Which Strategy Is Better: Rebalancing or Let Your Profits Run?

Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

“The business of investing is not the same as investing in a business.”

— Maxims of Wall Street, p. 143

At this year’s Fast Money Summit at FreedomFest, we had a panel discussing “Puzzles and Paradoxes in Finance: How to Profit from CRAZY Anomalies on Wall Street.”

Examples include the Wall Street Growth trap and the Winner’s Curse: Why did Jeremy Siegel, the “Wizard of Wharton,” say that growth stocks and media darlings are often the worst performers? How is it possible for high-dividend value stocks to outperform low-dividend growth stocks? Why do stocks with clever ticker symbols (like LUV and MAIN) so often beat the market? How is it possible for monkeys throwing darts at stock pages to consistently beat the index?

These and other fascinating questions were discussed and resolved by Rob Arnott, the “godfather of smart beta,” Gary Smith, professor of finance at Pomona College (Clermont University), Joel Stern (professor of finance, Carnegie-Mellon), with Rodolfo Milani as moderator. (See below for ordering an audio recording of this and 250 other sessions.)

Speaking of puzzles and paradoxes in finance, I came across another one in this week’s Economist, “Balancing Act” (July 28, 2018, p. 57).  It is an article on rebalancing one’s portfolio every year.

“Rebalancing pays off because it cuts back on equities when they become dear and adds to them when they become cheap.”

And yet…

“All this would seem to go against a lot of market wisdom. ‘Cut your losses and let your winners ride’ is a doctrine for the hedge-fund traders who bet on short-term shifts in market prices. Rebalancing does the opposite. Recent winners are cut in favor of more exposure to recent losers.”

So which strategy is best? I asked several experts, including Alex Green and Rob Arnott, about this contradictory advice, and both said that rebalancing works best as an asset allocation with mutual funds and exchange-traded funds (ETFs), and “cut your losses short, let your profits run” works best with individual stocks within the asset allocation.

If you own individual stocks, place stop orders to protect yourself on the downside, and trailing stops when your profits run high. Frankly, I think this strategy is also most effective with ETFs and mutual funds that have had a big run up. Raise your trailing stops to lock in super profits. That’s what we do at my investment newsletter Forecasts & Strategies.

Order the FreedomFest Audio Recordings — only $162.50!

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Want to hear the Wall Street vs. Main Street debate, as well as 250 other sessions at this year’s big show? Call Harold at Ensign Publishing toll-free at 1-866-254-2057 to buy all the recordings for half off — paying only $162.50 — by using the code 50off2018. Or go to www.miracleofamerica.com.

You Blew It! The Stock That Dropped 99%… Then Dropped 99% Again

Imagine a publicly-traded company whose sales went from $6 million to $10 million, a 40% increase, in a year.

You would think the company can’t help but make money. But in the case of MoviePass, owned by Helios & Matheson Analytics Inc. (Nasdaq: HMNY), you would have seen the stock fall 99% and then, after doing a 1-for-250 reverse stock split (to avoid being de-listed), plunge another 99%.

The company traded for over $8,000 in 2005 and now is selling for around 6 cents a share. Due to its acquisition two years ago of MoviePass, a movie-theater subscription service, Helios & Matheson Analytics ran out of money last month until it was bailed out by a $5 million loan.

MoviePass will go down in history as the worst business model since the dot-com era. It was a recipe for disaster. Based on the Amazon model that only revenues matter, it tried to be the ultimate disruptor of the movie theater business by offering moviegoers the chance to see an unlimited number of first-run films in theaters for only $9.95 a month. By 2018, over 2 million subscribers had signed up on their app. Sales went through the roof — but costs went up twice as fast, and the company lost $150 million this year. The stock has collapsed.

Exclusive  The Fed Gets ‘Transitory,’ and Markets Shrug

Now the company has changed its business model and limited the number of free movies to three a month for $14.95, but the CEO recently announced he hopes that customers use their app less! Imagine that. MoviePass also has tapped actor Bruce Willis to star in its first film “10 Minutes Gone.”

It might be a crapshoot now at 6 cents a share… but making a speculative purchase of HMNY shares could be worth the risk.

Upcoming Conferences

Join me at the San Francisco MoneyShow, Aug. 23-25, Hilton Union Square

I’m scheduled to debate Mike Turner again on “Buy and Hold vs. Market Timing.” Plus, listen to Jim Woods (Fast Money Alert), Jeffrey Saut (Raymond James), Gene Simmons (KISS co-founder, vocalist and bass guitarist), John BuckinghamNeil GeorgeMarilyn Cohen and Kelley Wright. To get your free tickets, call 1-800-970-4355 and be sure to mention code 045690.

Toronto MoneyShow, Sept. 14-15, InterContinental Toronto Centre: I will have a main stage appearance on “Everything You Need to Know about the Markets,” as well as a breakout session on “The SWAN Strategy: My Five Low-Risk Ways to Earn High Dividends and Capital Gains.” Other speakers include Kim Githler, Tom Sosnoff and Gene Simmons. To register and attend for free as my subscriber, call 1-800-970-4355 and mention priority code 045972. Or go to MarkSkousen.TorontoMoneyShow.com.

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