Terrence Laundry is Chairman of American Shareholders Investment Corporation. He is the Chief Financial Advisor for our client brokerage accounts at Fidelity Investments. Terry determines all investment advice which includes mutual fund selection and market timing. Terrence Laundry is also the President of T Theory Foundation, Inc., an educational and research foundation devoted to developing the T Theory Timing Principles. For over thirty years, Terry's theoretical expertise initiated a proprietary investment formula providing consistent growth of investment capital overtime. Terry is the author and commentator of many theoretical concepts featured at the www.ttheoryfoundation.org website. Terry also monitors the market on a weekly basis at www.ttheory.com. Terry is a graduate of Phillips Exeter Academy and the Massachusetts Institute of Technology.
Paula Burke is President of American Shareholders Investment Corporation. Paula Burke started working for Terry Laundry in 1978 part time while attending college. Paula became a full time employee in 1984 and and was elected President in 1995. Paula's responsibilities include client relations and she acts as client account services liaison with the Fidelity system. Paula is committed to providing exceptional customer service and enjoys working on client issues. Paula acts as Operations Manager overseeing fund accounting and financial requirements of our advisor trading program. She periodically, assists Terry with the publication of ASIC's monthly report and data metrics. In 2006, she became our Chief Compliance Officer. Paula maintains several programs to check client accounts to ensure the safety and security of our trading back office.
Welcome to American Shareholders Online by Terry Laundry
Since 1978 American Shareholders' single most important goal has been to apply my T Theory™ principles to the consistent growth of investment capital through both good times and bad. Below I present our actual successes. The table, lists the annual returns for client's actual accounts for the completed years 1978 to the end of 2009. Let us look at a few of the details.
First our program is unique from a client safety standpoint in that all client assets we manage reside in the individual client's (or Trust's) very own Fidelity Investment account protected and audited by this respected institution. Within this particular Fidelity account we are granted very limited rights (via the management agreement detailed later) to move these assets within the Fidelity authorized group of mutual funds as my interpretation of T Theory dictates. Clients pay a management fee that varies from an annual 1% for very large accounts to about 1.5% for very small accounts.
Beyond these rights, which are granted by the client agreement, the account funds are yours to do with as you wish and we have no other power. A typical average annual fee is 1.3% and in the table the gross returns provided by Fidelity are then reduced by 1.3% to the client's, net returns at the right. The accounts are always in your name and you may at any time access its dollar value and its fund composition as determined by Fidelity on a daily basis. Your account data can be accessed online after proper web security precautions have been taken.
Fidelity will also provide you with their own monthly accounting statements and we will follow up with our own monthly summary report describing our plans and strategies for the future. Clients may cancel the management agreement at any time in writing. In this event, our limited influence, over the account would legally be terminated.
I specifically required this pattern of strong fiduciary responsibility on the part of the organization holding our client assets, coupled with our more flexible and insightful T Theory™ management, way back in 1978. I knew from long history that fraud would likely resurface during any speculative periods, because it always has. I felt this separation of authority for us to develop a unique investment strategy, independent of fiduciary obligations, was the far safer long term approach. It is much like double entry accounting in which two independent sets of figures are compared over time with warning flags being raised whenever either concept see a discrepancy. This extra safety factor amounts to an extra cost to the client. However, my T Theory more than compensates for this insurance, as the record demonstrates, by moving us away from volatile equities whenever it sees a high risk situation developing.
This defensive thinking was justified, when, in 2001, Enron, the energy company, which Fortune magazine named for six consecutive years as America's Most Innovative Company, filed for bankruptcy, after which it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud. Likewise within the last year, the Madoff Ponzi scheme, which devastated many innocent investors with completely fraudulent accounting, was found to have taken place right under the noses of the responsible regulators. Our most basic philosophy is that it is far better to build into your basic investment approach, an embedded defensive plan as opposed to trusting the Government or some fictitious or presumed long term trend in order to defend your assets.
As an added precaution, at the very the outset of our program in 1978, I insisted that our investments be confined to mutual funds, rather than stocks, as the diversification and strict accounting regulations required by funds greatly limits the most serious kind of fraud. As a further safeguard, I should point out that T Theory has done a very fine job in keeping us out of major down trends and recessions when fraudulent activities tend to be discovered.
