Ludicrous Returns vs. the Market

By Joseph Furnari

Are you an individual investor or money manager investing for clients?
Have you been frustrated to earn a lower annual return than S&P500 index?
Have you ever had the desire to earn more than S&P500 market rate of return?
Did you ever wish you had a solid investment tool that objectively identifies the best investments and when to buy or sell?
Ludicrous Returns vs. the Market shares two investment models developed to outperform the market over the long term: a stock investment model and a market timing model. Both models are based on technical analysis, analyzing past stock price patterns to make an inference on how it will perform in the future.
To develop the stock investment model, analysis and data experiments were conducted on hundreds of stock price charts over a 50-year time frame. Stock price patterns found to consistently predict the future were transformed into the model logic. In a 2007 to 2020 simulation test, the stock investment model earned an average annual return of 44.5% and grew cumulative capital 41.5 times the S&P 500!
Before discovering patterns that predict the future, Joe Furnari would have been one to preach that no one has been able to successfully earn above an average market rate of return timing the market over the long-term. However, after the stock model predictive pattern discoveries, Joe Furnari conducted a plethora analysis on a mission to find predictive patterns that could be developed into a market timing model. The market timing model developed is based on buying and selling S&P500 index at optimal times. 1970 – 2021 test period result: timing model grew capital 4.8x more than buying and holding S&P500 index!
One reason why the market timing model outperforms buy and hold is the model will move out of equities and into cash before a lot of significant crashes and then back to equities before a solid run-up. Some example market corrections of successful market timing execution include 1973 – 1974, Oct – Nov 1979, March 1980, October 1987, 2000 – 2001, 2007-2009, August 2011, 2015, 2018, and February – March 2020.

• Language: English
• Publisher: Gatekeeper Press
• Release date: Nov 1, 2023
• ISBN: 9781662940545

Book preview

Preface

I’m Joe Furnari. I’m an Engineer by trade with a passion for data analysis. My other inspiration is investing and growing wealth. I have an MBA in Finance and have studied the market and economy since I was 18. Just like anyone who invests, my overall goal is to grow wealth as quickly as possible!

Throughout the years, I’ve tried almost anything and everything under the sun relative to investing techniques for stocks or market index funds. I had almost every investor subscription you can think of. I read several books on investing ideas or methods. I conducted a lot of research to look for new industry trends or game-changing technologies to invest in. I looked for opportunities not yet recognized by the market. I studied the impacts of stocks with insider buying information from the SEC. Sure, I hit some nice home runs along the way, but I had a hard time beating the market more than one year at a time. I would analyze my trades and try to identify ways to improve return performance.

Calculus is a math subject that studies the relationship of two variables. Correlation is the level at which one variable can influence the outcome of another variable. If there is a high correlation between two variables, then it’s possible one variable can influence the other. About 7 years ago, I had an epiphany. I thought to myself, I wonder if there is a relationship between the stock price, 10-day average, 50-day average, and 200-day average. I began to wonder if there were any mathematical relationships between these metrics and future stock price performance. I went on a mission to find patterns, trends, or specific elements that had a high correlation to future stock price performance. I started experimenting with data. I initially looked at stock charts in several industries from 1970 – 2021. I searched for patterns that were repeatable and had high correlation to what was going to happen next. I was searching for anything that could predict the future. With this philosophy, I wondered, could there be a system that advises buys and sells at the right times be the key to significantly outperform the market?

Stock Investment Model

I could not believe what I discovered! I found several patterns that predict outcomes. These patterns were consistent across stocks in many industries! These patterns consistently and reliably predicted the same outcomes over five decades! I derived these findings into the Furnari stock investment model, a collection of rules developed and proven to achieve significantly higher returns than the market over the long term. The model is based on common patterns that have high predictability on 3- to 6-month stock price performance. These patterns display an excellent time of when to buy before a solid run-up, when not to buy, and when to sell a stock that is about to flat line or decline. The model was tested over a 14-year period, from 2007-2020. In the test, the model evaluated about 500-750 stocks per year and picked the best of the best selection of stocks to buy each year. Results:

In the 14-year period between 1/1/07 and 12/31/20, the stock investment model:

1. Grew an initial $10K investment to $1.476 million, or 147.6x the amount of original capital. S&P500 buy and hold strategy only grew to 3.6x the original investment. The model generated 41.5x more capital than the S&P500.

2. Model investments have a high success rate of buys and sells. Capital gain/loss ratio is 24:1. Said differently, the value of the investment gains is 24x the value of losses.

Figure X

Stock Investment Model outputs:

1. Best of the best stocks to buy and own (Highest potential for huge returns)

2. Stocks to stay away from and not buy

3. Quality stocks that should be on a watch to buy list, waiting for the right opportunity to buy

4. Prioritizing stocks / Total stock performance rating score

5. Optimized time to buy a stock (when it is most likely to start a solid run-up)

6. Optimized time to sell a stock and keep capital and profits

This is not a day-trading system. This system is predicated on managing your portfolios after market close, so you can continue your day job without interruption. The scope of this model is to conduct weekly charting of stocks currently owned or waiting to buy. Under certain conditions, a small subset of stocks may require daily monitoring to boost performance. This system does not advise either way on options. Results reported here reflect buying and selling stocks to the model.

