SSP and risk: an observation

[unSane]

I've been following SSP for a while now (and using it as part of an investment strategy). Particularly focusing on Momentum v3 and v4 which seem to be in the sweet spot. Overall, I've been surprised how good the investing decisions are. However, there's a big warning which I think needs to be added to the portfolios, which is that at some point the volatility may completely wipe your portfolio out. Right now we are in a bull market for commodities and SSP is correctly identifying some of the steadiest risers. However, should there be a big commodity correction (not impossible if interest rates were to rise rapidly) then the effect on the SSP portfolios could be catastrophic.

This effect is amplified because only equities which are quoted on the US exchanges seem to be traded. This means that the portfolio is locked into the North American equity market and excludes, for example, T-bills or emerging markets such as Latin America, which may be a safe refuge when the North American markets tank.

I guess what I'm saying is that although SSP may give great results over the short or medium term, it may completely wipe you out over the long term if all your money is in it. You really need to have a strategy to bank profits from SSP and hedge out your risk rather than just reinvesting everything in SSP.

This is not just a problem (or even a criticism, really) of SSP. Lots of hedge funds operate in a similar way... producing high gains in return for a (relatively low) risk of being wiped out completely. But anyone using SSP to invest should be aware of the risk, especially if you are considering committing a large proportion of your capital.

[Victor]

Just a few notes:
1) The portfolios are locked into the North American equity markets through investments on the Toronto exchange, which is the large Canadian exchange.
2) Risk in these strategies has been covered by Bryan and myself (and others I'm sure).

• a) portfolio "wipeout" usually means total loss, whereas drawdowns of 40% are likely closer to future exposure.  This is a high level, unbearable for most investors.  I don't think anyone on this forum has endorsed using the SSP system with all their capital.
• b) as the system also includes exit strategies, drawdown is a function of these rules moreso than speculation on the future of interest rates, fx, commodities, etc.  It's been mentioned before, stops that allow you to stay with the system need to be very wide.

3) hedge fund strategies are very different (generally) than SSP, and any strategy that risks money will have the potential for significant losses.
4) warnings about putting "all your eggs in one basket" are quite common, although given the level of losses out there (putting all your cash in ABCPs turned out to be a bad idea too!) I suppose they still bear repeating.

SSP generally picks micro-caps with very high volatility.  Fortunately the "long term" exposes the positive side of the chosen investments.  Here's a quick update on my performance since August 2007:
Win %: 40%
Avg. Winner: +30%
Avg. Loser: -8%
Edge: 7.21%

Annualized return: 26%

Note: Win percentage is well under 50% (and has fallen into the 30s in the past).  It's the ratio of avg. winner to avg. loser that gives SSP the positive edge (so far). The annualized return is nowhere near SSP's posted numbers because I've overlaid a money management (position sizing) strategy over the SSP picks.  Cash (or equivalents) sometimes constituted 70+% of the allocated funds for SSP.  Therefore I also haven't experienced the depth of some of the SSP drawdowns.  I gave up some upside for a smoother equity curve.  In essence I'd say anyone wanting to trade SSP picks should first acknowledge the risk, and then make necessary adjustments so your exposure reflects your attitudes towards risk taking.

Cheers,

Victor