There was an isolated problem with the Reserve money market fund during 2008 when we were mostly in money market funds. Its failure to hold a $1.00 price was stressful at the time, but it was hardly a serious financial threat, and was quickly fixed by regulators. Fidelity was never involved; however Fidelity has provided fraud insurance protection as a part of its money market funds as a result. Paula has the details on our next page and you may download the Fidelity Capco letter. Go to ASIC forms and select Fidelity letter.
For the record, I should also note the gross performance figures above for these 30 years are from actual client annual records supplied by the fiduciary account holder which, in the early years, was State Street Bank, then Fidelity's 110 fund group that gave us more flexibility into the financial and technology funds, then on to the present, in what we call the Fidelity Network, which is a more flexible brokerage account and which gives us access to thousands of mutual funds outside of the Fidelity family.
I would also draw your attention to what we call "benchmarking" in this table. Paula and I spend a great deal of our time on what we call benchmarking as it provides us with a guideline for our mutual fund decisions. In the table above we have benchmarked our net client return, i.e., after fees are paid out, against the Standard and Poors 500 Total Return Index which measures the price and income returns of the 500 largest US stocks. This is an unmanaged investment measure which any investor can achieve without any significant fees. So it is the obvious benchmark alternative to active management. When referenced against this unmanaged benchmark, American Shareholders has consistently out performed it, doing as well in the good times and, much more superior in the bad times due to the defensive nature of T Theory.
Cumulative Effect of Superior "T Theory Management™"
With these thoughts in mind we now move on to the next graph which plots the trend of American Shareholders net "client" return against the S&P 500 total return as of October 9th 2009. One of the unique characteristics of our management program is the investments are percentage wise, the same for all clients who enter the Network Program which allows us the maximum number of investment options. Also the only investments are in mutual funds which are purchased or sold only at the 4 pm ET close. This insures that all clients are treated fairly, buying or selling at the same price.
To insure the integrity of the annual gains and losses we rely on the Fidelity Statements which we are permitted to view. We compute the ratio of the closing assets/starting assets across the 12 month period. Ideally the gains should be identical for all clients, provided the client has not added or deducted money during the year. However, rounding errors and the effect of small fixed fees give slight variations so we take a representative figure for the annual gain and that becomes our gross total rate of return for the year.
The resulting plot above strings these annual gains together, after the annual gross gains, have been reduced by 1.3%, as a representative annual cost to the client. The green line represents our net after fees return to clients as assets rose from an assumed initial $10,000 level to something over $1,100,000.
The red line below our performance, tracks the same $10,000 initial investment as it would grow in line with the standard equity index benchmark, the Standard and Poors 500 stock Index. This benchmark index covers a representative, broad array of US companies with dividends reinvested so as to provide an accurate picture of conservative large company investments over time.
When you compare the two plots it is easy to see that our steady adherence to our conservative mutual fund approach driven by my T Theory has allowed our clients to miss the many disappointments that have hindered the expected growth of stocks over the last decade. In general, I would argue our approach is less stressful and more productive and therefore more desirable than most of the alternatives commonly available for building lasting wealth.
I believe this chart best represents our program's primary goal of providing superior returns over the longer term and addresses the questions you might have with respect to the relative virtues of Financial Planning vs what we consider to be the more important first step, "Superior Money Management". Paula or I would be happy to give you our thoughts on this matter based on our long experience.
Finally, because we are registered investment advisors, we are required to say that these past results should not be construed as being indicative of future performance. This is certainly a true cautionary note from my perspective. As the result of gross mismanagement and extreme short sighted policies and attitudes, the US is no longer what it was in the pre 2000 era.
The US has become a debtor nation. It has lost its manufacturing and auto industry. It has seriously crippled its ability to function in the globally competitive financial going forward. It has very little credibility in the Global community due to past blunders so I think it is perfectly correct to assume that the great equity gains of the 1980s and 1990s are a thing of the past and no financial plan should assume these glory days will return anytime soon, if ever. As for my personal outlook, I think the problems we are seeing right now will be with us for the rest of our lives and we have factored that thinking into our investment strategies going forward.
