Gil Blake – Consistency

Gil Blake

This article is part of our 'Guru' series - profiles of successful traders, with takeaways for the UK private investor.
You can find the rest of the series here.


Today’s post is a profile of Guru investor Gil Blake, who appears in Jack Schwager’s book New Market Wizards. His chapter is called The Master of Consistency.

Gil Blake

Blake is a mutual fund timer.

He doesn’t merely switch back and forth between a single mutual fund and a money market fund but also makes the additional decision of which sector in a group of sector funds provides the best opportunity on a given day.

Blake uses technical-only models and normally holds for between one and four days.

He appears in Jack Schwager’s book “New Market Wizards”.

  • His chapter is called The Master of Consistency.

Performance

Gil Blake’s company is called Twenty Plus.

  • His logo shows a probability curve with a 20% return two standard deviations to the left of the mean.

Schwager says the implication is that he has a 95% probability of making 20% a year.

  • I think Blake just means that a 20% return means beating 95% of people.

In the twelve years to Schwager’s interview, Blake averaged 45% pa returns.

  • And he had no years with a return below 20%

Blake charges an astonishing 25% of profits, but unusually, he refunds 25% of losses (were there to be any) and 100% of losses in the first year.

  •  Sadly, he stopped accepting new money seven years into the fund (which started trading in 1982).
Early days

Blake started off as a naval officer on a nuclear submarine.

  • Then he went to Wharton Business School and became an accountant with Price Waterhouse, and then a CFO.

By accident, a friend showed him some evidence of non-random market behaviour (involving non-random mutual fund pricing, and an opportunity for market timing).

  • He thought this couldn’t be correct, but his subsequent research convinced him of the opposite.

So 15 years after college, suddenly convinced the markets offered opportunity, Blake became a trader.

Mutual fund timing

We called it the “one penny” rule. In the two years’ worth of data we had obtained, we found that there was approximately an 83% probability that any uptick or downtick day would be followed by a day with a price move in the same direction.

Even though he couldn’t go short, this strategy proved successful when the NAVs of the underlying funds (Blake started with bond funds) was falling.

I ended up taking out four successive second mortgages over a three-year period, which I was able to do because housing prices in the Northeast were rising.

Even using a single daily signal, the trends were so persistent that Blake only averaged 20 to 30 switches a year.

Fidelity’s guideline was four switches per year, but they didn’t enforce that rule. As the years went by, I got an occasional letter from Fidelity: “It has come to our attention.

I would use the municipal bond fund for four trades, then the high-yield municipal bond fund for four trades, and then the limited-term municipal bond fund for four trades, and so on.

Low volatility

Later the volatility of the funds – and the probability of one day flowing the other – begin to fall.

See also:  Michael Masters - Swimming Through The Markets

Blake looked at equity and commodity funds, but landed on sectors funds, despite a switching fee.

  • The flip side was that unlimited switches were possible if you paid the fee.

The sectors were also much more volatile (read profitable) than bond funds.

  • Blake found that homogenous sectors worked better than heterogeneous ones.

Since the funds were priced at the end of the day, Blake sampled the prices of 10 or 20 stocks in the sector to predict the close.

  • It turned out that it didn’t matter whether he used stocks that were actually in the Fidelity or not.

Since 50% of the profits in a 2-3 day holding period, this half-a-day advantage proved significant.

Remarkably, Blake invested 100% of his fund in a single sector each day.

I’m not a big fan of diversification. You can diversify very well by just making enough trades per year. If the odds are 70% in your favor and you make fifty trades, it’s very difficult to have a down year.

I would rank each sector based on a combination of volatility and historical reliability (persistency).

If every sector looked unfavourable, Blake would go to cash.

The fund

After a couple of years, Blake started a fund.

I could manage $ 100,000 of client money, share 25 percent of the gains and losses, and effectively be borrowing $25,000 for nothing.

All my accounts were either friends or neighbors. Some people don’t do any homework at all and give you their money immediately. Others wouldn’t dream of giving you $10, no matter what you showed them.

Finally, there are those that do a lot of homework and ask the right questions before they invest. Everyone falls into one of these three categories.

Schwager asked why Blake stopped accepting new money.

