When investors see that iDayo made profits averaging almost 40% per year during the 2000 to 2002 Bear Market, they usually say, “You must have been shorting stocks.” I reply that we only bought stocks; no short strategy was employed. “Oh, then you must have used options.” We didn’t use options either, nor did we use margin. “Then how in the world did you make money buying stocks that the funds were buying, when the funds lost money overall while buying those same stocks?”

The reason most people have a hard time understanding this is that they believe what most people said about those terrible years: “All the stocks were going down!” Well, all the stocks were not going down during the Bear, any more than “All the stocks were going up!” during the Bull Market of the 1990’s.

A market, by definition, consists of buyers and sellers. If “all” the stocks were going up in the 1990’s, that means there were no sellers; so who were buyers buying from? Likewise, if “all” the stocks were going down from 2000 to 2002, there were no buyers; so who were sellers selling to?

Because a market requires both buyers and sellers, if either of those conditions actually existed, the market would crash. If that happened, the US economy would crash. And then China would come in and buy us. So what does happen during a Bull or a Bear Market?

First, let’s look at a “normal” market (if there is such a thing). A typical trending market will normally have about one third of its stocks running counter to the trend, whether the trend is up or down. At times this 2 to 1 ratio will vary for short periods, but over time that will be the average.

In a strongly trending market (again, whether it is trending up or down), only about 20% of stocks will “buck the trend.” Occasionally this 4 to 1 ratio will vary over a few days or weeks, but usually 20% will go the opposite direction of the larger trend.

So why do people believe that all, or at least the great majority of the stocks, head in one direction in extreme markets? Because that is what they experience. We’ve all heard about the chimpanzees that beat many of the well-known money managers during the Bull Market. Researchers trained chimps to throw darts at pages of the Journal taped to a wall. Then they bought the stocks the chimps “picked.” Since the chimps made money during the Bull, it’s not surprising that most investors did well. Many imagined that they were geniuses!

During the Bear, investors had the opposite experience. They watched their retirement funds get slashed by 50% or more. They saw all the indices drop precipitously. (The Nasdaq Composite Index lost 75% of its value in these three years.) Their mutual funds across the board were crushed. And so they thought that “all” the stocks were going down.

While all this was going on, life went on pretty much as usual for the institutions. As one would expect, during the Bull most were fully invested. But, contrary to what most would think, they did not do as most individual investors did and sell off most of their stocks when the Bear began. This was not because they didn’t want to be in cash. It was because they were not allowed to go to cash.

Most mutual funds are required by their prospectus to keep at least 90% of their funds invested at all times. This is because institutions hold the vast majority of all shares; they’re the whales of the stock market. Individual investors are minnows by comparison. Collectively we own only a tiny percentage of all shares. If we go to cash, there is little effect on the overall market. But if the institutions went to cash, the market would indeed crash.

So what could they do to defend themselves? They sold the worst 10% of their holdings, and used that money to buy the best stocks they could find – the 20% of all stocks that were going up while the rest went down. But how did they identify these stocks?

As a group institutions spend billions of dollars for research each year during normal markets. During the Bull Market they probably spent much less than their normal budgets. But during the Bear, I’m sure that they spent their normal budget plus all the money they had saved on their research budgets during the 1990’s. By doing this they found many great stocks that made profits. But these profits didn’t make the institutions profitable. To the contrary, mutual funds lost huge amounts of investor capital during the Bear Market.

But finding these few excellent stocks did help the funds. Although they didn’t make profits during these three years, they did lose less than they would have if they hadn’t been diligent about finding superior stocks. So they were able to repair their 5 and 10-year track records more quickly after the Bear ended.

So we end where we started, with the question, “How did you make money buying stocks that the funds were buying, when the funds lost money overall while buying those same stocks?” Quite simply, we bought only the great stocks that the institutions were accumulating. And we didn’t buy the bad stocks that they held.

So while the S&P 500 lost an average of about 15% per year during the Bear Market, and the Nasdaq lost about 30% per year, iDayo profited almost 40% per year on average. We beat the S&P 500 by around 55% per year, and the Nasdaq by 70%. Not bad for a mechanical system that takes all the emotion out of investing, and selects stocks using objective criteria.

Feel free to call our office with any questions on this or any other areas of the iDayo system. Our courteous Customer Service agents will help you in any way they can. And if I am available, I will be happy to talk with you personally.

Tom Barrett, CEO
iDayo, Inc.
www.iDayo.com
561-753-5998 or
888-LOW RISK