Market Timing Model

When the Covid 19 market crash occurred February – March 2020, I was already well into developing a stock investment model. At that time, I had a flashback to several years ago when I was in business school. One of the principles of investing preached was, No one has ever been able to successfully time and beat the market over the long-term. Buy and hold is the best strategy! One would be foolish to believe otherwise. I was thinking about the huge crashes over the years, including one I got burned on in April 2000. Interesting thing is each time you’re in a crash, it takes a long time to gain back lost capital and return to where you started! Ask someone who lived through the market crash of 1929 – 1932, where the market index did not return to the 1929 peak until 1954, 25 years later. Would a person from that era believe buy and hold is the best strategy? In 2008, when the S&P500 index lost 37%, you had to earn 58.7% return on investment to get back to where you started. At an average market return of 11.1% per year, that could take 5 years. I know no one has publicly been able to successfully time and beat the market over the long term. However, that really bothered me. I was not willing to just accept that buy and hold is the way it is because no one has been able to time the market successfully over the long term. What if you had some bad circumstances in your lifetime and needed to earn more profits to have a chance at retiring one day? I personally know people who gave up retirement after losing their assets in the 2007-2009 market crash. I thought to myself, there just has be to be some kind of warning signal that could tell you when to get out of equity index and move to cash. By the same token, any model would also need to advise the best time to get back in the market without missing the bus or significantly lose from buying into a market environment that is still dangerous. I wanted to know if there was any kind of pattern that could consistently and reliably predict future performance. Any system would have to significantly beat the buy and hold strategy over the long term to be effective. I started on a second mission to study market index patterns from 1970 – 2021. By using the same techniques to develop a stock investment model, I created a second model I call the market timing model. The market timing model informs when to pivot between equity index and cash.

52-year Performance (1970 – 2021): The market timing model grew capital 4.8x more than buy and hold S&P500 index!

22-year Performance (2000 – 2021): The market timing model generated 2.6x the capital versus buy and hold! I don’t know about you, but I would love the opportunity to earn almost 3 times with the market timing model versus buy and hold.

The market timing model simulation test was based on buying 100% in S&P500 index or selling and converting to 100% cash at select periods based on consistent predictive principles. The timing model developed successfully moved out of equities and into cash before a lot of significant crashes. Examples where the model got completely out of equities before a crash include 1973 – 1974, Oct – Nov 1979, March 1980, October 1987, 2000 – 2001, 2007-2009, August 2011, 2015, 2018, and 2020. The model framework also includes innovative buy-back rules that enable getting back into the market at a great time. This model is useful for boosting returns on portfolios such as 401(k)s that are restricted to equity index ETFs or mutual funds.

If you are seeking a system that can significantly outperform the market and are willing to put in the time and effort, this book is for you!

This book will teach you how to apply the stock investment and market timing models with illustrative examples. You will learn:

1. Methods to find new investment opportunities

2. How to build a stock list

3. Identify the best of best stocks to buy and own

4. Identify a great time to buy a stock

5. Identify great time to sell a stock

6. Apply all stock investment model rules

7. Apply the market timing model and successfully time equity index vs. cash position

8. Invest optimum amount per stock based on portfolio size and max target quantity of stocks

9. Set up a spreadsheet to apply the investment model

Chapter 1:

Stock Investment Model Introduction / Return Performance

Market Timing Model

Between 1921 and 1932, if you invested $10K at the beginning of 1921, below is a summary of estimated returns:

Table 1.0¹

It is fascinating that the market doubled between the start of 1921 and mid-1925, in 3.5 years. Instead of a more expected 10 years, it only took 3.5 years. What’s more astonishing is that the market doubled again in the following 3 years to mid-1928. 1928 itself had a mind blowing 51% gain! By the end of 1928, capital was 4.7x the original investment of just 8 years earlier. Most people at this point were likely thinking the market was unstoppable and returns in the last few years were the new norm. Since I’m not old enough to have been around in 1929, I am only speculating on how people felt. However, how people felt is reflected in the market chart. Notice how the returns significantly increased at a higher rate from 1926 / 1927 to 1927 / 1928. In 1929, the DJIA peaked at almost 6x the investment since the beginning of 1921 (refer to August 1929 Peak in the last row on above table).

Ironically, 1929 was a year that would change history! In February 1929, the market experienced the first steep vertical line correction. Subsequently, a rebound occurred from February thru June. This is evidence that a lot of people brought on the dip. Then came August 1929. I encourage you to pull up a DJIA market index chart from 1928 – 1931. The market started a decline trend in August 1929. The correction had deepened and was exacerbated by October. The index chart featured a steep vertical line drop between August and November 1929. This is evidence of liquidity drying up. Liquidity dries up when you have all sellers and no buyers. It is a dangerous and scary situation that can occur abruptly.

