By Michael Brush
Imagine you had a money-making machine to harvest gains in the stock market while you sat back to enjoy life.
That’s everyone’s dream, right? Investor Vance Howard thinks he’s found it.
Howard and his small army of computer programmers at Howard Capital Management in Roswell, Ga., have a quantitative system that posts great returns.
His HCM Tactical Growth Fund /zigman2/quotes/208647207/realtime HCMGX -0.09% beats its Russell 1000 benchmark index and large-blend fund category by 8.5-10.4 percentage points annualized over the past five years, according to Morningstar. That is no small feat, and not only because it has to overcome a 2.22% fee. Beating the market is simply not easy. His HCM Dividend Sector Plus /zigman2/quotes/203589492/realtime HCMQX +0.11% ) and HCM Income Plus /zigman2/quotes/213493302/realtime HCMLX -0.07% funds post similar outperformance.
There are drawbacks, which I detail below. (Among them: Potentially long stretches 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 shares a lot, as you’ll see. And this Texas rancher has a lot of good advice based on “horse sense” — not surprising, given his infectious passion for the markets, and his three decades of experience as a pro.
Here are five lessons, 12 exchange traded funds (ETFs) and four stocks to consider, from a recent interview with him.
Lesson #1: Don’t be emotional
It’s no surprise so many people do poorly in the market. Evolution has programmed us to fail. For survival, we’ve learned to run from things that frightens us. And crave more of things that are pleasurable — like sweets or fats to store calories ahead of what might be a long stretch without food. But in the market, acting on the emotions of fear and greed invariably make us do the wrong thing at the wrong time. Sell at the bottom, buy at the top.
Likewise, we’re programmed to believe being with the crowd brings safety. If you’re a zebra on the Savanna, you are more likely to get picked off by a predator if you go it alone. The problem here is being part of a crowd — and crowd psychology — dumb us down to a purely emotional level. This is why people in crowds do terrible things 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. Base emotions take over.
To do well in the market, you have to counteract these tendencies. “One of the biggest mistakes individual investors and money managers make is getting emotional,” says Howard. “Let your emotions go.”
Lesson #2: Have a system and stick to it
To exorcise emotion, have a system. “And don’t second guess it,” says Howard. “This keeps you from letting the pandemic or Afghanistan scare you out of the market.” He calls his system the HCM-BuyLine. It is basically a momentum and trend-following system — which often works well in the markets.
The HCM-BuyLine basically works like this. First, rather than use the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.01% or the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.03% , Howard blends several stock indices to create his own index. Then he uses a moving average that tells him whether the market is in an uptrend or downtrend.
When the moving average drops 3.5%, he sells 35%. If it drops 6.5%, he sells another 35%. He rarely goes to 100% cash.
“If the BuyLine is positive, we will stay long no matter what,” he says. “We take all the emotion out of the equation by letting the math decide.”
Right now, it’s bullish. (More on this below.)
Your system also has to tell you when to get back in.
“That’s where most people screw up,” he says. “They get out of the market, and they don’t know when to get back in.” The HCM-BuyLine gives a buy signal when his custom index trades above its moving average for six consecutive sessions, and then goes on to trade above the high hit during those six days.
You don’t need a system that calls exact market tops or bottoms. Instead, the BuyLine keeps Howard out of down markets 85% of the time, and in for 85% of the good times.
“If we can do that consistently, we have superior returns and a less stressful life,” he says. “Being all in during a bad tape is no fun.”
His system is slow to get him out of the market, but quick to get him back in. Not even a 10% correction will necessarily move him out. He’s often buying those pullbacks. Getting back in fast makes sense, because recoveries off bottoms tend to happen fast.
“The HCM-BuyLine takes all the emotion out of the process,” says Howard.