Retired at 48, can you expand or link on Pyramid Up

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Quanta2998
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Retired at 48, can you expand or link on Pyramid Up

Post by Quanta2998 »

technique

Is there a post you made here that explains the strategy in more detail? It sounds interesting.
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gatorman
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Post by gatorman »

I'd like to see that as well. I'd also like to see someone take daily close data for the S&P back as far as possible and compare the ending value obtained by using this strategy with the ending value determined by using a simple buy and hold strategy.

I have monthly S&P data from November 2007 back to January 1937. Just to get a kind of gross idea of whether the strategy would be helpful, I ran a trial using a 7 month moving average as a proxy for the 200 day ma. The buy and hold strategy showed much better results (terminal value of a 10k investment $842k using buy and hold vs. $273k using the pyramiding up technique.) However, after I finished I decided that my test wasn't really fair to the Pyramiding technique because it was just too grainy and missed the exact buy and sell dates one would get using daily data.

I'd be happy to email my spreadsheet to anyone who has an interest. It's not the same quality as Gummy's excellent creations, but it comes with the same money back guaranty.

Regards,
gatorman
trefoil
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Post by trefoil »

There is a description here:

http://www.bogleheads.org/forum/viewtop ... c&start=50

I have also been wondering about doing a simulation of this technique, and also comparing it to Value Averaging.

As I posted before I think pyramiding up is a kind of variant of portfolio insurance, and suits an investor who is suffers severely from loss aversion. In fact I see r@48 states as much in the article above.

I would question whether avoiding transient decreases in value is really rational if you're in an accumulation phase. In other words the same effect might be more cheaply accomplished by just not looking at the portfolio value until you get to retirement. On the other hand as r@48 points out, this was originally implemented before retail index funds were available, so perhaps one could have real concern that if a fund declined it was due to a non-recoverable failure of management and you do need to pull the plug.

There is a black box in the algorithm which can't be simulated: Retired at 48 says he also picks particular funds to invest into based on a qualitative assessment of the fund, in addition to the technical merits. It is possible he really can pick funds that will outperform in the future, and this wouldn't be covered by just applying it to TSM indices. On the other hand presumably this selection talent could be applied equally well to DCA, VA or any other technique, so perhaps it cancels out.
retired at 48
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R48 Pyramidind Upward

Post by retired at 48 »

Hi Quanta2998

Just returned from US Open Golf Championship in San Diego, and saw your post request.

An additional posting can be found on the Morningstar DIEHARD Forum, post # 2496780, by hurleyhuckster, 3/13/08 titled Retired @ 48 Pyramiding Upward, by hurleyhuckster..

I don't have good search techniques to steer people to the posting, thus I will reprint below a description from the beginning of post, with some updating:


I invest using an investment technique I describe as “pyramiding upward”. Briefly, I initially buy 10% of the target allocation amount designated for a mutual fund. If the fund goes down in price I never buy more, unless a positive signal is given by a technical indicator, the 200 day moving average. If (and until) the fund price goes up, I subsequently buy more of the fund, at percentages ranging from 10 to 40%, until the full allocation is achieved.


Here are some details. “Pyramiding upward” has two underlying themes. The first is Warren Buffet says rule 1 is "don't lose money." Rule 2 is: read rule 1." But what is one to do, practically.

The second theme is that investors (me) make horrible decisions when in loss positions. One can minimize the extent of losses, and thus not lose sleep, and perhaps meet Buffet's goal, by employing the following scheme.




If one desires to buy a mutual fund (or ETF ), make your initial purchase with about 10% of overall money targeted to the fund. One then never makes the next purchase unless the fund is in positive territory…then further purchases are made. Positive territory to me is defined as a gain of about 4 to 10 percent. A typical pyramid may involve five purchases of 10, 20, 20, 30 and 20 percent. If the fund ever starts seriously declining, then one is always at least in a gain or break even position to make withdrawal decisions.




If the initial purchase declines, then either never buy more, or set a loss of about 10% as a time to get out (sell). A 10% loss on a 10% initial buy is only a 1% overall loss on the allocation. Thus one doesn’t lose much sleep over this amount. If during this time the market had stayed flat or gone upward, while your fund declined, one should seriously reassess the fund purchase scenario, as faulty logic exists somewhere. Note this would have kept one from purchasing more lagging “financials” a year ago, when the overall market kept going to new highs.



If, in any losing position, time (perhaps months) goes on and it is clear that a correcting or bear market caused the decline (eg everything went down), I would consider injecting the next 10% of monies, but only if the NAV rose on charts as piercing through the 200 day moving average on the upside! This forces patience, so one doesn’t catch “falling knives.” Then the pyramiding upward could begin in earnest if the fund held and kept trending upward.




Yes, one essentially never averages down on purchases, and has the effect of never suffering large losses in a bear market. This is like an insurance policy. One sacrifices some gain on the upside (versus a full lump sum purchase) yet if practiced as stated will also avoid huge losses. The scheme may thus also be quite useful for those who have received a large lump sum to invest; a middle road approach between lump sum versus dollar cost averaging.




An assumption here is that diehards are, or must become familiar with, a 200 day moving (NAV) average. Computers (like Yahoo) now graphically impose 200 day moving averages onto fund historical pricing charts. Checkout past funds with long histories to see such charts. (In Yahoo, enter fund symbol VEIEX and click get quote; in fund summary, click on technical analysis charts; click on 200 day averages, and click on years, such as 1,2,5 or max years.) For this example, click on “max”. Notice the performance if one does not buy when mutual fund prices are tracking below 200 day moving averages, and how one should be generally buying or invested when funds track above 200 day averages.




To illustrate this technique (no data mining) I selected the Vanguard Emerging Markets Fund, VEIEX, as an example. I have owned this fund in my daughter’s IRA for a long time. Furthermore, many diehards now own or are either considering adding EM as an allocation, or exiting it as too highly priced.




The following data is extracted directly from Yahoo Finance Charts. See link in first response below. I selected the two WORSE time periods to begin purchasing the fund, to illustrate how one would have fared by the pyramiding up approach. These were highly volatile times.




The first time period is 16 June 1997, NAV at $13.66 and thereafter declines in price to a low of $6.31, August 1998, a 54% loss. It eventually recovers to today’s price, $30.30.



The second period is on 14 Jan 2002, NAV of $8.42. It subsequently declines to a low of $6.79, then recovers, eventually ending at today’s price.





Table 1


Date....NAV.......buy....... tot shares.......dollars.......$ total.......Tot asset val.......remarks (below)

6/19/97 13.66... 10%...... 146 ........ $2000 ..... .... 2000......... ... 2000 ............ 1

8/11/97 .. 13.03 .... don’t buy ................................................................................... 2

8/15/97 11.86 ...... don’t buy ..................................................................................... 3

8/31/98 ... 6.31 .... no buying (hits all time low , down 54% from pp) .................................. 4

3/1/99 ... 8.03 ... 10% ..... 395 ....... 2000 ....... 4000 .......... 3176 ....... ..... 5

3/29/99 .. 8.77 ... 20% ...... 851 ......... 4000 ........ 8000 ......... 7464 .... ...... 6

5/24/99 ... 9.70 ... 20% ...... 1263 ......... 4000 ........ 12000 ......... 12254 ... ....... 7

6/7/99 ... 10.12 ... 10% ..... 1460 ......... 2000 ............ 14000 ......... 14781 .......... 8

11/1/99 ... 10.82 ... 10% ..... 1645 .......... 2000 ......... 16000 ...... 17800 ..... ........ 9

3/6/2000 ... 12.91 .... interim market peak

9/19/00 .... 9.95 ........ ............................................................................... $16367 ..... 10

2/18/08 ... 30.30 ....today ......... ................................................................. $49843 ...........

1 You decide to make Emerging Markets an Asset Class in your portfolio, with $20,000 targeted as your full allocation amount. Following pyramiding technique, you decide to buy on this day, injecting 10% of funds.

2 Doesn’t seem to be working out very well. Per rules, no more buying

3 Really dropping, maybe you made big mistake. Don’t buy more.

4 Yes, overall Asian markets suffer severe decline. Hits all time low, but you can’t tell how low is low…no buying.

Huge 54% decline, but your loss is only 5.4% of target $20,000 allocation.

5 Fund crosses 200 day Moving Avg. on upside. Buy more.

6 Nice gain in one month, buy more.

7 Two months later, another nice gain, buy more.

8 Looking good now, keep buying

9 Five months more, still going up…buy more

10 Market peaked 3/2000. But red flag goes up as VEIEX has subsequently declined about 17%. However, I am still slightly above water.

Assessment: Dot com bubble has burst in USA, and everything is down! Fund holding up well, considering. I’m even. Stay the Course!

(Thereafter I can add final $4000 anytime as upswing ensued). The initial $16,000 becomes $49843 after key stay the course decision. Let the party begin!