Nevertheless we are confident that we can handle any such problems and do very well. Our foresight in building into our program the early safeguards that I have discussed above, put us in a secure position going forward. Our discovery of the opportunities for rapid gain in the Capital and Income fund in the section below are an example of the strong creative research we are always pursuing to handle the next set of problems and I think bode well for the future.
"T Theory's Best Bond Strategy™"
By the year 2000 my T Theory forecast had concluded the era of great growth during the 1980s and 1990s had reached a dangerous over extended condition with great risk to equities for some years to come. In response, I spent the following years devising a new, more conservative bond investment strategy which has become unique to our company. It is derived from the Confidence Index, devised and maintained by Barrons Financial and has been published for many decades as a basic indicator of investor confidence in the future economic outlook. We call ASIC's interpretation of its logic the "Best Bond Strategy". Its annual back performance since 2000 is summarized in the table below.
In our program we simplify these two basic choices to either the Fidelity Capital and Income fund, a high yield, well managed bond fund of lower quality, but which the fund manager thinks can ultimately survive economic setbacks, or alternatively to a very high quality Vanguard US Government long term bond fund that places safety above current yield. My business partner Paula Burke spends much of her time evaluating the relative performance of these two alternatives and her conclusion is that Fidelity Capital and Income (FAGIX) provides the best low quality high yield fund for our program while the Vanguard organization provides the best and most efficient, safe alternative with either the Vanguard Long Term (VUSTX) or Vanguard Intermediate Term US Government bond fund (VFITX).
Its basic operation is to own the safer, lower yielding Vanguard US Government Bonds when confidence in the economic outlook is declining, then switching to the higher yielding Fidelity Capital and Income once the Federal Reserve makes it clear they are committed to pulling the economy out of a crisis situation.
*Data compiled from Morningstar,Inc. a leading provider of independent investment research.
As noted in the Table above the Total Return for the S&P 500 benchmark, which includes gains/losses plus dividends has over the last decade, returned a disappointing average return (1.1%). This has resulted from the recent gross over valuation of equities, the failure for regulator to limit past speculative practices, the general inability of the US economy to compete with Asia, and the US preoccupation with running up ever increasing debts which it can ill afford.
This divergence is not unexpected. As a general rule it is always true, when viewed over sufficient time, that if one seeks safety and security above all other considerations, one must accept a lower return as the price for "sleeping at night". Our first principle is that not that one kind of bond is superior to the other going forward, as there is room for both considerations because both look to be superior. Rather the over-riding consideration is that there is an alternative approach to the common equity investment for growth that we used in our early decades. Our program makes use of these two types of bonds. It is not a simple income approach as can be seen by the best Bond Total Return (21.6%) when the better of the two alternatives is selected retrospectively for any one year.
There are important points to note for the 10 year average total return for the Best Bond. First is a retrospective view, second its results are not guaranteed, and third it does not require trading within a one year holding pattern. Because it is retrospective it should be noted that the selection of which fund we use in our program is dictated by my T Theory which involves time symmetries in the chart below of Fidelity Capital and Income's price movements over the last 12 years. These time symmetries are represented by the graphical Ts which essentially conclude the the period of maximum price appreciation of the fund coming out of any major low has to be equal to the period of prior decline.
So for example, T#1 has its graphical pattern fixed by the decline from the early 2000 peak down to the late 2002 bottom pattern. This defines the time span that becomes the left side of the T. In 1973 I discovered that the duration of the subsequent advance must last an equal time period to the point of maximum appreciation rate. So the Time symmetrical T forecasts a peak in the funds price in early 2005. It is true the fund price moved higher into late 2007, but the maximum rate of price appreciation was completed in the equal time requirement of T Theory.
T # 2 develops along similar lines except the duration of the decline was shorter, so the projected up time ends rather quickly in August 2010. In our program that means by the end of this coming summer we will have sold our Fidelity Capital and Income holdings after capturing the maximum price appreciation that T Theory sees as likely. By September 2010 we will be invested primarily in the highest quality US Government bonds until the next attractive opportunity presents itself.
In general, the direction of this fund price tracks the Barons Confidence Indicator reasonably well. That is, a declining trend in the price FAGIX parallels a decline in investor confidence as bond investors, fearful of the economic future, move more of their income investments away from the riskier low quality bonds to the relative safety of the higher quality alternatives. In the event of a serious loss of confidence, such as occurred at the center of both Ts, extreme concern can depress the fund to the point that its indicated yield rises above 10% per annum to 15% per annum or so.
