Now I know that the true hot hands fund this year is Vanguard Growth Equity -- which is one if the worst performing Vanguard funds this year.

Yet, based on the posts of most HH  investors,  it appears that many of them are using other large growth funds.  Such as Primecap or Growth Index.  Growth Index is beating the TSM by about .9%.  Priemcap is beating the TSM by about 4%.

It looks like large growth has the momentum so far this year.  Let's see if it continues.

Petrocelli 

I'm using another large growth fund, Fidelity OTC (FOCPX) as the hot hand, it's very similar to Growth Equity, only a bit more aggressive. So far this year it's down -4.89%, it's trailing 500 Index and Growth Index.

Last 3 months it is beating  everything else though, so we'll see at the end of the year.

I recently jumped on the High-Yield bandwagon, so I may as well hop on the Growth wagon too.

I'm using the Growth Fund of America in my 401K.  Pretty nice fund that includes 18% in foreign stocks. 

 AGTHX

My other sucessful market-timing move is the Cohen & Steers Realty Shares fund. Looking good so far....  

CSRSX

At the end of 2007 when it was apparent that Growth Equity would be the Hot Hands Fund, DW did everything possible to detract from the selection.  This year we choose International Growth, which is DW's October Hot Hands pick.  Certainly, a better selection than Growth Equity.  Personally, I would never buy Growth Equity again after getting burnt so bad during the burst of the tech bubble.

Bill

Now I know that the true hot hands fund this year is Vanguard Growth Equity -- which is one if the worst performing Vanguard funds this year.

Yet, based on the posts of most HH  investors,  it appears that many of them are using other large growth funds.  Such as Primecap or Growth Index.  Growth Index is beating the TSM by about .9%.  Priemcap is beating the TSM by about 4%.

It looks like large growth has the momentum so far this year.  Let's see if it continues.

Petrocelli 

[/quote]

Petro:  "hot hands" investing always works if you pick the fund after the performance period is over.

Andy

Petrocelli: Hot Hands Funds are definitely working again. It depends on who is picking the Fund. Dan Weiner's Pick was Growth Equity and today 5/16/08 Vanguard says its YTD is -7.17%. Dan may not be very in happy with his choice but it was the best he could come up with.

I quickly came up with 7 mutual Fund that would beat his choice. The +YTD winners as of today are. CGMFX=+13.87, PRLAX=+12.27, JORNX=+3.31,  ACGOX=+2.22.  Even just an average investor can pick a hot Fund; but I will have to do this for twenty some years for your acceptance approval. I only own 3 of the above 4; the leaders of course. And 4 of the 7 original suggested funds. Of course you know the names of the 7 as you are tracking them. Be sure to let us know  the results December 31st.

Murfield 

Petrocelli: Hot Hands Funds are definitely working again. It depends on who is picking the Fund. Dan Weiner's Pick was Growth Equity and today 5/16/08 Vanguard says its YTD is -7.17%. Dan may not be very in happy with his choice but it was the best he could come up with.

I quickly came up with 7 mutual Fund that would beat his choice. The +YTD winners as of today are. CGMFX=+13.87, PRLAX=+12.27, JORNX=+3.31,  ACGOX=+2.22.  Even just an average investor can pick a hot Fund; but I will have to do this for twenty some years for your acceptance approval. I only own 3 of the above 4; the leaders of course. And 4 of the 7 original suggested funds. Of course you know the names of the 7 as you are tracking them. Be sure to let us know  the results December 31st.

Murfield 

[/quote]

I also quickly came up with some funds that would beat his choice.  Every single mutual fund offered by Vanguard.  Equity funds and fixed income funds.  Domestic funds and international funds.  Sector funds.  Large caps and Small caps.  Blend funds too.

Andy

I think you guys are missing the point.

Hot asset classes tend to stay hot. I don't know why that is, but it happens over and over.

At the beginning of this year, large growth was the hot asset class.  If you increased your exposure to this asset class, you would have beaten the market slightly this year.

Petrocelli 

Mac/Murfield... Let's be fair.... Dan's advice was to not invest in Hot Hands this year but if you still wanted to then his choice was ONEQ (Fidelity NASDAQ Composite Index)... this fund is down over 4% still...

We followed that advice.  It sucks too since after being locked out of the hot hands for four years.  We add to our international funds instead... VWIGX (Intl Growth).

Stats

Hot asset classes tend to stay hot. I don't know why that is, but it happens over and over.

[/quote]

Collective performance chasing. 

Hot asset classes tend to stay hot. I don't know why that is, but it happens over and over.

[/quote]

Collective performance chasing. 

[/quote] I agree with you. Investors always seem to want to jump on the gravy train, and hot hands takes advantage of that greedy instinct.  Just don't jump on the caboose.

Petrocelli 

I think you guys are missing the point.

[/quote]

We get the point:

When is the Hot Hands Fund not the Hot Hands Fund?

