The Million Dollar Stock Market Bet

Warren Buffett proved his point in 2016 when he bet $1,000,000 that the S&P 500 Stock Index would outperform hedge funds. His bet was that active investment management by professionals would under-perform the returns of people who were passively investing.

The Oracle of Omaha publicly wagered $500,000 and suggested a 10-year bet. "I then sat back and waited expectantly for a parade of fund managers ... to come forth and defend their occupation."

Only one person took the bet: Ted Seides, a former co-manager of Protégé Partners, a specialized asset management and advisory firm. Seides said that the two agreed to a million-dollar wager, which pitted low-cost S&P 500 Index fund returns against a group of Protégé's handpicked hedge funds.

By the end of the bet on Dec. 31, $1 million invested in the funds chosen by Seides would have gained $220,000 in the same time period that Buffett's low-fee investment would have earned $854,000.

That bet changed the world of investing as a host of no or low load (cost) funds, and ETFs geared up as a place for people to camp their money.

If you are really good at picking stocks, you can beat this strategy. The Motley Fools have an enviable record, due in part to the fact that they hold onto everything, counting on the fact that a few very big winners will more than make up for the many disappointing performers. The math of it does clearly work.

How hard is it to be really good? Can you do better than the professional money managers?

Consider this; a 2022 study of actively-managed mutual funds by S&P Dow Jones Indices asked the question above and came up with a startling result. It found that not a single mutual fund — not one — managed to beat its benchmark in either the U.S. stock or bond markets regularly and convincingly over the last five years. These results are even worse than those in 2014 and 2015. A study looking at 10-year performance showed only 20% of funds beat the index approach!

That's why I believe for the novice investor it's best to follow Buffett's advice to buy a stock index and hold. I would add to use market timing to make your purchases.

The reality, however, is there are now just too many of these investment vehicles. Where is the best place to park those investment dollars? Below, I'll give my answer to that, with lots of charts to help us see market reality. Pay attention to the price action of these investment possibilities in 3 ways:

1. How severe were the sell offs of 2020 and 2022?
2. How quickly did prices bounce back from the selloffs?
3. Is there lots of erratic price action that makes holding hard?

First -- Where Not To Plunk Down Your Hard-Earned Cash

ARKK is the ETF run by Cathie Woods. What do you think?

In Chart 2, we see the results of Katie Stockton's ETF. Again, what do you think?

Here's the ETF run by Blair Hull (now a TV personality) that has averaged 8% a year. Note the new high seen in 2023 and how the 2020 peak was exceeded in October of the same year.

Momentum Has Faltered

This momentum-driven fund did poorly in 2022 and still lingers.

Here is the Dorsey Momentum ETF, another fund that buys strong stocks. How well do they do? Very good in the bull run of late 2020, but since then it's been sideways and no recovery.

IMTM is another momentum-investing ETF that has a better-looking chart; the rub is the drawdowns have been vicious.

With PTH, the healthcare-investing ETF above, the momentum strategy is applied to just an industry, one that has been strong, yet the results have not been favorable. Those buying in 2018 are about even.

Back to the Bet

The Buffett Bet is that the overall market will outperform most all fund managers. Hence the investor should just buy the DJIA, NASDAQ, or S&P Index. Here are the ETFs for those choices.

For the Dow 30, the DIA is the only authorized ETF for the index. The Expense ratio is 0.16% and sports a 2% dividend. Just look how much better this performance is than the charts we have been studying.

If you want to replicate the Standard and Poor's average of 500 stocks, then you will want to buy the SPY or IVV. Both hold almost identical positions, but the IVV, shown here, has a 0.03% expense ratio, while the SPY dings you for an almost 3 times higher fee. Vanguard also offers the VOO with the same fee as IVV.

Perhaps you like the NASDAQ stocks best. In that case, you will want to be invested in either the QQQ or QQQM; their performance the year has been identical. QQQ carries a 0.20% expense ratio, while the QQQM is 0.15%. Performance is effectively the same as the overall market.

How about investing in the NASDAQ, home of the hottest stocks of the day? The upside has been great... when stocks rally, this has been the best. When stocks have declined, this has been the worst. Trade accordingly.

A Few General Observations

Clearly, it does matter which ETF you own. They are not all created equally. The DIA and the SPY seem the most stable to my eyes. That's what I want; a stock or index that does not get beaten to death in the declines.

The best one?

Well look at our next chart. Check out the new high seen in 2023, when none of the other averages could pull that off!

The COVID decline of 2020 was erased shortly thereafter with a massive rally. The 2022 slide did not last long, and again there are those new highs I talked about earlier!