-----------------------------------------------------------------------------------


Table 2


Date ... NAV ... Buy ..... Tot Shares ...... Dollars ...... $ total ....... Tot Asset Val ........ Remarks

1/14/02 ... 8.42 ... 10% ..... 238 ...... 2000 ...... 2000 .......,,,, 2000 ........... ,,,,, 1

10/07/02 ... 6.79 ...... cyclic low, no new purchases ...................................,,,. 1616 ..... ,,,, 2

5/12/03 ... 8.03 .... 10% ..... 487 ....... 2000 ........ 4000 ......,,,,. 3911 ................,,,,, 3

6/9/03 .... 8.77 ..... 20% ..... 943 ....... 4000 ........ 8000 .......,,,, 8271 ..........,,,,,..... 4

8/11/03 ... 9.67 ..... 20% ....... 1357 ........ 4000 ........ 12000 ......,,,,,.. 13119 ......,,,,,......... 5

9/29/03 .... 10.52 .... 30% ...... 1927 ....... 6000 ........ 18000 ......,,,,,.. 20275 .........,,,,,..... 6

11/22/03 ... 11.57... 10% ....... 2100 ....... 2000 ....... 20000 .....,,,,,,.. 24300 ..........,,,,,,..... 7

10/22/07 ... 35.95 .... (peak) ........,,,.................. .............................................. 75500

02/18/08 ... 30.30 ..... today ............................................... ,,,,, $63630 .......................,,,,,,,,,......... 8


1 You decide to make Emerging Markets an Asset Class in your portfolio, with $20,000 targeted as your full allocation amount. Following pyramiding technique, you decide to buy on this day, injecting 10% of funds.

2 I know, you idiot, you bought near the peak. At least you followed the rule and didn’t buy more. However, fund has only declined to about 2% loss on initial target allocation amount.

3 Fund price crosses upward of 200 day Moving Avg. Purchase more.

4 In one month, fund up nicely; buy some more.

5 Two months later, doing well. Up. Buy more.

6 Another month, doing good. Buy

7 Two months, up another 10%, make final buy.

8 No reason not to stay the course to present day.

Note that I used conservative purchases on about 10% upward moves. A more aggressive buy in (5%) would shorten the time period to fully allocate. Note also that making the initial 10% purchase at most other times would be an easier pyramiding up buying sequence.




In summary, buying VEIEX at two very poor times, using a pyramid up technique, resulted in the investor not enduring a sizeable loss at any time, and getting excellent upside appreciation in the long run. The reverse approach can be used on piercing the 200 day moving average on downside. But caution here re downside, as more and more people are using this, it seems. But still very good on upside.


In todays market, one could buy 10% now, then continue the scheme; or, since we are so far below 200 day moving averages for many funds, wait until the first crossing of 200 dayma to the upside to make initial 10% purchase.

For me, I have been and will use this plan to buy into the banking ETFs KBE and KRE. PyrUp has kept me out of these for the past year. And when their Net Asset Value crosses the 200 day moving average on the upside, I will be buying. No ifs, ands, or buts.

Whew...hope this helps.

I'll try to answer questions in the post.




Retired at 48


Edited to correct note matchups, Table 1, notes 5 thru 11.



****************************** ***************************
Last edited by retired at 48 on Wed Jul 02, 2008 10:53 am, edited 2 times in total.
retired at 48
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Post by retired at 48 »

Here is the link for VEIEX, Vanguard's Emerging Markets Fund:

http://finance.yahoo.com/q/ta?s=VEIEX&t ... e200&a=&c=

Use with above Tables. (Hope this works)

Also edited to add link to a video on 200 day or comparable moving averages, provided by boglehead G12 (many thanks). Video here:

http://www.youtube.com/watch?v=bN9WUIXaRr4


R48
Last edited by retired at 48 on Sat Oct 18, 2008 9:58 pm, edited 1 time in total.
DP
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Post by DP »

Hi,
I really don't get this. In the first example it's not clear when you would buy the last 20% allocation. Based on the market having continued up I would assume just prior to the peak in 2000. In any case, during the bear market you would have suffered almost a 50% decline (from 12.91 to a low of 6.83) with at least an 80% allocation, so at least a 40% loss. I'm missing how this method protects you from not enduring a sizeable loss at any time. In the end the results were good but then emerging markets have been extremely strong. How would this method have worked with something that never recovered, such as the Nasdaq?

Don
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Post by retired at 48 »

DP wrote:Hi,
I really don't get this. In the first example it's not clear when you would buy the last 20% allocation. Based on the market having continued up I would assume just prior to the peak in 2000. In any case, during the bear market you would have suffered almost a 50% decline (from 12.91 to a low of 6.83) with at least an 80% allocation, so at least a 40% loss. I'm missing how this method protects you from not enduring a sizeable loss at any time. In the end the results were good but then emerging markets have been extremely strong. How would this method have worked with something that never recovered, such as the Nasdaq?

Don
Hi Don

You raise an excellent point that requires some clarification.

First, this is a "BUYING STRATEGY". The goal here is to get one fully invested with their full dollar sum targeted for the allocation, without having any loss greater than a couple percent, at most. In the first (Table 1) example this was achieved, as well as in Table 2 example.

You state "...I'm missing how this method protects you from not enduring a sizeable loss at any time." This is not the goal, nor can it be reasonably promised. Your observation that later, VEIEX undergoes a significant decline is correct. You use a 50% decline (from peak). But from actual example purchases, I calculate a 24% decline to absolute market low. Then it quickly recovers, and a long, good market experience begins. Here's what we can say:

Pyrup is a buying- in strategy. Yes, comparable selling strategies exists that perhaps one could have exited before that future market low. But that is a separate subject. For me, however, I tend to be a buy and hold (long term) and do not sell unless caution flags abound. In this example, which was real life for me, I did not sell because VEIEX's downturn was entirely consistent with the yr 2000 bear market. In fact, VEIEX held pretty well, all things considered. I "stayed the course."

Here's the deal. If one cannot take or withstand a bear market at any time, then their asset allocation needs to be reassed. Perhaps they shouldn't be investing in Emerging Markets in the first place. But Pyrup will get you into an asset allocation. When you exit, IF EVER, is a separate subject. Note this example was picked as a worse case situation. And, of course, the second example, Table 2, worked well also.

Hope this clarifies...R48
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Post by DP »

Hi,
Thanks but I think I am still missing the point of this strategy. You scale in at higher and higher prices so that if there is a pullback early on you risk only part of a position, but the full position is purchased at higher prices and then fully at risk. Now if one's position is so large that it could move the market if entered all at once then this may be a necessity but that is certainly not an issue for my positions. Also, I can't help but think that one shouldn't buy a fund or a stock without an exit strategy, even if that exit strategy is to let the heirs worry about it. With this in mind I took a quick look at what would happen if you used the 200ma as an entry and exit strategy:

Based on the weekly data from the Yahoo chart, buying at the first price above the 200sma and selling at the first price below the 200sma turns the $16,000 into $56,000 over the same period of time. The worst drawdown is -19.4% and the worst drawdown from an entry price is only -6.3%. So higher return with significantly lower risk, and all gains were held beyond 1 year so qualified for LT Cap Gains rates.

Now I know such a strategy works better in strongly trending markets such as VEIEX has been than it does in flat markets, but it seems to me you have to take exits into account to avoid sizeable losses - although you last post states that avoiding losses is not the purpose of this strategy, your explanation of the strategy implies that it is. And if avoiding losses is not the purpose then why not buy the full position at once and use diversification or some exit signal to avoid or mitigate losses (from a lower entry price)?

Date Price Balance Return Days Held Peak Max DD
06/19/1997 13.66 16000
08/18/1997 12.8 14993 -6.3% 60
03/01/1999 8.03 14993
04/17/2000 11.02 20575 37.2% 413
07/03/2000 11.6 20575
07/17/2000 11.33 20096 -2.3% 14
12/03/2001 8.58 20096
07/15/2002 8.43 19745 -1.7% 224
04/14/2003 7.85 19745
04/21/2003 7.56 19016 -3.7% 7
04/28/2003 7.86 19016
05/10/2004 10.9 26370 38.7% 378
05/24/2004 11.67 26370
06/01/2004 11.35 25647 -2.7% 8
08/30/2004 11.99 25647
06/05/2006 19.04 40727 58.8% 644 23.61 -19.4%
06/26/2006 20.24 40727
07/10/2006 19.49 39218 -3.7% 14
07/24/2006 20.58 39218
01/14/2008 30.1 57360 46.3% 539 35.95 -16.3%
02/19/2008 30.95 57360
02/25/2008 30.82 57119 -0.4% 6
04/14/2008 31.8 57119
06/02/2008 31.3 56221 -1.6% 49

Don[/img]
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Post by retired at 48 »

DP wrote:Hi,
Thanks but I think I am still missing the point of this strategy. You scale in at higher and higher prices so that if there is a pullback early on you risk only part of a position, but the full position is purchased at higher prices and then fully at risk. Now if one's position is so large that it could move the market if entered all at once then this may be a necessity but that is certainly not an issue for my positions. Also, I can't help but think that one shouldn't buy a fund or a stock without an exit strategy, even if that exit strategy is to let the heirs worry about it. With this in mind I took a quick look at what would happen if you used the 200ma as an entry and exit strategy:

Based on the weekly data from the Yahoo chart, buying at the first price above the 200sma and selling at the first price below the 200sma turns the $16,000 into $56,000 over the same period of time. The worst drawdown is -19.4% and the worst drawdown from an entry price is only -6.3%. So higher return with significantly lower risk, and all gains were held beyond 1 year so qualified for LT Cap Gains rates.