When the Hot Hands Fund underperforms the market, because the Hot Hands Fund always outperforms the market.

This is pretty much a no-lose situation.  If Growth Equity outperforms, then the normal bragging will continue.  If it doesn't, then there will be rationalizations and justifications like the ones above.

- Tom

I think you guys are missing the point.

Hot asset classes tend to stay hot. I don't know why that is, but it happens over and over.

At the beginning of this year, large growth was the hot asset class.  If you increased your exposure to this asset class, you would have beaten the market slightly this year.

Petrocelli 

[/quote]

If you used active funds to increase your exposure, you lost.  The "Hot Hands" pick is turning out horribly, and US Growth would have been another active choice in Large Growth.  Oops.

If you used passive choices in this tactic, you would have done better - but still underperformed the market.

Sometimes market timing doesn't work, and this is a real life example.

Best wishes.

Andy

If Growth Equity outperforms, then the normal bragging will continue.  If it doesn't, then there will be rationalizations and justifications like the ones above.

[/quote]

We are analyzing whether there is momentum in the market.  Looking at the HH fund is one way of doing it.

I know several posters who use HH investing in their portfolios.  All have done pretty well.  Consistent with DW's recommendation, not one of them is using Growth Equity.  (In fact, come to think of it, I don't know anyone who owns Growth Equity.) 

Looking at M*'s market barometer, large growth is doing well this year.   Growth Index is outperforming TSM By 1.1%. 

Petrocelli 

I think you guys are missing the point.

Hot asset classes tend to stay hot. I don't know why that is, but it happens over and over.

At the beginning of this year, large growth was the hot asset class.  If you increased your exposure to this asset class, you would have beaten the market slightly this year.

Petrocelli 

[/quote]

Actually, MidCap funds and International funds had higher returns last year.  So if you truly were looking for momentum, you would be in those areas.  But for some reason you prefer to follow the Hot Hands strategy, but not acknowledge that it has obliterated several years of gains.  The gains of the Hot Hands strategy in 2004, 2005 and 2006 have all been wiped out by losses in this strategy in 2007 and 2008.  Now that the Hot Hands strategy has been discredited, why do you suddenly say it is all about asset classes?  Sounds like the "rationalizing" that Tom talks about.  Please show us previous posts in 2005 where you point other performance chasers to the asset class rather than the fund.

Andy

The gains of the Hot Hands strategy in 2004, 2005 and 2006 have all been wiped out by losses in this strategy in 2007 and 2008. 

[/quote]

This is not a correct statement.  If you had two investors: one who strictly followed the HH strategy beginning in 2004,  and the other who invested in the 500 Index Fund (for the sake of comparision), here's how much money they would have today:

• Hot Hands: $200,729
• 500 Index: $122,490

Note that this includes Growth Equity's returns.

Petrocelli 

Please show us previous posts in 2005 where you point other performance chasers to the asset class rather than the fund.

[/quote]

I have repeatedly stated that you can employ momentum investing using asset classes as well as funds.

Here is one example. 

Here is another. 

Here is another. 

I could provide you with about 10-20 more, but I'll stop.

Petrocelli 

The gains of the Hot Hands strategy in 2004, 2005 and 2006 have all been wiped out by losses in this strategy in 2007 and 2008. 

[/quote]

This is not a correct statement.  If you had two investors: one who strictly followed the HH strategy beginning in 2004,  and the other who invested in the 500 Index Fund (for the sake of comparision), here's how much money they would have today:

• Hot Hands: $200,729
• 500 Index: $122,490

Note that this includes Growth Equity's returns.

Petrocelli 

[/quote]

It is a correct statement, but you have used an inappropriate benchmark.

For four years, the Hot Hands fund was an international fund, so using Vanguard's International index for those four years is clearly more appropriate.  Here is how $100,000 turned out today:

• Hot Hands:  $201,434
• Alternative:  $201,454

As you can see, in a short 18 months, this strategy has eroded three years worth of gains.  Sadly, all the publicity you and others put into this strategy leads people to jump into the strategy late in the game, so undoubtedly people lost using this strategy since they experienced the recent losses - without being in the game from the early days.

Sad.

Andy

For four years, the Hot Hands fund was an international fund, so using Vanguard's International index for those four years is clearly more appropriate.  Here is how $100,000 turned out today:

• Hot Hands:  $201,434
• Alternative:  $201,454

[/quote]

Once again, I think you are off-base.

If you change the "benchmark" each time the HH fund changes, you are simply engaging in a different form of HH investing.  Indeed, what you propose is similar to the "Callan HH investing" which I discussed in the posts which I linked to above.

HH investing should be compared to a static benchmark.  I have chosen the 500 Index for the sake of comparison. (TSM may be a better choice, but I would have to redo all my spreadsheets.)

As you calculations prove, investors who have used HH investing since 2004 have doubled their money in less than 5 years, even though this year is negative so far.  I can't see any cause to be "sad" about that.

Petrocelli