Ed Mamula.com

Four of the Automatic 7 portfolios will be in REITs (VNQ), US small cap stocks (IWM), and 7-10 year US Treasuries (IEF).  The A7 Vanilla, which is a simple benchmark that I track to see if there really is a benefit to all of this fancy tinkering, stands out from the others in a much more defensive position, allocating nothing to IWM, and allocating 25% in cash.  A7 Classic, which is the only version geared for maximum absolute returns, stands out by being the most aggressive of the unlevered portfolios, by allocating nothing to IEF and splitting IWM and VNQ 50/50.  I may regret giving myself the extra work of publishing all of these variations, but I think that over time, it will be quite instructive to see which flavors perform as expected and which do not.

For my live trading in January, I will be following the A7 Plus allocations in my retirement accounts, and the A7 Full Tilt allocation in my taxable account.  My live results may differ materially from A7 Full Tilt because I am getting this exposure by trading Russell 2000 futures, and March 2012 call options on IYR (another REIT ETF) in addition to holding IEF.

Results for December will be published in early January, along with a re-tooled version of the allocations page, so that we can keep track of all of these monsters.

It’s never easy.

Running the Automatic 7 systems this year has been a great success and a great challenge.  As 2011 draws to a close, all I can say is, it’s never easy to choose an allocation, and it’s never easy to deliver strong returns.  I don’t suppose I should expect it to be.

Gold

Gold is an interesting buggar.  I got it into the mix in mid – 2011 and proceeded to do all sorts of batty things that were not indicated by the system.  At the end of the year, in my personal account, I lost about 4% of my equity trading in gold despite its theoretically positive contribution to A7′s 2011 returns.  For 2012, I resolve to trade gold only within the confines of the system.

MLPs

I suspect that not having Master Limited Partnerships (MLPs) in the rotation is a blind spot and I would like to add AMJ to the rotation, but I have not as of yet.  I will probably need to see a longer track record on this ETN (gasp, an Exchange Traded Note) before adding it in, if at all.

Following the plan

Besides gold, I had a couple of notable deviations from the plan in 2011.  For one thing, I really levered up on treasury futures in September / October, and I also found myself doing put spreads on IWM in the 4^th quarter.  Um, yeah, there was no reason for that, and it hurt overall returns.  I will track my actual returns in 2012, just as I used to do when I traded forex.  This tends to keep me following the system, as I don’t want to have to confess my baseless deviations in public.

Over thinking / tinkering

It is very difficult to avoid the urge to over think and over tinker with these systems…yes indeed, doing nothing is the hardest thing to do!  I noticed today that a very simple version of A7 (which will be called A7 Vanilla) returned almost 20% this year. Going forward, I will use this simple version as a benchmark for a couple of fancier optimized versions.

2012 A7 system variations:

For 2012, I will be publishing seven flavors of A7 and stop tracking external TAA systems.  External benchmarking is time consuming and it doesn’t add that much value to this site.  I will link to other people’s systems as appropriate in the “Influences” section.

So here is the list of systems that I will be maintaining; please note, that as of today, this is not a signal service, and I do not provide investment advice.  In the name of having an accurate, replicable track record, I will make every attempt to publish the allocations of all A7 variations in real time; however, if time does not permit me to do so, then I will publish only the A7 Vanilla portfolio in real time with the others being posted shortly thereafter.

A7 Vanilla – benchmark – simple parameters – not optimized

A7 Classic – benchmark – optimized for maximum absolute returns; no leverage

A7 Smooth– optimized for absolute return and smoothness of ride; no leverage; Goal: Beat A7 on a risk adjusted basis; does not attempt to beat A7 Classic on an absolute basis

A7 Plus– optimized for absolute return and smoothness of ride; sometimes uses leverage (primarily levers treasuries via the futures market); Goal: Beat A7 and A7 Vanilla on absolute and risk adjusted basis, and beat A7 Smooth on an absolute basis.  A tall order!  This is what I have been trading since August 2011, and I do believe if I ever ran a hedge fund or other money management firm, this would be the aggressive version available to the public.

A7 Timid (aka Mom and Pop) – optimized for smoothness of ride; Goal: Beat 50/50 benchmark on absolute and risk adjusted basis…and to use a cliché, “achieve stock-like returns with bond-like volatility”.  Again, if I ran a hedge fund, this would be the conservative version available to the public.

A7 Full Tilt – optimized for smoothness of ride; utilizes 2x leverage at all times – Goal: Maximum return in a margin account.

A7 actual – Ed’s actual results in taxable account (attempting to mimic A7 Full Tilt, at least until the drawdowns cause a nervous breakdown!); will show deviation from A7 Full Tilt because of commissions, slippage, use of futures and options instead of margined ETFs, and operator error.  Goal: Beat A7 plus on an absolute basis and be volatile enough for my high risk tolerance.

50/50 – benchmark — SPY/IEF – not optimized

Note, I use the term “smoothness of ride” to denote a proprietary optimization function that bears resemblance to a Sortino ratio.

Allocations for January 2012 will be published tomorrow.  Happy new year!