Surviving the Crash:

One Investor’s Story of What Worked

By Manny Mendelson
manny@mendelsonresearch.com
http://successbooks.blogspot.com

The crash of 2008-2009 was a frightening experience for most investors. As a full-time trader/investor
watching the drama unfold, I was no less terrified than everyone else, but when all was said and done, I
had a drawdown of approximately 12.55% in 2008 ,and about 4.22% in 2009. By the time of this writing
(May 2010) I am hitting new equity highs. In fact, measured from 2002, I am further ahead of the S&P
than I have ever been (approximately 21%). This article is intended to explain how and why I did what I
did, and also to shatter some “this time is different” myths about the crash.
50.00%
In essence, here is what worked Account Return Since
for me: 40.00% Jan 2002
S&P Return Since Jan
1. Making sure I was never 30.00% 2002
over-allocated in equities (ETFs
and mutual funds) going into the 20.00%
crash
10.00%
2. Keeping a portion of my
assets in bonds, and another 0.00%
portion in gold and other
commodities -10.00%
using ETFs
-20.00%
3. Exiting a few long positions
-30.00%
when weekly technicals were
breached, and… -40.00%

4. Trading about 5% of my
account in proprietary index futures systems.

This was not rocket science. Nor was it about brilliant stock-picking, canny options trading, or arcane
knowledge of short-selling. It was pure “blocking and tackling” based primarily on long-term trend-
following and asset class allocation. In fact, I am particularly happy that my results DID NOT require
extraordinary fine-tuning, because this suggests that the techniques I used might be robust and helpful to
me in the long term.

Strategy 1: MPT Worked for me

They say Modern Portfolio Theory is dead. “In the crash all correlations went to 1” was the cry, meaning
there was no place to hide, and all assets sold off more or less together. This doesn’t seem true to me. As
far as I can tell, I benefitted from holdings in both inflation protected bonds and gold. Here are some
examples of the correlations of these assets vs the S&P during the period from 10/1/08 thru 3/1/09. They
certainly did not “go to 1”:

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S&P vs Fidelity Inflation Protected Bond (symbol: FINPX)

10/1/08 – 3/1/09
CORREL = 0.11(weak)

S&P vs SPDR Gold Trust (symbol: GLD):

10/1/08-3/1/09
CORREL = -0.35(negative)

The graph below paints a picture of these divergences:

The percentage chart plainly shows significant benefits from holding gold and bonds in late 2008 and
early 2009. I had set a goal of getting more into bonds, and keeping around 4.5% in gold. This turned out
to be a good decision.

Strategy 2: Using weekly technicals to avoid overcommittment to equities

As the S&P declined below the 30-week moving average I did some selling of core mutual funds. As long
as the S&P was below the 30-week moving average, I did not attempt to add to make up allocations. The
results of adding to bonds and avoiding rebalancing into equities yielded the following asset weight
changes:

45% to 31% equities from Dec 07 to Dec 08

14.96% to 18.92 % in bonds From Dec 07 to Dec 08
Between 4.0% and 4.5% in GLD through 2008

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Strategy 3: Relative Strength Systems

I also was following some of Gerald Appel’s ideas about rotating into ETFs with strong relative strength.
By late 2007 these systems were picking bonds, currency ETFs and inverse ETFS. While not all picks
were in these categories, these systems helped a part of my portfolio. Here is a selection of the ETFs
selected, more or less purely by Relative Strength and low volatility:

