As we prepared some content for our 3rd quarter email newsletter, a commentator on CNBC was challenged about the validity of Buy and Hold investing. He replied that it was absolutely the best way for the amateur investor to approach the markets. The 45% drop in SP500 index value over the last 12 months not withstanding. Had we been there to follow-up we would have asked him to explain how much the individual investor would have to earn above any manager in positive territory for the last 12 months to get back on par within a reasonable time. So, we built a little calculator that does something similar. Given a manager’s performance over the last year and the market’s performance over the last year, the calculator allows the user to assume a market rate of return and a manager rate of return into the future and tells us how long it will take the market to catch up. For example: The SP500 total return over the last 12 months (as of 09/30) was -22%. Theta’s average of its top 5 managers was +96.2%. If the market earns 10% each year and the manager only half of that, it will take approximately 21 years for the market to catch up. You can play with the calculator yourself here .

At this writing on October 10, 2008 the S&P index has closed down 7 days in a row. The question was asked, “Has this ever happened before”? The answer is yes, but not this way. The market has fallen 7 successive days on many occasions but it has never fallen as much as it has this month in 7 days in at least the last 50+ years. That is not to say that it has not fallen as far in a shorter period. There is one 4 successive down day period where it fell farther. that was the 4 day period ending October 19th, 1987. Below is a table showing the number of times the market has fallen a certain successive number of days before it rallied at least one day and the maximum it fell during that period fall.
These statistics are computed for the period beginning January 1, 1950 and ending October 9, 2008.

It’s not often that we find ourselves spewing our morning coffee all over our trading journals and keyboards when viewing an online video, but John F. Carter of Tradethemarkets.com has succeeded in causing minor damage to our desk, monitors and new sweat shirt. Let’s see, what did the wife say about getting coffee stains out of my clothes? If you are one of the few who has not heard Carrie Underwood’s song “Before He Cheats” then don’t CLICK HERE to view the parody video “Before He Trades”. Carter is a CTA and professional trader with an article in the October 2008 issue of SFO Magazine. As with all good parodies, this one is so stinking funny because it is so close to the truth. The Underwood song simply provides a familiar platform for explaining the relationship risks of professional trading. We hope you enjoy it as much as we did.

Paul Schatz of Heritage Capital (one of Theta’s Blue Ribbon managers for the last 12 months) was interviewed about his view on the economy on CNBC. You can watch Paul keep his cool while being interrupted by the over zealous anchor. Nice job, Paul!  Check out the video here.

It is not everyday that we are able to present a verified 20 year track record of consistent performance and risk management. But, with the addition of Treece Capital Management to our roster of managers, we are please to say that today is one of those days. With an inception date of 12/1987, Treece has achieved an annualized performance of nearly 11.50% over the last 20 years vs the S&P index performance of 8.7%. That is an additional 2.8% return with half of the maximum drawdown relative to a buy and hold indexed approach to investing. Take a moment to realize that when Dock Treece started his strategy we did not have email, the internet, cell-phones (car phones were the closest thing), and the S&P index was about 250.00. We are thinking of words like ‘pioneer’ and ‘trailblazer’ but competent and skilled also come to mind.

One of Theta’s purposes is to investigate innovative ideas in investment management, especially when it involves technical analysis or actively managed strategies. Sometimes we pursue ideas that are generated through the course of our daily interaction with the actively managed investment community. Other times we are hired by firms to create and test strategies based on an idea they have. Recently, we finished a project for an investment management firm that built on some ideas we had developed several years ago. Because this was paid for by the client, we can’t disclose the end results of the model and its testing (the client owns the rights to that data). But, we can show you an updated proof of concept study that formed the foundation for the new model. You can see the full report here.

On February 22, 2008, Rydex Investments launched the Japan 2x Strategy Fund. The fund seeks to provide investment results that correlate to the performance of the Nikkei 225 Stock Average, a leading index for the Tokyo Stock Exchange, with 200% leveraged exposure. For more information, call 800.820.0888.