Now I know such a strategy works better in strongly trending markets such as VEIEX has been than it does in flat markets, but it seems to me you have to take exits into account to avoid sizeable losses - although you last post states that avoiding losses is not the purpose of this strategy, your explanation of the strategy implies that it is. And if avoiding losses is not the purpose then why not buy the full position at once and use diversification or some exit signal to avoid or mitigate losses (from a lower entry price)?


Don[/img]
Don, don't take this the wrong way, but I (and other "active" investors) love you!

That you turned $16,000 into $56,000 by using momentum investing, and the 200 day moving average, is exhilirating. But most here will call it lucky. You see, I am both an active and passive investor, but most on this forum are predominately passive. I thus have to tread lightly around here. (To be honest they have been fair to me.)

Of course, I have exit strategies, and the one you backtested is certainly one of them. But most people here are asset allocator/rebalancers and their exit strategy is usually a smaller dollar amount rebalances, accordingly to whatever their strategy is.

Thus I have not been promoting or explaining much of exit strategies. This forum is like eating an elephant...it can be done, but one bite at a time.

The pyramid up buying strategy allows making purchases in a disciplined way. I feel the forum spends considerable threads on bettering performance, but not much on the behavioral/psychological aspects of investing such as staying the course/rebalancing.

For example, how many Bogleheads had a strategy to rebalance the first few days of each year, yet actually carried it out this year. Remember the first days of January. Human nature says to wait, with such a poor market going downward. Many delayed rebalancing.

Many can't pull the trigger and create an Emerging Market allocation segment, because they feel the market there is "too high." So many will never invest there, in what may be the best return areas for decades, albeit highly volatile. When I use Pyrup I am not uncomfortable buying anything, anytime.

Lastly, lunp sum situations are the hardest. A person may inherit a large sum, let's say one million. Their goal is not to invest and make X% returns. Rather, their goal is to avoid their worst fear, namely, "a bear market just hit, and they lost 20% following a lump sum buyin!" Or their worst fear is "my Dad would be rolling over in his grave if I lost $200,000 all at once!" The Pyramid Up technique provides a third alternative versus lump sum and dollar cost averaging in. Pyrup sacrafices some upside potential, to avoid any big loss. IMHO, handling a lump sum is the best situational use of Pyrup.

Whew!

Stuff to ponder. I'll try to field all questions.

retired at 48
diasurfer
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Post by diasurfer »

I think about my asset allocation in terms of percentages. For the sake of argument, let's say that I am considering at 10% allocation to a CCF. (Full disclosure: I've been considering this for almost 2 years and never made a move. Now REALLY worried I would be buying high).

Let's also keep it simple by saying I have a portfolio of $100K. So to use your method, I want to buy 10K worth of a CCF fund. So my first 10% is a 1K purchase (let's ignore whether it is possible to buy 1K of a CCF).

What happens when the CCF fund goes dramatically up (or down) and the rest of my portfolio goes down (or up). Should I change the allocation goal or just go for the 10K? What about as the overall value of my portfolio grows due to new contributions to the rest of the AA?

It just seems a lot simpler to switch to 10% all at once and invest 10% of new contributions. But come to think of it, I guess the same "complexity" issues could be raised with DCA as well.
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Post by retired at 48 »

diasurfer wrote:I think about my asset allocation in terms of percentages. For the sake of argument, let's say that I am considering at 10% allocation to a CCF. (Full disclosure: I've been considering this for almost 2 years and never made a move. Now REALLY worried I would be buying high).

Let's also keep it simple by saying I have a portfolio of $100K. So to use your method, I want to buy 10K worth of a CCF fund. So my first 10% is a 1K purchase (let's ignore whether it is possible to buy 1K of a CCF).

What happens when the CCF fund goes dramatically up (or down) and the rest of my portfolio goes down (or up). Should I change the allocation goal or just go for the 10K? What about as the overall value of my portfolio grows due to new contributions to the rest of the AA?

It just seems a lot simpler to switch to 10% all at once and invest 10% of new contributions. But come to think of it, I guess the same "complexity" issues could be raised with DCA as well.
Come to think of it, diasurfer, I've read your posts (I think) where you have been contemplating this move. Has the hesitancy been caused by the full 10% at once?@#?$@?

The starting percentage (and subsequent buys) are not fixed in concrete. For the dollar amounts you are talking, a 20% initial purchase may be fine. Or if a $3000 initial purchase is required, one may be stuck with doing 30%.

If your CCF fund goes dramatically up, then some buyins may be much quicker, perhaps weekly. But one must be cognizant of the general volatility of the fund being bought (Commodities are volatile). And from a practical standpoint, the markets of today have much more daily volatility that the past decades. One has to be careful of daily 2% up/down swings. But the mathematics will work. Some investor experience helps mitigate this.

If your CCF fund goes dramatically down (which you know it will :( , )then the rule is simple. No averaging down. No new purchases unless and until the 200 day moving average is crossed on the upside. Then consider beginning anew fund purchases.

You ask, what about changing allocation goals. This, of course, is independent of Pyrup technique. For me, I change allocation goals, but infrequently. I've been reducing equity allocation with age (more bonds); increasing international (now 50% of equity) due various reasons. And lastly, to me, valuations matter. And if I sense any area is so far out of wack fundamentally, I might get out/in accordingly.

You ask of portfolio growth re AA..Just rebalance per your plan. All portfolios will skew in time.

Hope this helps

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Post by diasurfer »

Thanks for the reply R48. I think the message is be flexible about the numbers. Yes it's more complex than all at once, but nothing a few calculations can't sort out.
retired at 48 wrote:
Come to think of it, diasurfer, I've read your posts (I think) where you have been contemplating this move. Has the hesitancy been caused by the full 10% at once?@#?$@?

retired at 48
I laughed at myself after I wrote that post. Setting myself up as an example for the very reason to use pyramid up! In fact, the only option available in my 401k is the TRowePrice Nat Resources fund and at about 1.35% I though it was too expensive based on the principles I picked up here. Hindsight is 20/20.

Since then (as in, a couple of weeks ago) I've transferred an old Trad IRA from Vanguard to Wells Fargo and can do commission-free ETF buys. But I only have enough $ for the expensive PIMCO fund (PCRDX) I think it is.

So if I decide to spring for a CCF now, I'm in a position to do it, but it will still cost a lot. And it seems like a really bad time.

Otherwise, pyramid up seems like the way to go! :wink:
DP
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Post by DP »

Hi,
Thanks for the responses. In considering the "problem" of a large windfall and how to invest, I better understand how your strategy could be useful. Unfortunately I don't have this "problem", so I guess I'll just stick with diversification. Yes, I'm not a true Boglehead, I do use momentum to some extent but I am combining it with a core asset allocation strategy - something I wish I had been using all along.

Don
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Post by retired at 48 »

diasurfer wrote:Thanks for the reply R48. I think the message is be flexible about the numbers. Yes it's more complex than all at once, but nothing a few calculations can't sort out.
retired at 48 wrote:
Come to think of it, diasurfer, I've read your posts (I think) where you have been contemplating this move. Has the hesitancy been caused by the full 10% at once?@#?$@?

retired at 48
I laughed at myself after I wrote that post. Setting myself up as an example for the very reason to use pyramid up! In fact, the only option available in my 401k is the TRowePrice Nat Resources fund and at about 1.35% I though it was too expensive based on the principles I picked up here. Hindsight is 20/20.

Since then (as in, a couple of weeks ago) I've transferred an old Trad IRA from Vanguard to Wells Fargo and can do commission-free ETF buys. But I only have enough $ for the expensive PIMCO fund (PCRDX) I think it is.

So if I decide to spring for a CCF now, I'm in a position to do it, but it will still cost a lot. And it seems like a really bad time.

Otherwise, pyramid up seems like the way to go! :wink:
Three points, diasurfer:

First, if one is buying funds in their 401.k plans, the PyrUp technique is not the one of choice. Rather, I would direct paycheck savings as follows. If you have an equity type fund, then when you hear that the market has collapsed, and blood is in the streets, change your payroll savings allocation to 100% equity. When you read in the papers the market is hitting a new high, and everything is great, change the allocation to 100% fixed income for awhile. Be total contrarian to the news.

Second, You state buying CCF will "cost a lot." I presume you mean is at a high value, because your cost to purchase should be near zero, with your new Wells Fargo Brokerage account.

Third, why not backtest using Pyramid Up buying, making purchases two years ago when you first thought of buying CCF, but didn't. I suspect you would have a large gain, and be well positioned, today.

Glad to see you concluded the Pyramid Up technique "seems like the way to go."