S&P S&P
Symbol Entrydate EntryPrice Exitdate Exitprice Entry S&P Exit %PL %PL
PSQ 9/18/2008 65.119 12/17/2008 76.11 1206.51 904.42 16.88% -25.04%
SH 9/18/2008 74.02 12/17/2008 83.258 1206.51 904.42 12.48% -25.04%
TLT 9/18/2008 98.25 12/17/2008 119.79 1206.51 904.42 21.92% -25.04%
TLH 9/18/2008 110.61 12/17/2008 121.93 1206.51 904.42 10.23% -25.04%
PSQ 10/14/2008 72.972 1/6/2009 69.5 998.01 934.7 -4.76% -6.34%
UUP 10/14/2008 24.96 1/6/2009 25.172 998.01 934.7 0.85% -6.34%
SHY 10/14/2008 83.62 1/6/2009 84.4 998.01 934.7 0.93% -6.34%
PSQ (addl) 10/27/2008 83.66 1/6/2009 69.5 848.92 934.7 -16.93% 10.10%
UUP(Addl) 10/27/2008 26.89 1/6/2009 25.172 848.92 934.7 -6.39% 10.10%
Shy(Addl) 10/27/2008 84.07 1/6/2009 84.4 848.92 934.7 0.39% 10.10%
DEE 11/24/2008 60.57 2/24/2009 97.86 851.81 773.14 61.57% -9.24%
PSQ 11/24/2008 86.07 2/24/2009 76.05 851.81 773.14 6.47% -9.24%
SH 11/24/2008 93.66 2/24/2009 84.79 851.81 773.14 3.32% -9.24%
FXY 11/24/2008 103.52 2/24/2009 103.1 851.81 773.14 -0.41% -9.24%
LSC 12/18/2008 10.9979 3/18/2009 10.104 885.28 794.35 -8.13% -10.27%
TLT 12/18/2008 122.22 3/18/2009 101.2 885.28 794.35 -17.20% -10.27%
MYY 12/18/2008 82.64 3/18/2009 74.94 885.28 794.35 4.36% -10.27%
FXY 12/18/2008 111.5594 3/18/2009 101.62 885.28 794.35 -8.91% -10.27%
LQD 1/6/2009 101.29 4/6/2009 92.93 934.7 835.48 -8.25% -10.62%
IVW 1/6/2009 46.68 4/6/2009 43.16 934.7 835.48 -7.54% -10.62%
DBA 1/6/2009 27.154 4/6/2009 24.61 934.7 835.48 -9.37% -10.62%
IWV 1/6/2009 54.01 4/6/2009 47.81 934.7 835.48 -11.48% -10.62%
TLT 1/14/2009 115.92 4/6/2009 102.93 842.62 835.48 -11.21% -0.85%
FXY 1/14/2009 111.899 4/6/2009 98.9 842.62 835.48 -11.62% -0.85%
SLV 1/14/2009 10.408 4/6/2009 12.04 842.62 835.48 15.68% -0.85%
IEF 1/14/2009 98.97 4/6/2009 94.84 842.62 835.48 -4.17% -0.85%

Average return for each position 1.11%

Average return if position had been in S&P: -8.18%

In retrospect, I wish I had been even more involved in Relative Strength/Low volatility ETFS during this
period!!

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Strategy 4: Intraday Futures Systems
Futures are often considered a risky investment because of their leverage. I would certainly agree, if they
are considered on their own. But , in my experience, intraday futures systems provided excellent non-
correlated returns particularly in 2008.

120.00%
Intraday Futures Returns 2008
100.00%

80.00%

60.00%

Return on account
40.00%

20.00%

0.00%
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1
1

1
1
1
1
1
2
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I am a Tradestation programmer and had about 5% of my account in my own proprietary futures systems.
The high volatility of this period enabled a really good return of approximately 100% in 2008. These
excellent returns do not invalidate my contention that most of my results might well be obtainable by pure
ETF or mutual fund investors. The futures returns added about 4% to my total return in 2008.

Conclusion: This time is Not Different

In my experience, a lot of established ideas continued to work through 2008-2009 and these ideas
benefitted me, as they would have any investor:

MPT works.
Technical trend-following works
Relative Strength works
Intraday futures systems can provide manageable risk and return

All in all, applying some good quantitative methods and some broad-based technical indicators helped me
survive the crash without too much damage. Then, making sure I got re-allocated in 2009 (I did most of
my buying in May and June) allowed me to participate in the rebound. This reallocation was also based
on the 30-week moving average, and my acquaintance with this indicator comes from Stan Weinstein’s
book, mentioned below.

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Recommended Reading:

Stan Weinstein “Secrets for Profiting in Bull and Bear Markets”

Gerald Appel “Technical Analysis: Power Tools for Active Investors”

Ben Stein and Phil DeMuth “Yes, You Can Still Retire Comfortably”

Ben Stein and Phil DeMuth “Yes, You Can Supercharge Your Portfolio!”

David Swensen “Pioneering Portfolio Management: An Unconventional Approach to Institutional

Investment”

Mebane Faber “The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets”

Special thanks to Jackie Sloane, communication consultant, http://sloanecommunications.com

Manny Mendelson is a private trader and trading systems developer. With degrees from Brown
University, Manhattan School of Music, and the Eastman School of Music, he spent 18 years
composing and arranging music for television commercials before beginning to trade full-time.

Copyright 2010 Manny Mendelson