Okay, what is this??

Yes, I know you want to know the name of this one. Take another look at the chart, then take a guess.

This is the chart of Buffett's Baby, BRK/B. Yup; Buffett continues to win the battle of all-around performance. Love him or hate him, his performance has been spectacular.

Wealth is not Health.

The leading cause of death in the USA---for a long, long time---has been heart disease. The latest data shows almost 700,000 deaths from heart disease, more than even cancer.

Obesity is a risk for heart disease. In fact, a large 2018 study found that, compared to individuals with a healthy BMI*, people with obesity not only had a higher risk of heart disease,but they also had a higher risk of death due to heart disease.

*BMI is a measure of your body size that takes your weight and height into account. It's calculated by dividing your weight in kilograms by the square of your height in meters.

This is why one of the hottest stocks of 2023 has been Novo Nordisk (NVO), the Danish corporation that markets the new hot weight loss drug, Ozempic.

The drug is not actually approved for weight loss. It's a drug for diabetics. However, doctors do off label prescriptions for weight loss. Docs have written so many scripts that the company has begun a $4 billion dollar expansion program. Typically, a patient will pay +$1,000 to start the program plus doctor fees.

While prior weight loss drugs have worked by speeding up your metabolism, this one (semaglutide) works by suppressing your appetite. I have had several friends try this approach to weight loss; it was almost a miracle. They lost weight and easily. No wonder the stock has been so strong, and respondent to our Money Flow index.

Of course, it has side effects; don't all drugs? The most notable have been fatigue, dizziness, as well as kidney failure and pancreatitis. Perhaps suicide.

That's the wealth side of this, now here's the health side ...

As the summer of 2023 began, I realized I needed to drop weight so I could perform better in the Senior Olympics. Like everyone else, I was looking for a quick and easy way to slim down. In the process, I learned about Berberine, an alkaloid extracted primarily from a shrub called Berberis.

This is what I learned...

In one 12-week study of people with obesity, taking 500 milligrams (mg) of berberine three times per day caused about 5 pounds of weight loss, on average. The participants also lost 3.6% of their body fat. Additionally, a review of 12 studies found that supplementing with berberine led to significant reductions in body weight, body mass index, and belly fat. It also decreased levels of C-reactive protein, a marker of inflammation.

A National Library of Medicine article states, "Clinical studies also indicated the beneficial effects of this plant on dyslipidemia in human beings. Oral administration of BBR (0.5 g twice per day) in 32 HCh patients for 3 months reduced serum cholesterol by 29%, TGs by 35% and LDL-C by 25% compared to the control subjects."

In another study, subjects on the BBR therapy were given 0.5 g of BBR hydrochloride orally twice a day for 3 months and it significantly lowered blood cholesterol, TG, LDL-C, ALT and AST, but increased HDL compared to the control subjects. Berberine also appears to inhibit the growth of fat cells at the molecular level, which could help promote weight loss.

Being a non-risk adverse trader, I gave it a spin taking 2, 1000 mg capsules in the morning and another about 4 PM. A 90-day supply on Amazon will set you back about $30. Results were surprising; I went from 182 to 169, the lightest I had been since college football days. Shortly after going off, I gained back 7 lbs. and leveled off there; lower than when I began. Why? I think being on the stuff helped me realize I did not have to have such large portions. So it was a little behavior modification. Recently I resumed the protocol again. The scale gave better readings.

Side effects seem to be negligible. Keep I mind, I have no medical training. This is just one person's experiment to maximize health. If you are concerned about heart disease and your weight, then I suggest a trip to Google and Facebook land to come to your own conclusions.

Hold Them or Fold Them?

Don Schlitz wrote it, and Kenny Rogers sang it best ...

"If you're gonna play the game, boy

You gotta learn to play it right

You got to know when to hold 'em

Know when to fold 'em

Know when to walk away

And know when to run"

This is not a time to fold your cards or run away from the game based on my cycle studies and fundamental models.

I will let history prove my point.

Why am I a buyer and holder? You'll see in the next few charts.

The red lines in the charts represent an important cycle or better yet, an emotional wave. We have seen it 21 times in the stock market as far back as I have data - since 1885. Of those 21 occurrences, 20 have had higher prices at the end of the wave than they had at the start.

The one failure was 1940, as WWII broke out. The wave was calling for higher prices. No two ways around it; the pattern was wrong, as stock prices tanked.

Going forward in time to 1947, the wave again called for higher prices. Sure, that happened, but it was erratic. A time, like the song says to hold them. To my way of thinking, as long as this emotional wave is in effect, hold ‘em; stay long and/or buy any market breaks.

