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Author: tradecraft Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 40850  
Subject: To those disappointed w/ recent F4 performance Date: 2/13/2000 5:17 AM
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Having read some of the recent posts by those who have not, as yet, experienced success with the F4 strategy, I am compelled to point out a few things.

I have been designing and trading investment/trading strategies/systems for ten years both for my own use and that of others. I've designed and traded all types of strategies and, IMO, the F4 is one of the best of it's kind. That's not to say it doesn't have it's strengths and weaknesses, but so does any other system. If you want to discuss this in more detail, I invite you to the Tradecraft Guild board for that as well as some ways to deal with them(stick with the strategy). I don't say this will gaurantee improvement, but you may find it easier to stick with the F4.

As for the basic pure F4 strategy, I wouldn't give up on it just yet.

One point that seems to escape beginners to systematic investing is that the distribution of results is not static, but variable. In English, this means that the results of ANY systematic trading strategy, such as the F4, will fluctuate between extremes of profitability and loss. We call this risk.:-) It is entirely possible and within the realm of expected behavior for the F4 to have a year or string of years when it outperforms the S&P 500 by a wide margin and a year or years when it outperforms it only by a little bit. It is also possible for the losing years to fluctuate the same way. During the years when the F4 doesn't outperform by as wide a margin, you can expect the weekly/ monthly/ quarterly results to spend more time in the minus column. As frustrating and scary as this can be, particularly to newbies to F4, the strategy is still sound, and these events will balance out over time. It is unfortunate if you have gotten in during a less than stellar period, I know, but this is just the time when patience becomes a lucrative virtue.

Secondly, recognize that it's the market which makes a system profitable and not the other way around. The F4 is a long-term, trend-following, buy-and-hold methodology. As such, it will tend to do best during periods when the DOW is in a strong up trend. This hasn't been the case recently, and the results have reflected that. However, just about any trend-following strategy would have done that. I think you'd be less than prudent to believe that won't change. When it will change is impossible to know in advance, but that doesn't mean that the strategy has been rendered in-valid. Besides, the F4 has a fair track record for picking stocks likely to fall the least during such periods.

Thirdly, keep in mind that the F4 historical returns are overall returns for the entire portfolio. The F4 strategy makes it's money in most years because one or two of the four stocks in the portfolio really take off and run. This makes it not at all unlikely that you could get a year during which all four stocks spent most of the year slightly underwater with one or two making a big jump at the end of the year. This is the sort of thing that looks great on a historical back test, but is difficult to live though as it happens. It also means that there will be years when all four stocks lose money or when one or two will lose substantially, offsetting large profits in the others. Be aware it can happen.

Lastly, remember that the outcome of any give trade doesn't necessarily have anything to do with the soundness of an investment strategy. THE SUCCESS OR FAILURE OF ANY GIVEN TRADE IS MOSTLY DUE TO LUCK. THE SUCCESS OR FAILURE OF AN INVESTMENT ACCOUNT OVER ANY GIVEN YEAR OR STRING OF YEARS IS MOSTLY DUE TO SKILL.
The last thing you want to do is start switching strategies based on the outcome of just a few trades or a few weeks performance in a single, long-term trade. It is highly likely that the time you pick to switch will be precisely the time the strategy starts making money again.

Fool On

--Tradecraft
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