Key
Vocabulary
Terms (terms
are in order by pages in the book,
to which the citations refer)
stockmarkethistorian.net The
website that accompanies this book. (p. viii) Carefully
examine this website to understand the book’s “big
picture” (estimated time required 15–30 minutes).
From 11/12/19 to the present, the HK model’s performance
has been sensational. The website and the book tell a
classic David vs. Goliath story, including the complete HK
performance record vs. B&H since launching the model
on 11/12/19 as well as backtesting for 2000 to 11/11/19.
S&P
500. The
broad-based large company index that
comprises about 80% of the total
market value of all publicly traded U.S. stocks and some
40% of the total market value of all publicly traded
stocks in the entire world. The S&P 500 is embedded in
the culture such that some investors think a lot about its
movements, even while on vacation! (p. 3)
Market
risk. The
extent to which an investment’s
value is subject to fluctuation. The
greater the possible fluctuations in market value, the
greater the investment’s market risk. (p. 157)
S&P
500’s risk. The
uncertainty of its future market
value. In the practical
application of this definition of risk, investors mainly
concern themselves with the possibility of the S&P 500
declining in market value. There are two simple but useful
measures of the S&P 500’s risk: (1) its largest
declines and (2) the minimum number of calendar years,
following a major decline, needed to avoid a loss. (p. 9)
Buy-and-hold
(B&H) strategy.
The strategy of
simply buying-and-holding an asset
class, in this book, the S&P 500. This strategy is
underpinned by modern portfolio theory (MPT), which is
firmly embedded in today’s conventional investment wisdom.
(p. 14)
Dark math of the
B&H strategy. For
example, a 50%
loss in the S&P 500 requires a
100% gain in the S&P 500 for the B&H investor to
be even. (also see pp. 16–17)
Reversion
to the mean. An
immutable force affecting
the S&P 500 (and at work in all
financial markets). Under this force, periods of high
returns tend to occur after periods of lower returns, and
in turn, periods of low returns tend to follow periods of
higher returns. (p. 12, 123)
Market Timing. The investor
attempts to take advantage of the stock market’s (that is,
the S&P 500’s) upward and downward movements. (p. viii)
Technical
analysis. This
analysis uses data generated
by the stock market itself or data
from any other source to forecast the stock market (in
this book, to forecast the S&P 500). (p. 51, 121, 173)
Wealth
self-insurance. For
1966–2015 (50 years), the Grow and Protect (G&P)
investor would have paid wealth self-insurance in the 14
years when the G&P model underperformed B&H; all cases were during
bull markets. In those years, the mean annual cost
of this insurance was 3% of the G&P model’s portion of
the investor’s portfolio lost versus B&H.
(p. 65)
Harris-Karney (HK)
model. This
is a brand-new
proprietary market-timing model
(launched 11/12/19), which succeeded the G&P model and
challenges B&H. Chapter 7–15 discuss various
applications of the HK model. (p. 69)
Exchange-traded
funds (ETFs). These
funds trade
all day like stocks. Two examples are
SPY and SH.
(p. 16)
Long
(going long). Owning a security such as SPY
that mimics the rises and falls in the
S&P 500.
When owning SPY, the HK investor roots
for the S&P 500 to rise. (p. 71)
SPY. An ETF
that mimics movements in the S&P 500. SPY goes “long”
the S&P 500. For example, if the S&P 500 rises
0.45%, SPY would have a very similar gain, and vice versa.
(p. 71)
Short
(going short).
Owning a security such as SH
that rises in proportion to falls in
the S&P 500, and vice versa. When owning SH, the HK
investor roots for the S&P 500 to fall. (p. 71)
SH. An ETF
that inversely mimics movements in
the S&P 500. SH is “shorting” the
S&P 500. For example, if the S&P 500 falls by 1%,
SH should rise about 1%, and vice-versa. (p. 71)
HK buy signal. Sell SH
and buy SPY. (pp 71–72)
HK sell signal. Sell SPY
and buy SH. (pp 71–72)
HK
pseudo buy signal.
It is used to measure HK’s
performance as of a particular cut-off
date, such as the end of a calendar year. (p. 72)
HK
pseudo sell signal.
It is used to measure HK’s
performance as of a particular cut-off
date, such as the date of a bear market bottom. (p. 72)
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