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A Rising Tide Lifts All Boats, It Also Lift All Garbages, And Garbages Got Lift Sooner Than Boats.

Apr. 27, 2011 2:35 AM ET
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Diffusion's Blog
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My latest blog post documented an unsuccessful experiment on devicing a hedging strategy by longing the top ranked stocks (returned by my fundamental ranking system) and shorting the bottom ranked ones. While during the 2007 bear market, this strategy provided good hedge and reduced the maximum drawdown from over 60% to about 20%, the bottom ranked stocks, the garbages, got lifted much faster than the top ranked ones, the boats, during the 2009 sizzling rally. As a result, the hedged portfolio kept falling while the entire market is charging ahead. It is catching up lately, but still the portfolio moved nowhere in the past 3 years.

In my ETF ranking post, I suggested to long the top ranked sector ETF and short bottom ranked one to stay market neutral. Now it looks not a brilliant idea. Yes you are "neutral", but if your portfolio is not moving anywhere, neutral is not a good word.

Read more on my blog: http://trustamind.blogspot.com/

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