Avoiding Loss And Making Money In Declining Markets
by Jayanthi Gopalakrishnan
He's seen the good times, he's seen the bad times. A trader and money manager, Victor Sperandeo has 38 years' experience in Wall Street. He has managed money and traded for institutional accounts and well-known professionals such as George Soros and Lee Cooperman. He is especially known for his ability to make money in declining financial markets. Throughout his career, Sperandeo has placed a greater emphasis on loss avoidance than on scoring large gains. He has authored two books detailing his philosophy: Trader Vic: Methods Of A Wall Street Master and Trader Vic II: Principles Of Professional Speculation. Just out is his third book, this time a novel: Crashmaker: A Federal Affaire. STOCKS & COMMODITIES Editor Jayanthi Gopalakrishnan spoke with "Trader Vic" Sperandeo on April 30, 2003.
What have you been up to recently?
I've been spending a lot of time creating an index, which has been branded by Standard & Poor's as an indicator.
There's an academic difference between indicators and indexes, isn't there?
There is. An indicator is a non-benchmark index, which means that parenthetically, the Dow Jones Industrial Average (DJIA) is an indicator.
Well, in academic theory it is. Like the Wilshire index, because you can't buy the Wilshire index. It's illiquid in some of the 5,000 stocks. Basically, anything that you can't duplicate in size is more of an indicator than it is an index. The Lehman Brothers bond index, for instance, is an index, because you can execute it in size. So is the Standard & Poor's 500. But the Dow Jones 30 isn't really an index, because if everyone wanted to buy it, they couldn't. The 30 stocks are too illiquid.
So this index I created is an indicator also, since it's a nonbenchmark index. It has a long and short feature to it and because it's unusual that way, the S&P branded it as the S&P diversified trends indicator. Since the early to mid-1990s I've been developing a concept that can be used in asset allocation that is noncorrelated to traditional assets and has a very low volatility.
Tell us about it.
This index has had, in the last 10 years, for instance, a 4.91 volatility. That's similar to a five-year Treasury that is also correlated to inflation, as in the Consumer Price Index (CPI), over longer periods. Since it's noncorrelated to traditional asset classes, you can also use this as an overlay. You don't need to allocate money to it because it's made up of all futures.
Why is that?
If something is made up of futures, you don't put up any money. Instead, you put up collateral. In any regard, the bottom line of this concept is that if you wanted to put forth something that's traditional according to modern portfolio theory, and noncorrelated to traditional asset classes, you'd have to use something like the Goldman Sachs commodity index.
...Continued in the July 2003 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the July 2003 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2003, Technical Analysis, Inc.
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