R48
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Post by diasurfer »

retired at 48 wrote:
Three points, diasurfer:

First, if one is buying funds in their 401.k plans, the PyrUp technique is not the one of choice. Rather, I would direct paycheck savings as follows. If you have an equity type fund, then when you hear that the market has collapsed, and blood is in the streets, change your payroll savings allocation to 100% equity. When you read in the papers the market is hitting a new high, and everything is great, change the allocation to 100% fixed income for awhile. Be total contrarian to the news.
Whoa. Now you are talking about full-on market timing. I'm already at 90% equity (high for my age) and am just going to leave it there for the blood in the streets we're seeing now and ... to come?
retired at 48 wrote:
Second, You state buying CCF will "cost a lot." I presume you mean is at a high value, because your cost to purchase should be near zero, with your new Wells Fargo Brokerage account.
No, what I meant is that the expense ratio of PCRDX is 1.24%, which makes even Larry Swedroe hesitate. But it's certainly at high value and that gives me pause as well. (I'm keeping in mind I'm talking to someone 43% into energy!).
retired at 48 wrote: Third, why not backtest using Pyramid Up buying, making purchases two years ago when you first thought of buying CCF, but didn't. I suspect you would have a large gain, and be well positioned, today.
No need to. I could have made a lump sum change in my 401k two years ago, I could have DCA'ed, I could have pyramidded up, any six ways from Sunday, including lump sum this January - and I would have a large gain today.

Still doesn't mean I should do it now though.
retired at 48 wrote: Glad to see you concluded the Pyramid Up technique "seems like the way to go."
R48
Well, when viewed as a way to counter trepidation to buy with a thoughtfully slow form of DCA, it makes sense. But it's going to take a lot more than that to get me into commodities now. I mean when there's talk of Congressional hearings to stop the inflows of money, you know you're late to the party, even if it goes on for another hour or two.

thanks for your input
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Post by retired at 48 »

diasurfer wrote:
retired at 48 wrote:
Three points, diasurfer:

First, if one is buying funds in their 401.k plans, the PyrUp technique is not the one of choice. Rather, I would direct paycheck savings as follows. If you have an equity type fund, then when you hear that the market has collapsed, and blood is in the streets, change your payroll savings allocation to 100% equity. When you read in the papers the market is hitting a new high, and everything is great, change the allocation to 100% fixed income for awhile. Be total contrarian to the news.
Whoa. Now you are talking about full-on market timing. I'm already at 90% equity (high for my age) and am just going to leave it there for the blood in the streets we're seeing now and ... to come?

Response: diasurfer, perhaps you misunderstood, or I wasn't clear enough. I'm not advocating switching, eg, bond fund holdings into stock funds. Rather, each amount taken from your future paycheck is directed towards equities (or bonds.) This is a very small biweekly amount, not massive reallocations. It is a form of small scale rebalancing.

Hope this clarifies...R48
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Post by diasurfer »

Rebalancing with new contributions, radical form. Gotcha.
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Post by retired at 48 »

diasurfer wrote:Rebalancing with new contributions, radical form. Gotcha.
I think I get your "radical form" comment surfer dude :) , but I hope Bogleheads, many of whom are in 401.k plans, realize this convenient form of asset rebalancing. That is, redirect your paycheck withholdings targetted for the 401.k, into the asset that needs the rebalancing with additional dollars. Slow, steady rebalancing!

R48
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PyrUp

Post by retired at 48 »

A few words about the 200 day moving average:

There is a large body of evidence and studies that suggests that “technical analysis” (TA) does not work. TA generally involves developing buy and sell signals based on chart patterns of individual stocks. Such patterns have colloquial names like head and shoulders top or bottom, breakout through support/resistance levels, and on and on. And while some indicator works for awhile, it becomes followed by everyone, thus negating its effectiveness. I agree with these studies, and am not a supporter of TA.

I view the 200 day moving average as not a technical indicator. Here’s why. Obviously all stocks and mutual funds have a “chart” of net asset value (NAV) performance. With computers, these charts can show data hourly, daily, weekly, monthly, graphed for several years. I don’t think investors can be charged with using TA by simply being aware of such charts, noting where a stock/fund has been and what is the current NAV trend. Their use is universal.

A problem with such charts is trying to ascertain the trend, because the NAV data can be very choppy, or all over the map. It is simply not always clear. Enter the 200 day moving average... Its construct takes the last 200 trading days of a fund, and determining its “average” value. Each day, the new days NAV is added in, and the 201st day NAV is subtracted. So what does this do?

First, it smoothes out the NAV daily ups and downs…creating a smooth running plot on a chart. Secondly, it is a mathematically certain representation…no fudging here. Most usefully, it readily shows the TREND of any stock/fund. And therein lays its usefulness.

Warren Buffet (and many others) says rule #1 is to not lose money. Rule 2 is to follow rule 1. But what does this mean practically? What is one to do? Well, it certainly means one cannot “average down” when buying a fund! That is, buying more of a fund as its NAV falls in price, for by definition these are “losing positions.” So the only way to meet Buffet’s rule is to buy things that are in an uptrend. But if one lump sums in, and the fund price falls next month, one is again “losing.” Thus the only answer is to buy in periodically, following an NAV uptrend! Hence, the Pyramiding Up technique.

I feel comfortable buying any fund, anytime, by following the PyrUp simple rules I developed. Initial purchase of about 10% of targeted monies, followed by subsequent buys ONLY if the fund NAV goes upward. The 200 day moving average better illustrates the trend, to carry out this approach. It is not any magical indicator. Rather, a mathematical smoothing out of the data to allow determining an uptrend or downtrend. And I have found that after particularly long fund downtrends, the 200 day MA is quite useful in identifying the change in trend to upward, thus allowing buying on an uptrend.

A final note. The 200 day MA works best for mutual funds, because funds also have a “smoothing effect” in their NAV versus a single stock. That’s because the fund NAV is an average itself, an average of all the stocks it holds, thus smoothed to begin with.

To illustrate all this, take your own mutual funds and on a site like Yahoo, observe the workings of a 200 day ma for long time periods. Look at some hi tech downturns aka 2001 and see its performance. General rule of thumb: Fund NAV tracking above 200 day MA: HOLD OR BUY MORE; tracking below 200 day MA: Don’t buy.

A Boglehead recently commented he wouldn’t begin buying financials until the stocks steadied and improved. I asked “how will you know this?” He replied, when they are above water…when I can buy some and not buy more unless they are “above water”, i.e., when each buy is at a higher level. Ah, I said to myself, he gets it. A great candidate for using the Pyramiding Up technique!

Hope this clarifies some points.

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Post by gassert »

This is about as predictive and sucessful as Sudi - and at least that was entertaining.
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Re: PyrUp

Post by trefoil »

Hello Retired at 48,

As I recall William Bernstein proposes the definition that technical analysis is attempting to choose buying or selling opportunities by looking at past price data, possibly in combination with other variables. While you're not doing, shall we say, "sophisticated" technical analysis, it is technical analysis. And of course the measurement is the same regardless of whether it's applied to individual stocks, forex, commodities, or whatever.

The research on technical analysis that I am aware of (mostly from summaries like Bernstein) is that you cannot perceive trends until after the fact. In other words if there you have observed an upward trend for X days that's no predictor of whether it will immediately reverse or how long it will continue for.

As I understand it Buffett is saying: first of all, don't put your money in something that could totally and permanently lose value. By averaging in to any reasonably diversified fund you've largely avoided this risk, especially if you avoid high fees. I don't think he's particularly scared of being underwater at any particular time, so long as he doesn't have to sell.

As others have pointed out there is a logical difficulty in this approach. It seems that you think the market can, when averaged over 200 days, generate a reasonable estimate of true value. But then surely you want to buy when it's below the average, rather than above?

I can see how this toe-in-the-water approach would work for people who really hate being underwater, but I don't think it's rational. I bought into a Vanguard fund last week at $1.50. If it was worth buying at $1.50 surely it's an even better deal at $1.48?

So I'm not retired (and not 48 either) and so hesitate to criticise something that in combination with long-term substantial saving has obviously worked well for you. It's actually not so much criticism as trying to understand it.

Maybe a useful question is: how do you think the market price relates to the real value (if such a thing exists?)

Cheers
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Post by Ted Valentine »

R48, why is this better than DCA? In your table 1 if the investor simply adds the first $16k in equal amounts monthly over one year they end up with more shares by June 1998 than you have in your example by 11/1/99. I don't see how this method wins.
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Post by statsman »

R48,

How does the pyramid technique work with bond funds (or does it)? You mention waiting for rising 200 day averages in the NAV, but in the case of bond funds, a lower NAV indicates a higher yield.

I am looking to purchase $300-400K in tax-exempt bond funds, and there's a part of me that really doesn't want to lump sum that amount right now. Maybe with bond funds it doesn't matter as much?
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Re: PyrUp

Post by retired at 48 »

trefoil wrote:Hello Retired at 48,

As I recall William Bernstein proposes the definition that technical analysis is attempting to choose buying or selling opportunities by looking at past price data, possibly in combination with other variables. While you're not doing, shall we say, "sophisticated" technical analysis, it is technical analysis. And of course the measurement is the same regardless of whether it's applied to individual stocks, forex, commodities, or whatever.

