Imagine having a money making machine to reap gains in the stock market while you sit down to enjoy life.
It’s everyone’s dream, isn’t it? Investor Vance Howard thinks he has found it.
Howard and his small army of computer programmers at Howard Capital Management in Roswell, Georgia, have a quantitative system that is showing great returns.
Its HCM HCMGX tactical growth fund,
beats its benchmark Russell 1000 and broad range fund category by 8.5 to 10.4 percentage points annualized over the past five years, according to Morningstar. That’s no small feat, and not just because he has to overcome a 2.22% fee. Beating the market is just not easy. Its HCM Dividend Sector Plus HCMQX,
) and HCM Revenu Plus HCMLX,
the funds show a similar outperformance.
There are drawbacks, which I detail below. (Among them: potentially long periods of underperformance and regular tax bills.) But first, what can we learn from this winner?
So-called quants never share all the details of their proprietary systems, but Howard does share a lot, as you will see. And this Texan breeder has plenty of great advice based on ‘horse sense’ – not surprisingly, given his contagious passion for the markets and three decades of experience as a pro.
Here are five lessons, 12 exchange-traded funds (ETFs) and four stocks to consider, taken from a recent interview with him.
Lesson # 1: Don’t get emotional
It’s no surprise that so many people are doing poorly in the market. Evolution has programmed us to fail. In order to survive, we have learned to run away from the things that scare us. And yearn for more pleasurable things, like sweets or fats to store calories before what could be a long time without food. But in the marketplace, acting on the emotions of fear and greed invariably causes us to do the wrong thing at the wrong time. Sell ââbelow, buy above.
Likewise, we are programmed to believe that being with the crowd brings safety. If you are a zebra in the savannah, you are more likely to get ripped off by a predator if you go it alone. The problem here is being part of a crowd – and crowd psychology – dumbs us down on a purely emotional level. That’s why people in the crowd are doing terrible things that they would never do on their own. It doesn’t matter how smart you are. When you join a crowd, you lose a lot of IQ points. Basic emotions take over.
To do well in the market, you need to counter these trends. âOne of the biggest mistakes individual investors and fund managers make is getting emotional,â Howard says. âLet go of your emotions. “
Lesson 2: Have a system and stick to it
To exorcise emotion, have a system. âAnd don’t guess it,â Howard said. “It keeps you from letting the pandemic or Afghanistan scare you off the market.” He calls his system the HCM-BuyLine. Essentially, it’s a dynamics and trend tracking system, which often works well in the markets.
The HCM-BuyLine basically works like this. First, rather than using the S&P 500 SPX,
or the Dow Jones Industrial Average DJIA,
Howard mixes several stock indices to create his own index. Then it uses a moving average which tells it whether the market is in an uptrend or a downtrend.
When the moving average drops 3.5%, it sells for 35%. If it drops 6.5%, it sells an additional 35%. It rarely goes 100% cash.
âIf the BuyLine is positive, we will stay a long time no matter what,â he says. âWe take all emotions out of the equation by letting the math decide. ”
Right now, it’s bullish. (More on this below.)
Your system should also tell you when to return.
âThis is where most people go wrong,â he says. âThey are leaving the market and don’t know when to come back. The HCM-BuyLine gives a buy signal when its custom index trades above its moving average for six consecutive sessions, then trades above the high reached during those six days.
You don’t need a system that calls for exact highs or lows in the market. Instead, the BuyLine keeps Howard out of bear markets 85% of the time and 85% of the good times.
âIf we can do it consistently, we’ll have higher yields and less stressful lives,â he says. “Being full out on a bad tape is no fun.”
His system is slow to get him off the market, but quick to get him back. Even a 10% correction won’t necessarily get it out. He often buys these withdrawals. Coming back quickly makes sense, as fund recoveries tend to happen quickly.
âThe HCM-BuyLine takes all emotion out of the process,â Howard explains.
Lesson # 3: Don’t Fight the Gang
This concept is one of the centerpieces of wisdom from Marty Zweig’s classic book, âWinning on Wall Streetâ.
âYou have to stay on the right side of the market,â Howard agrees. “If you try to trade a bad market for a long time, it’s painful.”
In other words, don’t try to be a hero.
âSometimes not losing money is where you want to be,â he says.
Likewise, don’t be careful just because the market is reaching new highs like now. You should like the new highs because it is a sign of market strength that can likely last.
Lesson 4: keep it simple
As you will see below, Howard does not use esoteric instruments such as derivatives, swaps, or index options. He doesn’t even trade stocks or foreign currencies. This is refreshing for individual investors, as we have a harder time accessing these tools.
âYou don’t have to trade crazy stuff,â he says. âYou can trade vanilla ETFs and beat everyone. “
Lesson 5: How to trade in today’s market
First, be long.
âThe HCM-BuyLine is very positive. We’re 100%, âHoward says. âThe market is expanding. It gets pretty exciting. We don’t see him turning around anytime soon. We buy withdrawals.
A bullish signal is all the money on the sidelines. âIf there is any relief at Covid, we could attend a large rally. We may end up with a great fall [season]. “
Howard also uses momentum indicators to select stocks and ETFs. For the sectors, he favors the following.
He enjoys healthcare, tradable through the iShares US Healthcare IYH,
and ProShares Ultra Health Care RXL,
AND F. He’s becoming more optimistic about biotechnology, which he plays through the iShares Biotechnology IBB ETF,
He likes discretionary consumer goods tradable through the iShares US Consumer Services IYC,
and airlines via US Global Jets JETS,
He also likes the tech exhibition through the Invesco QQQ Trust QQQ,
iShares US Technology IYW,
and iShares Semiconductor SOXX,
He likes small caps via the Vanguard Small-Cap Growth Index Fund VBK,
And convertible bonds via SPDR Bloomberg Barclays Convertible Securities CWB,
and iShares Convertible Bond ICVT,
As for the individual names, it distinguishes Microsoft MSFT,
and Apple AAPL,
in technology, as well as Amazon.com AMZN,
and Tesla TSLA,
Also consider Howard’s two ETFs: the HCM Defender 100 QQH Index,
and HCM Defender 500 Index LGH,
He prefers to add to holdings on declines of 1% to 3%.
Since its launch in 2015, its HCM Tactical Growth fund has underperformed over two years ranging from 1.5% to 8.8%. The fund then came back in force to offset the very positive five-year outperformance mentioned above. Investing in your system can take patience.
Every manager, including Warren Buffett, can have an underperformance, Howard says.
âWe are in the odds game,â he said. “Even in the odds game, you can get a bad hand or two thrown to you.”
Another challenge is the high turnover, which is 140% per year for Tactical Growth. This means Uncle Sam takes a big part in the good years. So if you are buying funds from Howard, you may want to do so in a tax-sheltered account.
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no position in the stocks mentioned in this column. Brush suggested MSFT, AMZN, in their stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.