The market timing model was developed to objectively time the market and cash out ahead of these types of crashes. Ironically, there are plenty of warning signals before a free fall if you know what to look for. I found certain key signals that provide direction to move into cash and not invest. There are times when you should never buy on the dip unless you’re OK with losing your shirt. Some people are OK with that as they can’t help but buy when there’s a perceived sale. Investing in October 1929 was certainly not one of those times to buy on the dip! In October, there was a short reversal: The market went up from October to December, before tanking again like no tomorrow. From the peak in 1929 to the market low in June 1932, the market lost roughly 85% of value! 85% lost over a 3-year span! Is that even possible? That unwound all of the gains made in the prior 10 years of investing. While the stock market was correcting, there were likely a lot of people buying on the dip! Some of the likely thoughts were Double your money when the market returns to the 1929 peak. This is what happens when emotions get the best of us. Pending your age in 1929, if you were one who lost 85% of your investment assets, it was common to live poorly for the rest of your life. There was likely a lot of people who kept investing until they had nothing left. It took until 1954, 25 years later, for the market to return to the 1929 peak! So, if you were 40 in 1929, you would be 65 years old to see the stock return to the 1929 peak! Said differently, if you were at full equity in 1929 and lost 85% of your capital, you would have to earn 6.7x your money (+567% Return on Investment) to get back to 1929 capital level. Flash forward to October 20, 1987. Black Monday, October 20, 1987, is another day that anyone who experienced it will never forget. The S&P 500 lost 28% in one trading day!

The market timing model was developed with a power to predict the future and take action to sell equities. The timing model is also effective at keeping powder dry prior to further huge market drops. The timing model was configured to buy back into the market at a low price at the right time! One of the foundation principles of the market timing model is the ability to distinguish market dips that are still dangerous from those highly likely to be a lucrative investment period. The index market timing model and how to apply it will be covered in Chapter 7.

Stock Investment Model

Investment Analysis Types

There are two main types of analysis applied to individual stocks. The first type is fundamental analysis, which uses financial metrics to evaluate liquidity, profitability, cash flow, and valuation to compare companies within an industry. Fundamental analysis provides a critical overview to understand the stocks you are buying. However, fundamental analysis is one piece of the overall equation. You can find great stocks, with growing revenues, profits, cashflows, and great liquidity position, but this does not mean the stock price in the next 3-6 months is going to perform well. The stock could have already had a run-up and be near the end of a stock price solid growth stage. Other than a quick high-level summary of applying some of the key metrics of fundamental analysis covered in Chapter 2, this book is not about fundamental analysis. It’s about the second type, technical analysis! Technical analysis is analyzing past stock price patterns to make an inference on how it will perform in the future. It is not generally taught as a textbook principle.

Inspiration to Create the Stock Investment Model

My frustration of mediocre performance on stock portfolio accounts was a motivation to find something better. I wanted a system that could take out emotions on stock investment decision making. My sense is that when emotions come into play, there is a tendency to make some bad investment decisions. To be successful investing in stocks, performance at a portfolio level pretty much has to exceed the returns of market indexes (S&P 500, Russell 2000 Index, Midcap 400, etc.) consistently over the long run to make it worth your time. Otherwise, what’s the point? You could just invest in a pool of ETFs or mutual funds on all your accounts and not spend time looking for stocks and managing trades.

I made a list of common investment actions that contribute to poor return on stock investment performance:

1. Everyone is talking about Nvidia, Amazon, Facebook, or x stock. In fear of missing out (FOMO), you opt to buy the stock even though the stock has already exploded.

2. You do some research and buy a stock before it’s noticed by the market. The stock explodes. You think it’s going to keep going and that you’re going to retire in two years, so you hang on. The super high growth stock that exploded in value in a short time has now corrected from 70% from the peak reached. You kick yourself, If only I sold sooner!

3. You buy a stock, it explodes in value, and you sell it, making a nice profit! What do you do next? So many of us, myself included, have a tendency to buy that stock right back. Sometimes, you can’t even wait to buy it back. There’s a small correction or a small increase, you buy it back so that you don’t have to miss another run-up on the stock. The stock then tanks!

4. Buy a stock that tanks right after.

5. Buy a stock, it generates a profit, then flat lines horizontally for another year. While it may seem like you’re still doing well based on the overall return, you essentially just wasted the capital in the stock that treaded horizontally for a year. If you’d sold a year sooner, you could have applied that capital to a new, strong growth opportunity missed because you tied up the capital to hold the horizontal stock!

6. Weight average down on a stock, buy it multiple times so that you feel like you’re making good money by the time you’ve bought it for the 3rd time on a decline, when in fact the overall return performance is poor.

7. Buy a group of stocks and the market tanks right after, pulling your stocks down.

8. You see the stock trend starting a new growth and feel it’s the right time to buy, but you wait to see what happens. You then miss a big run-up. Sometimes you buy it at a significantly higher price than if you’d bought sooner. Other times you make the decision to just miss that stock.

9. Buy mediocre stocks that don’t generate too much relative to the return on investment, but they’re good solid stocks that you believe in and invested in several times through the years. Holding onto stocks that trend horizontally for a long period of time eliminates the opportunity to be invested in a stock with a solid run-up.

Folks, all of the above actions lead to poor stock portfolio return performance. Honestly, if you’re stuck in the