The research on technical analysis that I am aware of (mostly from summaries like Bernstein) is that you cannot perceive trends until after the fact. In other words if there you have observed an upward trend for X days that's no predictor of whether it will immediately reverse or how long it will continue for.

As I understand it Buffett is saying: first of all, don't put your money in something that could totally and permanently lose value. By averaging in to any reasonably diversified fund you've largely avoided this risk, especially if you avoid high fees. I don't think he's particularly scared of being underwater at any particular time, so long as he doesn't have to sell.

As others have pointed out there is a logical difficulty in this approach. It seems that you think the market can, when averaged over 200 days, generate a reasonable estimate of true value. But then surely you want to buy when it's below the average, rather than above?

I can see how this toe-in-the-water approach would work for people who really hate being underwater, but I don't think it's rational. I bought into a Vanguard fund last week at $1.50. If it was worth buying at $1.50 surely it's an even better deal at $1.48?

So I'm not retired (and not 48 either) and so hesitate to criticise something that in combination with long-term substantial saving has obviously worked well for you. It's actually not so much criticism as trying to understand it.

Maybe a useful question is: how do you think the market price relates to the real value (if such a thing exists?)

Cheers
Hi trefoil!...an excellent post. Let me respond to your last question, first, as it is a premise in many comments. You asked:
Maybe a useful question is: how do you think the market price relates to the real value (if such a thing exists?)
I don't think real value, or true value, has any relationship to current prices, and usually misleads the investor. One may short oil at $50/barrel, yet now sits on a $140/barrel loss position, all the while exclaiming "well, its true value is $45." And it is much easier to "put a value" on a commodity than a stock.

At General Electric' "finance 101" course, one defines value in terms of:

cost value...the amount it takes to produce an item

use value...the benefit one gets from utilizing the product or service

commemorative value...the added value of things like family photos

exchange value...what one is willing to pay for something, now.

Regarding stocks, one can do the calculations of things like book value, dividend usage value, etc. but it usually provides little relationship to exchange values, the current stock prices. The other value parameters become like benchmarks, to assess current prices, and in that regard are useful.

To illustrate the difficulty of determining real value, look at KBE, the large banks etf. It was priced at $56.58 (7/16/07); 50.96 (9/10); 45.34 (11/7); 39.60 (1/8/08); 37.75 (5/30); and $29.72 yesterday. I doubt anyone can tell what "the real value" is supposed to be.
The research on technical analysis that I am aware of (mostly from summaries like Bernstein) is that you cannot perceive trends until after the fact. In other words if there you have observed an upward trend for X days that's no predictor of whether it will immediately reverse or how long it will continue for.
Yes, trends come by after the fact review of data. The 200 day point has been chosen (over 100 day for example) as providing a reasonable time to see the trend, or change in trend.

Regarding "predictor value", let's call it momentum investing. Several studies, including Fama French have shown there is a momentum bias to prices. Our own administrator, Alex Frakt ,(who studies these things diligently), said in response to one paper, quote:

"The paper looks at various factors that have been proposed to explain stock returns. The authors then applies various statistical tests to try to determine 1) which combination of factors are most highly correlated with (best "explain") stock returns and 2) what are the fewest number of factors that appear to adequately explain returns.

For #1, they find two winners. Our old standby Fama French 3 factor model (market, size, value) plus momentum is one of the finalists..."(end quote)

The problem has been to capture it without trading costs eating up alpha. Today, trading costs can be extremely low, almost zero with ETF's. But one doesn't have to be a momentum investor. Asset allocators and lumps sum investors can use Pyr Up.

I don't think he's (Buffet)particularly scared of being underwater at any particular time, so long as he doesn't have to sell.
If we all had $50 billion, perhaps underwater is ok. A recent Boglehead poster just described a mistake(his words) he made in selling out completely, because he was underwater.

As others have pointed out there is a logical difficulty in this approach. It seems that you think the market can, when averaged over 200 days, generate a reasonable estimate of true value. But then surely you want to buy when it's below the average, rather than above?

I can see how this toe-in-the-water approach would work for people who really hate being underwater, but I don't think it's rational. I bought into a Vanguard fund last week at $1.50. If it was worth buying at $1.50 surely it's an even better deal at $1.48?
As discussed above, the fault here is your premise of "true value." 200 day averaging is a mathematical derivation, suggesting nothing of "true value." It shows the trend. And an old wall street addage is "never chase bad money with good."

That you bought a Vanguard fund last week at $1.50 also says nothing of true value, and is a better deal at $1.48 ONLY in your eyes, if that. See KBE example above on the pitfalls of averaging downward.

A final note: Another poster said he saw a stronger need for Pyramid Up when buying actively managed funds, or sector funds, because one could have a real "bummer" manager, etc. I agree. If one is investing in passive, true index funds (Rick Ferri's definition of true), then being underwater is less of a concern, albeit may keep one awake at night. But one finds so many investors, even Bogleheads, who admit they own some active funds, some sector funds and index funds. People in 401.k plans may have no passive funds available. So the pyrUp need is there.

Whew! Hope this helps.

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Post by retired at 48 »

statsman wrote:R48,

How does the pyramid technique work with bond funds (or does it)? You mention waiting for rising 200 day averages in the NAV, but in the case of bond funds, a lower NAV indicates a higher yield.

I am looking to purchase $300-400K in tax-exempt bond funds, and there's a part of me that really doesn't want to lump sum that amount right now. Maybe with bond funds it doesn't matter as much?
For bonds with durations of short to intermediate term, I don't use it, because one is losing interest vis a vis a money market fund while waiting for the "best time". And even if bond funds decline in NAV, the interest earned usually keeps one close to even anyway.

That said I was surprised when I Yahoo'd Vanguards Short Term Corp Bond Fund, and saw several long periods it traded either above 200 dayma(be in) or below 200 da ma(be out), but the NAV differences from top to bottom are not severe. Click here for chart:

http://finance.yahoo.com/q/ta?s=VFSTX&t ... m200&a=&c=


Now for long term, lower grade bond funds (like junk bond funds) the 200 dayma may be quite useful. I invested in Fidelity Capital and Income Fund for decades, and the following chart shows good up/down correlation with 200 day ma. You be the judge, click here:

http://finance.yahoo.com/q/ta?s=FAGIX&t ... m200&a=&c=

Bottom line: Not really needed for short to intermediate term bond funds. Consider for LT funds, especially junk bond funds.

R48
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Post by retired at 48 »

Ted Valentine wrote:R48, why is this better than DCA? In your table 1 if the investor simply adds the first $16k in equal amounts monthly over one year they end up with more shares by June 1998 than you have in your example by 11/1/99. I don't see how this method wins.
Ted, we'll have to each review our mathematics. I get 1454 shares by 11/1/99 using DCA. In Table 1 above I have 1645 shares using Pyramid Up. PyrUP has more!

Here's the Dollar Cost Averaging DCA data I used (Yahoo interactive charts):

Baseline: $16,000 invested monthly is $1333 per month, purchasing VEIEX starting 6/16/97:

date.............price per share.............# shares Purchased

6/19/97...............13.66..........................97.6

7/21/97................13.78.........................96.7

8/18/97.................12.80........................104.1

9/15/97..................12.30.........................108.4

10/13/97.................12.38.......................107.7

11/17/97..................10.12......................131.7

12/15/97..................9.81........................135.9

1/12/98....................8.92........................149.4

2/17/98....................9.90.........................134.6

3/16/97.....................10.60.......................125.7

4/13/97......................10.66.......................125.0

5/18/98......................9.72.........................137.0

.......................................TOTAL SHARES: 1453.8


Note also a very important point here. USING DCA RESULTED IN A LOSS OF $2359 (15%OF TARGET ALLOCATION) BY JAN 12 1998, JUST BEFORE THE NEXT DCA MONTHLY PURCHASE. PYRUP HAD A LOSS OF $760 (4% OF TARGET BUY ALLOCATION). This is the market low point area.

This demonstrates the loss avoidance control of PyrUp.

Lastly, in other threads where DCA of lump sum was discussed, with start dates of other posters choosing, PyrUp resulted in the largest returns versus DCA (or in these cases, lump sum). Details here:

http://www.bogleheads.org/forum/viewtop ... 69&start=0

Ted..let's get to mutuality on the data. Recheck your numbers. But I think Pyramid Up betters DCA in this case.

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Post by White Coat Investor »

In my opinion, this technique requires far too much skill for ME to do it successfully. It is isn't all that automatic at all. You buy when it is trending upward, but every week...every month...every year (one judgment call) using 10-40% at a time (another judgment call) and then when things decline a certain amount (another judgment call)you decide whether it is due to an overall market decline or poor management/sector momentum (another judgment call). I suppose you could set limits on everything to make it more automatic, but how do you know which limits are the right ones to use? If you pick the wrong decline amount to trigger a sell, or the wrong increase amount to buy, or the wrong % to buy at a time or the wrong interval between buy decisions, it could easily work out much worse than a simply buy/hold/rebalance strategy.

