10/03 monthly performance

French and Fama Factor Model: [211 days, 2004-12-01]
Blend         Value         Growth
SPY     4.58
MDY    12.66
IWB     6.15  IWD     7.83  IWF     4.32
IWR    13.79  IWS    14.86  IWP    12.02
IWM     5.68  IWN     5.56  IWO     5.05

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So far this year SP500 is gaining 5%. It is pity. My portfolio is gaining +15%. I pride myself of beating SP500 by 10 points. This is the measure that Warren Buffett is looking for. And 15% tops all the numbers listed above. Therefore I am very happy to reach that. In my bio, I set three goals for my portfolio: It has to either beat SP500 by 10 points, or obtain more than 20% absolute yield, or match the best major index. If I can achieve this consistently, my portfolio should perform quite well.

Part of the gain in October is from the high flying oil refinery stocks. Your beloved President announced that the country needs more refinery capacity. Since this is in line with the interest of many Whitehouse insiders (not a smoking gun like "we need to conserve gas"), the related stocks took off. On the other hand, CME continues to lead the portfolio to all time high. But its PE ratio seems to be stretched to a very dangerous level...

These numbers do not include the big drop of today (10/04). We will see how much selling is in store and I am prepared some non-performing stocks in the portfolio will be stopped out in October.

I am also developing a method to efficiently align with the best performing sectors. (There is another stochastic reason for doing this, but it is hard to explain in a paragraph.) It seems intuitive that when a sector is ultrahot, one month of superior gain can exceed many months of mediocre performance. But this method is very hard to simulate (for lack of historical information). Therefore, I am experimenting it carefully in a small portion of my portfolio. It is far from convincing that you will outperform by simply chasing the hot sectors. A lot of times, the market is so efficient that, after a business cycle (such as dot com boom and bust), most investors do not gain any edge. This showed up in my many simulations, therefore, I am conservatively skeptical about it.

--Steve