Let's look at the wave as it began in 1918, a time when prices met their destiny from the forecast with almost perfect harmony.

While prices wobbled a bit from the wave in 1898 (Chart 18), it nonetheless was good guidance to the future bull market.

Moving now closer to recent activity, I am posting here the wave in 1982. Perfect? No. Did you want to have a bullish position and hold? Yes, as, again, prices moved higher with the wave.

The bull move that began in 1988 was foreshadowed by this wave of emotional bullishness as, yet again, prices played out almost lock-step with the projection.

Some say you are only as good as your last trade. So I am posting in Chart 2017 the last time we saw this wave... again... a great time to be fully invested. Indeed, it was a time to hold.

As we have learned, price may not exactly follow the mathematical model. Yet the model has been the harbinger of the long-term trend. This will be my strategy. With a +90% record of success, this fits my criteria of investing when the long-term odds are in my favor, as I believe they are now.

Cycle forecasts are a good technical tool. Yet ultimately, fundamentals drive stock prices. Two things cause stock prices to crater.

The first is the news of the day. Today's "fake news" is everywhere coupled with the heightened emotional state of the populous. It's no wonder we have seen prices getting beat up; the Hamas attack, the delay in getting a Speaker of the House in congress, the Trump trials, a Fed president who looks as pessimistic as he talks, and the fear of rising inflation. You would think stocks would be much lower.

The second, and greater driving force, is business conditions. When business is good, stocks rally. When bad, earnings falter and stocks collapse.

What Big Money Fears

A "Family Office" is a management company setup to handle the wealth of large families. Typically, they are run or heavily influenced by a member of the family. They may manage one or more families and usually cover all aspects from taxes and charitable trusts to investing. They are not for everybody; you need close to $100,000.00 in assets to qualify for what is basically an in-house hedge fund that manages other areas of wealth with less regulatory oversight.

An example would be Walton Enterprises LLC, the family office that managers Walmart's some $160 billion of assets.

Citi Bank just released their Family Office survey, a report of investing by this class of informed investors. As a group, they represent $565 billion dollars of net worth. That sure classifies them as being smarter than me. So I pored over the survey and found this out.

Chart 22 shows the survey results of the forces they are most concerned about. This is telling us to focus on indicators that help us predict these influences, which is not the lack of currency risk!

On a broad scale, they see the most opportunity in global investment-grade fixed income and private credit.

They are negative (see the red circles) on Real Estate emerging-market fixed income and, most of all, crypto assets.

Where They are Putting Their Money

Based on this survey of 268 Family Offices, they are most bullish on Technology and Healthcare while remaining positive on energy. This is a great tip as to where they will be allocating assets over the next 12 months.

Is Business Booming or Busting?

This is such a critical question. Fortunately, there are several tools that tell us the current state of business. Good forecasters of business from the FRED are the Current Genera Business Conditions and the OECD leading Indicators.

The Chicago Fed publishes an excellent tool to help forecast good and bad times -- the Chicago Fed National Activity Index. They describe it as the three-month moving average of the sum of the absolute values of the weights for the underlying indicators whose contribution to the CFNAI is positive in a given month, less the sum of the absolute values of the weights for those indicators whose contribution is negative or neutral in a given month. Periods of economic expansion have historically been associated with values of the CFNAI Diffusion Index above –0.35.

Here is the chart for you to study.

Since the 1970s, every recession has been heralded in by readings below the dashed line in this Chart 25. Also note that not every time it dipped to this level did we have a recession. Further note the larger view of where the indicator rests at this time (Chart 26).

As it sits at this time, there is no forecast for a recession or bad business conditions to come anytime soon.

Inflation Projection

The Federal Reserve Bank of Philadelphia has a gauge as to what the trend of inflation is expected to be. It is the Aruba Term Structure of Inflation Expectations (ATSIX).

They say "ATSIX is created by using a factor model to optimally combine major surveys — the Survey of Professional Forecasters published by the Federal Reserve Bank of Philadelphia and the Blue-Chip Economic Indicators and Blue-Chip Financial Forecasts published by Wolters Kluwer Law & Business — using a methodology in Aruoba (2016). It is useful to market participants for pricing securities whose returns are linked to inflation expectations at arbitrary horizons".

Chart 27 shows the expectation for inflation last October vs. September and October of this year. What we see is the expectation is for lower inflation and sooner than last year's projection.

Bonds Beating All Over?

It's time for bonds to rally when we look at Cycles, Seasonals, the Commitments of Traders Report, and our Money Flow Index. Chart 28, showing the dominant 500+ days cycles, says we are in the zone where a rally should start, lasting until the 10th or so of December.