It seems to me there is entirely too much market timing skill required. It sounds like R@48 either has that skill, or simply got lucky (better to be lucky than good anyway) but I'm not sure I'd attempt to reproduce the results. I think I'll just stick to my get rich slowly scheme.

It is my experience that the plural of anecdote is NOT evidence.

Let's look at another anecdote that perhaps displays why pyramiding up may not be a good idea. We'll say, for whatever reason, you want to establish a position in Tech (say QQQ) in early 1999. It seems to have been trending upward, and the NAV is above the 200 day moving average. So you buy 10% of your position in March at $49. It continues to trend upward so 3 months later you put in 20% of your position at $53.92. It continues to go up, so in September you buy another 20% at $62. In December, you buy yourself a Christmas present at $88, another 20%. In March, as things are continuing upward, you buy your last 30% at $112.

Say you started with $100,000.
In March you bought 204 shares.
In June you bought 370 shares.
In September you bought 323 shares.
In December you bought 227 shares.
In March you bought 268 shares.

You own 1392 shares purchased at an average price of $72/share.

On the 10th of April you check in for the week and notice you've dropped below your stop-loss amount (fairly dramatically) and sell at $78/share.

Your profit for the exercise was $8756. Subtracting out say 30% for ST capital gains, $75 in commissions, and $200 in bid ask spreads (0.1% each way seems reasonable to me) and you're left with $5854, or a 5.85% gain.

If, instead, you just lump summed in the whole thing in March 1999 at $49, then you see your investment peak at $115 in March 2000. By December, you realize you've been caught up in the tech bubble, you say you're sorry, you go boglehead and you sell at $57. You have a profit of $16337. You pay your LT capital gains taxes at 15%, $30 in commissions, and the same $200 in bid: ask spreads and call it a day for a gain of 13.7%.

I'm not seeing how pyramiding up would have helped in a situation like this. The price dropped from less than 10% down from the peak ($104) to $78 in less than a week. Was the investor supposed to have a permanent stop loss order in? Was he supposed to adjust it upward every week, every day as the market climbed? When markets fall, they often do so very rapidly and you cannot sell at your desired stop-loss price anyway. And of course, even getting out at $78 required you to be checking your investments every week.

I'd be neurotic if I was constantly changing stop loss orders and checking prices on a dozen different investments. Not to mention dealing with the tax return hassles of so many different buy and sell opportunities.

Congratulations on your success, but I don't think I'll be investing that way.
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Post by gatorman »

EmergDoc wrote:In my opinion, this technique requires far too much skill for ME to do it successfully. It is isn't all that automatic at all. You buy when it is trending upward, but every week...every month...every year (one judgment call) using 10-40% at a time (another judgment call) and then when things decline a certain amount (another judgment call)you decide whether it is due to an overall market decline or poor management/sector momentum (another judgment call). I suppose you could set limits on everything to make it more automatic, but how do you know which limits are the right ones to use? If you pick the wrong decline amount to trigger a sell, or the wrong increase amount to buy, or the wrong % to buy at a time or the wrong interval between buy decisions, it could easily work out much worse than a simply buy/hold/rebalance strategy.

It seems to me there is entirely too much market timing skill required. It sounds like R@48 either has that skill, or simply got lucky (better to be lucky than good anyway) but I'm not sure I'd attempt to reproduce the results. I think I'll just stick to my get rich slowly scheme.

It is my experience that the plural of anecdote is NOT evidence.

Let's look at another anecdote that perhaps displays why pyramiding up may not be a good idea. We'll say, for whatever reason, you want to establish a position in Tech (say QQQ) in early 1999. It seems to have been trending upward, and the NAV is above the 200 day moving average. So you buy 10% of your position in March at $49. It continues to trend upward so 3 months later you put in 20% of your position at $53.92. It continues to go up, so in September you buy another 20% at $62. In December, you buy yourself a Christmas present at $88, another 20%. In March, as things are continuing upward, you buy your last 30% at $112.

Say you started with $100,000.
In March you bought 204 shares.
In June you bought 370 shares.
In September you bought 323 shares.
In December you bought 227 shares.
In March you bought 268 shares.

You own 1392 shares purchased at an average price of $72/share.

On the 10th of April you check in for the week and notice you've dropped below your stop-loss amount (fairly dramatically) and sell at $78/share.

Your profit for the exercise was $8756. Subtracting out say 30% for ST capital gains, $75 in commissions, and $200 in bid ask spreads (0.1% each way seems reasonable to me) and you're left with $5854, or a 5.85% gain.

If, instead, you just lump summed in the whole thing in March 1999 at $49, then you see your investment peak at $115 in March 2000. By December, you realize you've been caught up in the tech bubble, you say you're sorry, you go boglehead and you sell at $57. You have a profit of $16337. You pay your LT capital gains taxes at 15%, $30 in commissions, and the same $200 in bid: ask spreads and call it a day for a gain of 13.7%.

I'm not seeing how pyramiding up would have helped in a situation like this. The price dropped from less than 10% down from the peak ($104) to $78 in less than a week. Was the investor supposed to have a permanent stop loss order in? Was he supposed to adjust it upward every week, every day as the market climbed? When markets fall, they often do so very rapidly and you cannot sell at your desired stop-loss price anyway. And of course, even getting out at $78 required you to be checking your investments every week.

I'd be neurotic if I was constantly changing stop loss orders and checking prices on a dozen different investments. Not to mention dealing with the tax return hassles of so many different buy and sell opportunities.

Congratulations on your success, but I don't think I'll be investing that way.
I don't have an ax to grind in this argument, but it is my understanding that the Pyramiding Up technique applies to buys only, it has no application to sells. FWIW, I had some initial confusion on this as well which is reflected in my earlier post on the subject.
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Post by White Coat Investor »

gatorman wrote:
I don't have an ax to grind in this argument, but it is my understanding that the Pyramiding Up technique applies to buys only, it has no application to sells. FWIW, I had some initial confusion on this as well which is reflected in my earlier post on the subject.
gatorman
I was under the impression that setting stop losses was an important part of the strategy to prevent heavy losses. Correct me if I'm wrong.
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Post by retired at 48 »

EmergDoc wrote:
gatorman wrote:
I don't have an ax to grind in this argument, but it is my understanding that the Pyramiding Up technique applies to buys only, it has no application to sells. FWIW, I had some initial confusion on this as well which is reflected in my earlier post on the subject.
gatorman
I was under the impression that setting stop losses was an important part of the strategy to prevent heavy losses. Correct me if I'm wrong.
Hi Doc... I have never used the words "stop losses", and personally have never used them as I only buy mutual funds. But now with Etf's they could be part of ones toolbag.

But gatorman got it right, this is a BUYING IN technique. When to sell is a different matter. I will adress all your other points, Doc, regarding your longer post, below.

R48
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Post by Cosmo »

retired at 48 wrote:
Ted Valentine wrote:R48, why is this better than DCA? In your table 1 if the investor simply adds the first $16k in equal amounts monthly over one year they end up with more shares by June 1998 than you have in your example by 11/1/99. I don't see how this method wins.
Ted, we'll have to each review our mathematics. I get 1454 shares by 11/1/99 using DCA. In Table 1 above I have 1645 shares using Pyramid Up. PyrUP has more!
retired at 48
I am still having trouble grasping this. Intuitively, this makes no sense that you would end up with more shares with PyrUP versus. DCA if you are investing over the same time frame. It would seem that you would be getting more shares on the cheap with DCA during a market downturn where with PyrUP you would be on the sidelines until shares get more expensive.
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Post by mall0c »

I kinda like this technique - it seems like the poor-man's version of what DFA does with momentum trading to avoid catching falling knives. Momentum trading has firm grounding in academic research.
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Post by retired at 48 »

Cosmo wrote:
retired at 48 wrote:
Ted Valentine wrote:R48, why is this better than DCA? In your table 1 if the investor simply adds the first $16k in equal amounts monthly over one year they end up with more shares by June 1998 than you have in your example by 11/1/99. I don't see how this method wins.
Ted, we'll have to each review our mathematics. I get 1454 shares by 11/1/99 using DCA. In Table 1 above I have 1645 shares using Pyramid Up. PyrUP has more!
retired at 48
I am still having trouble grasping this. Intuitively, this makes no sense that you would end up with more shares with PyrUP versus. DCA if you are investing over the same time frame. It would seem that you would be getting more shares on the cheap with DCA during a market downturn where with PyrUP you would be on the sidelines until shares get more expensive.
I'm sorry that one has to look at the chart/graph provided above for Vanguard's Emerging Msarket Fund, and look at Table 1. It may appear busy, but I have no other way to display it. That said, I'll try to state in words why PyrUp beats DCA.

First this example was selected as a worse case time to start buying into Emerging Markets (I suspect this fear keeps many out of EM). The initial buy is near the top, for both DCA and PyrUp.

But DCA is a timed based buying strategy. Ted Valentine has selected monthly. So as EM went into a bear market, Ted continues buying monthly. History, and inspection of the chart, shows these were mostly losing positions, averaging down.

