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An ancient Spanish proverb observes "Lo que hace el loco a la postre, hace sabio al principia," or "That which
the foolish do in the end, the wise do at the beginning."
Nowhere is this more true than in the stock market!
In the stock market, every single trend of any significance - both uptrend and downtrend - ends only after the
Foolish have piled in. And, at the same time as the Foolish are piling in, the Wise are starting to take the very
opposite action, thus beginning the opposite trend by buying from the Foolish who are despondently selling,
or selling to the Foolish who are eagerly buying.
It has always been this way, in all markets, and always will be. Simply put, it is human behavior that drives
the markets - not cold mathematics or science or even economics. In fact, one of humanity's most brilliant
scientists ever, Sir Isaac Newton, said in frustration (after losing a bundle in the stock market of his day), "I can
calculate the movement of the stars, but not the madness of men!" Almost four centuries later, the 2002
Nobel Prize for Economics was awarded to two pioneers in this field of investor behavior, now formally
called "Behavioral Finance."
The Sherman Strategy is designed to profit from these unchanging, eternal characteristics of human - and thus
investor - behavior.
The Sherman Strategy carefully monitors the market for those occasions when the Wise are acting in
opposition to the Foolish, and then invests (or un-invests) in alignment with the Wise.
Therefore, at the conclusion of an uptrend, when The Sherman Strategy detects that the Foolish are piling into
the buying and that the Wise are beginning to sell, The Sherman Strategy exits the market and patiently waits
while the subsequent downtrend unfolds. It doesn't matter how bullish the newspapers are; it doesn't matter
how enthused the talking heads on TV are. In fact, just the opposite - as Warren Buffet says, "It's optimism that
is the enemy of the rational buyer - you can't buy what is popular and do well." Joseph Kennedy, Sr., asserted
that he avoided the crash of 1929 by selling on the very day that his shoe-shine boy gave him a stock tip!
Likewise, at the conclusion of a downtrend, when The Sherman Strategy detects that the Foolish have become
the despondent selling majority, and that the Wise are beginning to buy, The Sherman Strategy re-enters the
market and participates in the gains as the subsequent uptrend unfolds. This is Warren Buffet's favorite situation!
He says "The time to get interested is when no one else is," and "The most common cause of low prices is
pessimism...we want to do business in such an environment, not because we like pessimism but because we
like the prices it produces."
To quote Mr. Buffet yet again, "We simply attempt to be fearful when others are greedy and to be greedy only
when others are fearful."
The goal of The Sherman Strategy is to avoid those market declines and participate in those market uptrends,
which are signaled by investor behavior - the actions of the Wise and the Foolish.
A Deeper Look
The Sherman Strategy has two parts: the Risk Management Module, and the Position Selection Module.
The Risk Management Module determines market exposure, while the Position Selection Module determines
the composition of the portfolio.
The Risk Management Module
The Sherman Strategy implements highly effective risk management by seeking to avoid most significant
declines in the market. It is, after all, declines in the market, which are the risks of the market, so avoiding most
significant declines is to avoid most of the market's risks.
When conditions indicating a high probability of a significant decline are detected by the Risk Management
Module (i.e., when the Foolish are enthusiastically buying while the Wise have begun to sell), The Sherman
Strategy signals a 100% cash position (Money Market or Short-Term Bond funds, typically).
Later, when measurements within the Risk Management Module indicate that the decline has run its course
(i.e., when the Foolish are frantically selling and the Wise have begun to buy), The Sherman Strategy signals a
return to full 100% market exposure.
The philosophy of the Risk Management Module is very simple: when the market has a high probability of
going down, no amount of exposure is appropriate; when the market has a high probability of going up, 100%
exposure is appropriate.
The Risk Management Module is designed to detect intermediate-term moves lasting from 1 to 6 months,
rather than short-term "wiggles" in the market. A proprietary measurement called the Shermanator, specifically
created to perform this task, has signaled just one to three instances per year for the last decade. During that
period, about 67% of the time has been spent invested in the market, and 33% of the time has been spent out
of the market in the safety of cash (e.g., Money Market or Short-Term Bond Fund).
The Position Selection Module
The measurements used by the Position Selection Module are designed to identify candidates that have
intermediate-term strength and staying power, since The Sherman Strategy does not usually change the
portfolio composition for the duration of the upmove. Surprisingly, this results in less activity in the portfolio
in a typical year than would be experienced by the common "buy and hold with quarterly rebalancing"
investing strategy.
The Risk Management Module + the Position Selection Module
Combined, the two Modules within The Sherman Strategy create a complete investing methodology.
In real-time use since January, 2004, The Sherman Strategy has successfully outperformed the market in all
up-years, while avoiding the significant downdrafts - including the down-year of 2008 (through 7/31).
Analysis of the effectiveness of each module reveals approximately equal contributions from each toward
the total outperformance of The Sherman Strategy.
The Sherman Strategy successfully challenges the usual belief that risk reduction must necessarily be
associated with performance reduction. On the contrary, by every measure of performance The Sherman
Strategy delivers a superior investing methodology.
The Sherman Strategy in Detail
The Sherman Strategy Annual Performance Charts
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