Some help in timing may come from our True Seasonal and Cycle Forecast indicators in StockCharts. In blue above, see the True Seasonal pattern for TLT; in red, see the Cycle Forecast. They too are in the areas where we should look for rallies.

Two Reasons to Look for a Rally

It's best to have fundamentals to back up technical projections. With that in mind, turn your attention to the next chart that shows "smart money" has begun buying TLT, a la our Money Flow Index. That, just this week, entered the buy zone. This is not a timing indicator, but helps us to be in alignment with what professional money is doing.

There's more bullishness when we take into consideration my WillVal Index.

This is the most unique of all my tools. It is not technical, but gives a clear view of the fundamentals in any market. Just look at Chart 31. While not perfect, it has called for the best times to sell Bonds or TLT, and spotted a few opportunities on the long side.

Next, we see that our Paunch indicator has entered the buy area; all we need now is a rollover and turndown in the index. I have marked off prior ones so you can judge for yourself.

Best Trades for November

There are two seasonally reliable trades for November. The first is to buy the S&P 500 E-minis (futures contract), but the same influence is seen in the SPY and QQQ.

The optimal trade has been to buy on the opening of the fourteenth Trading Day of November with a $3,100 Stop.

These are trading days, not calendar days. Fed holidays do not count at trading days. Saturday and Sunday are not trading days.

The best exit, which is what produced the 96% accuracy, is to hold for 6 days, then exit on the first open that shows a profit. For ETF traders, just look to hold for 5-6 days then pitch the trade. Also note the first three days of November have a bullish bias.

Speaking of Bonds...

November has often seen rallies in the Bond markets. The Optimal trade is shown here.

Typically, Bonds begin to rally on the fourth trading day of the month, with an ideal hold of 10 days, then exit on the first open that shows a profit. This trade has legs.

Best Bet in the AI wave?

The star of growth in Artificial Intelligence has been NVDA, but, on close inspection, I will favor ASML Holding (ASML), the Dutch maker of chips used for AI. They do have a competitive advantage in that their ultraviolet technology allows them to make smaller chips with less cost. Gifted with a backlog of orders of about $30 billion, they have a nice income stream.

I am drawn to this because, in the recent tumble on Wall Street, all of other AI related stocks have been weaker with most making new lows. Only AMSL has held and rallied. Clearly, this stock is in strong hands, and has responded well to buying on a breakout of 7-to-8-day highs.

Here is my forecast for the stock, followed by its seasonal pattern.

Following Up on Stocks From Prior Letters

There is a lot to learn from the current sell-off, as we see in the next chart. Let me explain.

These 5 stocks have been the darlings of short-term traders, with great hope for long-term holders. Sir Isaac said it best: "An object set in motion tends to stay in motion."

I will paraphrase that for stocks to this: "The less a stock declines, the more it rallies on the next bounce."

We see here that CRWD has clearly been the strongest of these stocks, designating it as one that rallied the most. META and NVDA have also held up better than most stocks; short- and intermediate-term traders will want to focus on these three.

Not shown here, so take a dash to StockCharts.com to see that DraftKings (DKNG), and other mentions from when we began this journey -- e.g. Lululemon (LULU) and Walmart (WMT) -- have also shown unusual strength.

Special Situations Follow Up

As you know from prior letters, IBM almost always rallies at this time of the year; 2023 has not been an exception. We should see higher prices over the next month.

American Airlines (AAL) has still not taken off. As you know, we want a trend change before we buy, but that $9-to-$10 price seems like a place to begin accumulating for a long-term position. I expect energy prices to fall, which should also help this and other transporters to show more profits.

Closing Comments

There is no doubt about it ... I have been bullish when prices have been tagged. The reasons are many; Auto Strike, lack of House Speaker, Hamas bombing leading to??, FED lack of clarity, a collapse in the bond market, and a potential Presidential race between a fool and a felon. Given all that, prices have held up well.

My perspective is that we are still in a bull market and this recent shellacking is about over. I see no need to ditch my bullishness.

A Good Place to Kick Off a Rally

It's standard technical analysis to look for a market to rally as it approaches a trend line from recent lower lows. That's precisely what we see here; another reason to expect Cycles and Seasonals to activate at this time.

The Next Family Meeting Will be November 17th

3 Great Thanksgiving Day Trades!

And... Coming Next Month

How to play the Christmas Rally in Stocks and Gold!

Until then...

Good Luck and Good Trading,

Larry Williams

If you have questions for Larry that you'd like addressed in future postings, please email familygathering@stockcharts.com.