Enter PyrUp. The first purchase(10% of dollar allocation) is made, but by rule the next purchase will be made only if the mutual fund trends upward. IT DID NOT. So by rule no further buying was done until the fund NAV crossed the 200 day moving average on the upside. By inspection, this was much later, not until 3/1/99, when additional purchases resumed. The bear market was avoided. No falling knives caught. DCA caught falling knives. PyrUp ended up with more shares, with no significant loss along a rocky road period.

The process repeats itself in Table 2, actual historical experience.

Unless one can show a flaw in calculations, the comparisons are mathematical; the strategic buy points are mine, PER RULE, of where I would have bought. Just like Valentines DCA is Per rule...time based, mine is NAV performance based. A big difference.

Let's think about this for today. If one started buying the financial excange traded fund, XLF, at any time during the past year, he is losing greatly with DCA. With PyrUp the most invested to date is 10% of targetted monies. No more, because XLF has been below 200 day ma for the full past year.

Hope this clarifies...R48
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Post by diasurfer »

Well I'm sure R48 is writing extensive replies, but here's my 2 cents. My take is that the primary value of PUP is behavioral. It is a systematic way to cautiously enter a new position. Basically, it says "it's okay to stop" whereas DCA says "damn the torpedos, full speed ahead" no matter what. And, it might save you some money if you started developing a position during a bubble, by stopping early. Like for example, commodities might be in right now. You could always just decide to stop a DCA if the bottom falls out, but then you'd be bailing from your plan (IPS) in an intellectual free-for-all and we can't have that can we.

That said, Cosmo your argument makes sense on a basic level. I went back and looked at Table 1. It seems that the key was not just stopping buys when it dropped, but when they resumed, buying in much larger chunks (20% as opposed to 10%) once you started again. This is, as EmergDoc pointed out, another one of those "judgement calls" that need clarification. How do you know went to increase your allocation? R48, if you bought in 10% increments only each time, would you still have come out ahead of DCA?

That said, even PUP hasn't convinced me to open a position in commodities. For me, Larry won the argument, but I have bubble fears. The idea of using PUP has gotten me closer, but in the meantime I still sit on the sidelines as oil just goes up and up and up ...
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Pyr up

Post by retired at 48 »

EmergDoc wrote (partly):
In my opinion, this technique requires far too much skill for ME to do it successfully. It is isn't all that automatic at all. You buy when it is trending upward, but every week...every month...every year (one judgment call) using 10-40% at a time (another judgment call) and then when things decline a certain amount (another judgment call)you decide whether it is due to an overall market decline or poor management/sector momentum (another judgment call). I suppose you could set limits on everything to make it more automatic, but how do you know which limits are the right ones to use? If you pick the wrong decline amount to trigger a sell, or the wrong increase amount to buy, or the wrong % to buy at a time or the wrong interval between buy decisions, it could easily work out much worse than a simply buy/hold/rebalance strategy.

It seems to me there is entirely too much market timing skill required. It sounds like R@48 either has that skill, or simply got lucky (better to be lucky than good anyway) but I'm not sure I'd attempt to reproduce the results. I think I'll just stick to my get rich slowly scheme.
OK Doc, let’s examine whether this versus DCA is that difficult. Here’s the real world. With DCA, one has to pick a periodic time frame to buy. Is it biweekly, monthly, quarterly? Oh, a decision point. Not that easy. Let’s say monthly. Secondly, the investor has to make buys on the exact 30 day date…or is it 31 days, or 28, or last day of the month? Then WILL THE INVESTOR REALLY BUY ON THAT DATE? Or does he allow some wiggle room for market conditions? And if he hits a sharply rising market, does he hold off some buying because the “market will come back…wait awhile”. Point is, even DCA has some anomalies.

Now follow PyrUp. You have already concluded to buy something, anything. Let’s say VEIEX emerging markets fund. Pick any day to start. Your choice (not too complex). Now take 10% of your targeted money allocation. If you want to buy $20,000 worth, it is $2000…easy. Now call Vanguard and BUY. Oh, but Vanguard says need $3000 min to open fund. OK, buy anyway, so what if 15% is first buy. Easy. Like all investors do, monitor your funds net asset value, NAV.(e.g., $10.00 on day one).

Oh, the NAV about a month later crossed the percent threshold you set for next purchase! For aggressive investors, use 4-5%; conservative ones, select 7-10%. I know Doc is aggressive, so at $10.50 or above, he calls Vanguard and buys 20% more.

Ditto for each NAV uptrend threshold, until full moneys invested. About as simple as DCA.

It is my experience that the plural of anecdote is NOT evidence.

Let's look at another anecdote that perhaps displays why pyramiding up may not be a good idea. We'll say, for whatever reason, you want to establish a position in Tech (say QQQ) in early 1999. It seems to have been trending upward, and the NAV is above the 200 day moving average. So you buy 10% of your position in March at $49. It continues to trend upward so 3 months later you put in 20% of your position at $53.92. It continues to go up, so in September you buy another 20% at $62. In December, you buy yourself a Christmas present at $88, another 20%. In March, as things are continuing upward, you buy your last 30% at $112.

Say you started with $100,000.
In March you bought 204 shares.
In June you bought 370 shares.
In September you bought 323 shares.
In December you bought 227 shares.
In March you bought 268 shares.

You own 1392 shares purchased at an average price of $72/share.

On the 10th of April you check in for the week and notice you've dropped below your stop-loss amount (fairly dramatically) and sell at $78/share.

Your profit for the exercise was $8756. Subtracting out say 30% for ST capital gains, $75 in commissions, and $200 in bid ask spreads (0.1% each way seems reasonable to me) and you're left with $5854, or a 5.85% gain.

If, instead, you just lump summed in the whole thing in March 1999 at $49, then you see your investment peak at $115 in March 2000. By December, you realize you've been caught up in the tech bubble, you say you're sorry, you go boglehead and you sell at $57. You have a profit of $16337. You pay your LT capital gains taxes at 15%, $30 in commissions, and the same $200 in bid: ask spreads and call it a day for a gain of 13.7%.

I'm not seeing how pyramiding up would have helped in a situation like this. The price dropped from less than 10% down from the peak ($104) to $78 in less than a week. Was the investor supposed to have a permanent stop loss order in? Was he supposed to adjust it upward every week, every day as the market climbed? When markets fall, they often do so very rapidly and you cannot sell at your desired stop-loss price anyway. And of course, even getting out at $78 required you to be checking your investments every week.

I'd be neurotic if I was constantly changing stop loss orders and checking prices on a dozen different investments. Not to mention dealing with the tax return hassles of so many different buy and sell opportunities.

Congratulations on your success, but I don't think I'll be investing that way.
First of all Doc, you selected the one area of the market, QQQ, that had a bubble…but no matter

You selected to buy in a sector with PE’s nearing 100 (valuations matter to Bogleheads), and no profits. in many stocks…no matter

You selected a time period of all upward prices, where a lump sum is (as stated) obviously better…no matter

I said I would be comfortable buying anything, any time. So let’s look at what happened. First you grossly misapplied the PyrUp buy in rules. How? Each buying is to occur at a set percentage increase in NAV. For aggressive investors, 4-5%; conservative ones, 7-10% each subsequent gains. But your subsequent buyins were June, 10%; Sept, 15% gains; Dec, 42% (why?); and March, 27%! This really distorts both the buying time period, and amounts. A recalculation would show much more profit…but no matter

Let’s say one followed your example right through your sell point. You show a profit! Do you know how many investors would have loved to have had a profit in the tech sector, at this time? Most lost their shirts. Millions would be glad to exchange their experience for this outcome. So even buying into a clearly overvalued (by historical standards) sector, and bubble burst, one walks with a profit. Not bad.

Lastly, as discussed in your earlier post above, this is not a selling technique.

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Post by White Coat Investor »

Obviously I picked a bubblicious asset class to demonstrate my point. If an asset class crashes shortly after your last buy (or any large buy) you can get burned pretty badly. Just like with DCA, "pyramiding up", or lump sum, there are times when each will work out better than another. But knowing which will work out better beforehand is impossible. Assuming an investor doesn't have a lump sum, he is stuck with periodic investing like most of us. So he has to either choose to invest when he gets the money, or he can put the money in a money market account and attempt to market time via any scheme he wants (such as pyramiding up.) This may, or may not, work out better than just investing as soon as he has the money. The benefit of investing as soon as he has the money is that he requires no system, has no emotional involvement, and doesn't have to watch the market. The benefit of market timing is that he MIGHT time the market successfully and get a greater return over the long run.

So far in my short investing career (admittedly much shorter than yours) I have seen that I am an awful market timer, and certainly worse than most of the professionals I compete against. In fact it seems to me that there are very few successful market timers, no matter what system they use.

This system is designed to lower risk, and lower returns, while hopefully raising the risk-adjusted returns. I guess I'm not convinced that it lowers risk any more than it lowers returns, and in fact I suspect it lowers returns more than it lowers risk.