It’s not a limit to how much money I can handle but rather a limit to how much money may be welcome in the funds I’m trading.

I’m very sensitive to any potential impact I might have on the fund manager or on the other shareholders who don’t move as actively as I do.

I prefer to restrict the amount of money I move to only a couple of million dollars in a fund of several hundred million dollars, so that the impact will be minimal.

Psychology

What I did not fully appreciate at first was the psychological importance of finding and maintaining a stable proportion of client money to my own capital. Actually, I prefer this proportion (or leverage) to decline over time.

I found myself rationalizing taking 50 percent positions. For example, a green light would come on, and I would trade only $200,000 of a $400,000 account.

I have a routine of internalizing how I would feel given what might happen on the next day. My approach is to confront losses even before they materialize. I rehearse the process of losing.

When a loss happens, I believe in embracing it. By embracing a loss, really feeling it, I tend to have less fear about a potential loss the next time around. If I can’t get over the emotions of taking a loss in twenty-four hours, then I’m trading too large.

It’s important to have a blend between an artistic side and a scientific side. You need the artistic side to imagine, discover, and create trading strategies. You need the scientific side to translate those ideas into firm trading rules and to execute those rules.

Fidelity

Eventually Fidelity imposed restrictions that made active switching difficult, including fees for funds held for less than 30 days.

I suppose they thought that the profits being made by some market timers were coming out of shareholders’ pockets. I would submit, however, that the profits were coming mostly from unsuccessful market timers.

Systems

For me, it’s important to be loyal to my system. When I’m not, which happens occasionally, then, win or lose, I’ve made a mistake. I usually remember these for years.

If you break a discipline once, the next transgression becomes much easier. Breaking a diet provides an appropriate analogy.

Most traders don’t have a winning strategy. Among those traders who do, many don’t follow their strategy. Trading puts pressure on weaker human traits.

I believe that systems tend to be more useful or successful for the originator than for someone else. It’s important that an approach be personalized; otherwise, you won’t have the confidence to follow it.

Beating the market

A prevailing myth on Wall Street is that no one can consistently beat the market year in, year out, with steady returns of 20 or 30 percent a year.

On the other hand, the sales side would have you believe that it can be done by anyone. Neither is really the truth.

One hundred money managers each believe that they can consistently outperform the market. My feeling is that the number is a lot closer to zero than one hundred.

Becoming successful

First, focus on trading vehicles, strategies, and time horizons that suit your personality.

Second, identify non-random price behavior, while recognizing that markets are random most of the time.

Third, absolutely convince yourself that what you have found is statistically valid.

Fourth, set up trading rules. Fifth, follow the rules.

Conclusions

This is a terrific chapter, with a very quotable trader explaining in detail a simple strategy that showed terrific performance for more than a decade.

See also:  Monroe Trout - The Best Return That Low Risk Can Buy

As Schwager notes:

Blake’s amazingly consistent track record (65 winning months in a row, 25 winning months for each losing one) provides compelling empirical evidence that the markets are indeed non-random.

Schwager concludes:

If you are able to uncover non-random market patterns, only two steps remain to achieve trading success:

Devise your trading rules and then

Follow your trading rules.


The only weakness with this chapter is that it begs the question of what Blake did after Fidelity squeezed him out of their funds.

Schwager says only that:

Blake switched to different fund families and different strategies.

Nowadays it might be possible to come close to the strategy using ETFs on a low-cost trading platform, if you can trade in big enough size.

  • Let’s see – I have it in mind to give this a go at some point.

Until next time.

Mike Rawson

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 35 years, with some success.

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2 Responses

  1. Avatar Jeff Christian says:

    Did you ever try it? If so, how is it going?

    • Mike Rawson Mike Rawson says:

      I don’t use Blake’s “one penny” rule, but yes, I’ve been doing it in a small way for a few years now. It gets easier as transaction charges come down.

      This is not a great macro environment for factor investing of any kind (low interest rates, massive central bank intervention), but if any is still working, it’s trend/momentum.

      That said, at the moment I see this as a way of reducing the volatility (and increasing the Sharpe ratio) on my core long passive portfolio, rather than as a source of outperformance.

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Gil Blake – Consistency

by Mike Rawson time to read: 5 min
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