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A Reassuring Look Back© Sound Mind Investing | February 2012
When our grandson Ben was two years old, his parents were teaching him good manners, the usual "pleases" and "thank yous" that children would do well to learn. During this phase, he was under the weather and his mom took Ben to an Immediate Care Center for a checkup. When the nurse put a stethescope to his chest to listen to his heart, she said "Can I listen to your heart beat real quick, sweetie?" Ben was a little scared and replied, "NO THANK YOU! NO THANK YOU!" Many investors are feeling that way after a volatile and somewhat scary 2011. When it comes to staying the course, many are saying, "No thank you!" Upgraders are no exception, with some wondering if Upgrading — given its subpar year — is still the best way to invest in today's uncertain times. I can understand why some might be concerned given that Upgrading underperformed the overall market in 2011. It was an uncommon result, as the table below illustrates. Over 40+ years of investing, I've learned to take the long view. The markets will have good years and bad, and the same is true of every investing strategy. Systems that don't seem to be working for a season aren't necessarily broken. In reflecting on this, I was reminded of an experience I had as a money manager many years ago. In 1978, a close friend and I launched an investment advisory service based solely on market timing. During periods of market weakness, we performed exceedingly well for our clients due to our ability to sell out and move quickly into money market funds. When the eventual rallies occurred, we were nimble enough to get back in and enjoy most (but not all) of the ride up. Our strategy generated returns which saw our average managed account more than triple in value during our first five years of operations. We were ranked in the top 5% of money managers nationwide. In April of 1987, we sold all our stock holdings and placed our clients 100% into money market funds. We did this because our system indicated the market had risen too far, too fast, and had entered a high-risk area. As the Dow Jones Industrials continued to rise over the next several months, we began losing clients to other firms that had no reservations about risk. Our warnings to departing clients fell on deaf ears. They seemed to think that because our strategy wasn't working well that particular summer, it was broken. Then came October 19, Black Monday, when the Dow dropped almost 23% (almost 3,000 points in today's prices!) in a single day. The crash vindicated our caution — our system was working just fine. Those clients who became impatient and moved on to other firms and other strategies incurred great losses. 
Because Upgrading has had such great results for so long, newer readers may not know that the strategy has had "off years" before. In 1998, for example, our portfolios had their worst year ever in terms of performance relative to the market (as measured by the Wilshire 5000). That difficult season, however, ran its course and was followed by nine straight years of outstanding performance. In 2011, the extreme market volatility due to worldwide global economic concerns provided a difficult environment for Upgrading, which is essentially a trend-following approach. Fortunately, the kind of volatility we saw in the market in 2011 is relatively rare. If it was common, Upgrading would routinely be undermined by it, and as the table at right shows, that's not been the case. In retrospect, it's always possible to point to ways we could have made more money (or lost less money) than we did. The human inability to make fully accurate predictions means it's pointless to think of the "right" investment decisions simply in terms of making the highest possible profit. If that is your approach, you will always be moving from strategy to strategy, second-guessing yourself, and ending up frustrated and disappointed. Instead, the "right" approach is one that realistically faces where you are right now, looks years ahead to where you want to go, and has a very high probability of getting you there on time. The long-term performance record of Upgrading gives me confidence it's still the "right" approach for the long haul. 
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