And I'm not even addressing how and when to choose which asset classes to invest in, which introduces multiple other difficult decision points. Do you use 8 of 12 classes, 6 of 18, 4 of 10, and we haven't even addressed when to get OUT of an asset class yet. I think your "system" seems a lot simpler to you than it actually is and I think you're fooling yourself that there is any kind of an automated system underlying your investment decisions. You may be good, you may be lucky...you are certainly successful, but I don't think trying to imitate your investing style would be a good idea for the average investor or the average Boglehead.
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Post by trefoil »

You may be good, you may be lucky...you are certainly successful, but I don't think trying to imitate your investing style would be a good idea for the average investor or the average Boglehead.
Retired at 48 has saved a substantial fraction of his income over many years, and put it into sound and fairly low-cost investments. My guess is that applying PyrUp has somewhat randomized the timing of investments (compared to a metronomic DCA) but is basically noise as far as the overall result goes. It might have made a little more or a little less but the main feature was that he felt more psychologically comfortable with not buying into an apparent negative trend, and possibly it let him weed out active managers that were real dogs. Just saving money somehow is more important than choosing the strictly optimal asset allocation or investment schedule. On the other hand if we give informal advice here it's nice to put it to the test first.

To me, Occam's razor suggests that until this has been demonstrated in simulations and I understand why it'll work, I'll stick with rough DCA.

So as I say this is just a guess. I know people have played through particular short term scenarios but the problem is always whether you're choosing one that is favourable or not. To make this more than a guess it would be useful to do a Monte Carlo simulation of PyrUp over many different possible markets. I think r@48 has described it well enough that someone would code it.

One issue is: MC simulations generally assume uncorrelated randomly distributed prices, which is a good match with actual market data, but will have no long-term trends. (Beyond the underlying real long term rate of return.)
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Re: Pyr up

Post by Cosmo »

retired at 48 wrote: OK Doc, let’s examine whether this versus DCA is that difficult. Here’s the real world. With DCA, one has to pick a periodic time frame to buy. Is it biweekly, monthly, quarterly? Oh, a decision point. Not that easy. Let’s say monthly. Secondly, the investor has to make buys on the exact 30 day date…or is it 31 days, or 28, or last day of the month? Then WILL THE INVESTOR REALLY BUY ON THAT DATE? Or does he allow some wiggle room for market conditions? And if he hits a sharply rising market, does he hold off some buying because the “market will come back…wait awhile”. Point is, even DCA has some anomalies.


Retired at 48
Thanks for your responses, Retired. PUP definitely has caught my interest but I need to look at some more scenarios. Just a word about DCA. In most cases, no one needs to pick a periodic time or an exact date. It is done automatically in peoples 401(k)s, and in some cases, IRAs and taxable accounts. It's entirely a mechanical process, which requires no thought.
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Re: Pyr up

Post by retired at 48 »

Cosmo wrote:
retired at 48 wrote: OK Doc, let’s examine whether this versus DCA is that difficult. Here’s the real world. With DCA, one has to pick a periodic time frame to buy. Is it biweekly, monthly, quarterly? Oh, a decision point. Not that easy. Let’s say monthly. Secondly, the investor has to make buys on the exact 30 day date…or is it 31 days, or 28, or last day of the month? Then WILL THE INVESTOR REALLY BUY ON THAT DATE? Or does he allow some wiggle room for market conditions? And if he hits a sharply rising market, does he hold off some buying because the “market will come back…wait awhile”. Point is, even DCA has some anomalies.


Retired at 48
Thanks for your responses, Retired. PUP definitely has caught my interest but I need to look at some more scenarios. Just a word about DCA. In most cases, no one needs to pick a periodic time or an exact date. It is done automatically in peoples 401(k)s, and in some cases, IRAs and taxable accounts. It's entirely a mechanical process, which requires no thought.
Thank you, Cosmo. You moving to a nuetral position, and has "caught your interest", shows openmindedness. I agree with your 401.k DCA comment...it is the easiest form of DCA because it forces one to do it. It was perhaps why I was able to retire early from GE.

Do note that earlier, I did say PyrUp is not for 401.k standard investing. But studies show many workers in 401.k's start out in a money market or bond fund. Then as years pass they educate themselves about stock fund investing, and finally get the courage to switch a reasonable sum from bonds to stock funds. PyrUp could be useful here.

Good to chat

R48
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Post by diasurfer »

R48, the first time I missed the part about picking a certain percentage for new buys and sticking to it. I'd appreciate one more point of clarification. Do similarly have set rules for increasing (or not) the percentage of your goal position that you buy? In your examples I've seen 10-30% after that first buy-in ... are you doing this part on the fly?
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Post by retired at 48 »

diasurfer wrote:R48, the first time I missed the part about picking a certain percentage for new buys and sticking to it. I'd appreciate one more point of clarification. Do similarly have set rules for increasing (or not) the percentage of your goal position that you buy? In your examples I've seen 10-30% after that first buy-in ... are you doing this part on the fly?
Emergdoc asked a similar question. The reason for the later, higher percentage, lies in the mathematics. Here's what I mean.

The objective is to stay in a "gain position." If one buys 10% to start, and by definition it goes up 10%, you have now built up a gain. So the next buyin can be at a larger percent, since you have a gain to play with. So let's say 20% alotted to the second buy.

Assume the fund now goes up another 10% (by rule, don't buy unless it does). So now you have a 20% gain on the initial buy, and 10% gain on the larger second buy, so you now have this extra gain to make the third buy. Get the drift here. The third buy may now be 30%, and still have the same relative gain to be a buffer in a down market.

I've suggested percentages of 10, 20, 20, 30, 20 as very comfortable ones.

Do I change on the fly. Yes. Ladies perrogative :!: . Of course, just like DCA, one could stop altogether. Or, I have found that if a fund is really moving up fast, and by the time I buy the percent increases my be even greater than I originally set, I might up the percentages. Also depends on amounts. On $10,000 total buying, it may not matter too much. $1,000,000 lottery that diasurfer is sure to win, then the percentages may get even more conservative.

Clear?

R48
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Post by diasurfer »

unfortunately Hawaii doesn't have a lottery and I have to travel back home to Texas to fund this key component of my retirement plan.

thanks for reply
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initial purchase

Post by jberkman »

R48,

With PUP, is it best to make the initial 10% purchase only if the NAV is above the 200 day market average? You mentioned in an earlier post that you would hold off on the initial purchase if the NAV is way below the 200 day ma, but I would think it's best to wait if the NAV is anywhere below the 200 day ma. Please clarify.

Thanks,

J
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Post by CrankyCube »

R48: Sorry if if I've missed it but have you ever calculated the difference of your investments with PUP vs just straight investing in an index using the same equity split as you did with PUP? I understand index funds may not have been around at the start, but maybe some creative excel work can do it?

-adrian
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Re: initial purchase

Post by retired at 48 »

jberkman wrote:R48,

With PUP, is it best to make the initial 10% purchase only if the NAV is above the 200 day market average? You mentioned in an earlier post that you would hold off on the initial purchase if the NAV is way below the 200 day ma, but I would think it's best to wait if the NAV is anywhere below the 200 day ma. Please clarify.

Thanks,

J
Indeed, if I read you correctly, you are right. Take a look the link and chart for KBE (Banking ETF) below. Or go back and look at any of the funds you own. Clearly, right now most funds have NAV's below 200 day ma. One has two choices for first 10% buy.

http://finance.yahoo.com/q/ta?s=KBE&t=2 ... m200&a=&c=
One, pick an entry point where one feels the value is so compelling they should buy at that price (as opposed to "picking a bottom."). Example, homebuilders as a group are off about 80-85% from highs. Compelling? Or if AA index funds get down 40% from high. Compelling?

Or the second alternative, wait untill NAV crosses 200 dayma, on upside. And if a bear market accompanies the situation (like now), it helps if the slope of the smoothed 200 day ma has actually turned positive; that is, upward, so that a real trend change has occurred.

I personally will lean to using the latter (200 dayma) , in the current market.

R48
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Re: initial purchase

Post by woof755 »

jberkman wrote:R48,

With PUP...
R48, clearly you have "made it." You are acronym-ed.

:wink:
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Re: initial purchase

Post by White Coat Investor »

woof755 wrote:
jberkman wrote:R48,

With PUP...
R48, clearly you have "made it." You are acronym-ed.

:wink:
Yea, and you didn't even get stuck with an acronym frequently mistaken for Erectile Dysfunction
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pyrup

Post by retired at 48 »

To Woof and Doc... :lol: :lol:

But I hope this doesn't mean thread is deteriorating! I still owe a response or two.

R48
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Re: initial purchase

Post by woof755 »

EmergDoc wrote:
woof755 wrote:
jberkman wrote:R48,

With PUP...
R48, clearly you have "made it." You are acronym-ed.

:wink:
Yea, and you didn't even get stuck with an acronym frequently mistaken for Erectile Dysfunction
Oh, cheer up, ED.

It happens to lots of guys! (Maybe it's something about living in the UK...by the way, you move around a lot--are you running from the law?)
Last edited by woof755 on Thu Jul 03, 2008 1:13 pm, edited 1 time in total.
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Re: pyrup

Post by woof755 »

retired at 48 wrote:To Woof and Doc... :lol: :lol:

But I hope this doesn't mean thread is deteriorating! I still owe a response or two.

R48
Sorry for the tangent...please continue!
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