lagged the S&P 500. It's mathematically impossible for an average of three asset classes to outperform whichever one is the strongest. (The S&P 500 is often the winning asset class because, by design, it holds the strongest US equities.) To ensure survivable losses, your trade-off from diversifying is gentle shadowing of the index during rallies. This fact will actually keep most individual investors from ever adopting and thereby overgrazing Goldilocks Investing. Armchair investors are obsessed with the mirage of beating the S&P 500 every year — something even a genius like Buffett can't do.

Works in taxable accounts, too. The graph shows tax-deferred accounts, but most of the returns of the Mama Bear were long-term capital gains, which enjoy lower tax rates. Even if you subtracted from the Mama Bear's annualized real return a 25% effective tax rate — more than most Americans actually owe — you'd still be far ahead of an S&P 500 portfolio that incurred no taxes.

Are you a long-term investor or a speculator? Achieving 2/3 of the S&P 500's return during good times, and then keeping most or all of your gains during bad times, is the key to reaping great returns over complete bear-bull market cycles.

Only disciplined, informed investors will stay the course when the index happens to be the highest-flying asset class. If you understand this, you can enjoy reliable gains for the rest of your lifetime. You avoid crashes using asset rotation's gradual tilting of your portfolio, with no need for hit-or-miss market timing.

That's all for now. Be sure to try the stats page when the market is open, and send in your feedback using the email address shown above. Thanks for your support!
The Goldilocks Investing Newsletter

Anyone may sign up at to receive this free newsletter.

Goldilocks Investing, Mama Bear Portfolio, Papa Bear Portfolio, Baby Bear Portfolio, and Muscular Portfolios are trademarks and service marks of Publica Press. All rights reserved. Other marks are the trademarks or service marks of their respective owners.

Neither Publica Press nor its authors are registered investment advisers or broker/dealers, and they do not accept accounts for management. Readers are advised that this information is issued solely for educational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities. The opinions and analyses included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. All information should be independently verified with the companies mentioned. Past good performance does not predict future good performance. Investments are not appropriate for all investors. Statements are made without consideration of your financial sophistication, financial situation, investing time horizon, or risk tolerance. Readers are urged to consult with their own independent financial advisers with respect to any investment.

Copyright © 2015 Publica Press. All rights reserved.

Our mailing address is:
Publica Press
300 Queen Anne Ave. No. 456
Seattle, WA 98109

Add us to your address book

To unsubscribe <<Email Address>> or change your address, use the following links:
unsubscribe from this list    update subscription preferences 

Email Marketing Powered by Mailchimp