At these major price lows the fear of lower quality bond default keeps bond investors at bay, but in time all recessions end, and at some point these very high yields can be captured in our program by converting the high quality US bond assets which have appreciated during this period of declining confidence, into a very high yielding investment which has high capital appreciation potential once the crisis blows over. This process is basically how our "Best Bond" program operates over the very long term assuming an ongoing systemic bond default risks exist.
Praise for "T Theory™"
You may not have heard of Terry Laundry's T Theory, however amongst professionals it is known and respected. The two press releases noted below tell our story. During the strong bull market of the 1980's and 1990's Marty Schwartz complied the greatest and most successful individual record during numerous trading contests of that era. When he published his exploits in the book "Pit Bull", he had this to say about T Theory,
"…Of everything I read Terry Laundry’s Magic T Theory made the most sense to me. …Terry was an eccentric genius living out on Nantucket Island. He was a fellow Marine, a jughead, who’d graduated from MIT and was now using his considerable engineering skills to analyze the market. Terry believed that the market spent the same amount of time going up as it did going down…When you look at the letter T, hence, the Magic T Theory…With the Magic T there was order in the universe a high and low tide every…The Magic T and I became as one."
- Marty Schwartz, legendary trader and author of the “Pit Bull"
After the market "crash" of 1987, investors were frightened as the possibility of a 1929-1932 continuing disaster and the highly respected Barrons financial magazine, which is a division of Dow Jones, interviewed Terry to discuss his ongoing bullish T Theory outlook. Their August 29, 1988 publication of that interview has its introductory text below provided courtesy of Barron's. The full paper reprint of this Barron's article is available from American Shareholders.
The Magic T Formula
It's the Secret of One Money Manager's Success
by John Liscio
"Nantucket,Mass- Terry Laundry is sitting in the attic-office of his home, plotting Ts on graph paper spanning a 25-foot-by-4-foot table alongside a wall. What's he doing? Trying to pinpoint the beginning of the next leg up in a bull market he thinks will continue into the middle of the next decade.
Laundry is no cockeyed optimist, though. Employing the "Magic T formula," he got his clients out of the stock market before the Crash, in again in January and out in the middle of July. He currently manages about $30 million and his disciples include the fabled trader Marty Schwartz (Barron's, Feb. 15).
Magic T stands for the Matched Trend Time formula. Simply put, it holds that the market spends as much time going up as it does heading down. "The crux of the formula is identifying the cash-buildup phase - - when investors are either selling stock or receiving money and not investing," explains Laundry, who is sweating freely on this hot, breezeless August day. "If you can do that you'll know that when a new bull market starts, it will have a lifetime equal to the preceding cash-buildup phase."
Laundry, who holds a degree in electrical engineering from the Massachusetts Institute of Technology, hatched the Magic T formula back in the mid-'Seventies when he was working for Hughes Aircraft, Co. trying to locate missile sites by listening to radar echoes. Like many engineers, he is more comfortable speaking in complicated equations than simple English, but eventually he puts aside his T square and relents. "One of the first things you notice in nature," he reflects, "is the pairing of exact opposites; it is simply the most common property. Any kind of matter is made up of an equal but opposite amount of electrical charges."
Convinced that market trends were also symmetrical, Laundry set out to devise a timing system. The one he came up with has helped his American Shareholders Investment Corp. post a 25% annual return over the past 10 years, mostly by investing in mutual funds that concentrate on secondary growth stocks. " ...
The article then goes on to the long range forecast that T Theory projected would last from its 1982 beginning point into the late 1990 before topping out. From this perspective the 1987 "crash" was argued to be just a mid term correction like the 1962 example and certainly not the prelude to a great depression. The T Theory projection of a major top came later in 2000, and 2007, but that is another story.
American Shareholders owns reprints of this article and would be happy to send you a complementary copy if requested at our next page. If you have an interest in my T Theory you might also want to visit my T Theory Foundation site where tutorials are freely available. When you get to the next page look for the About T Theory link at the top of the page and you will be presented with a whole array of T Theory topics.
American Shareholders Long Term Client Commitment
As a final topic I would like to stress our long term client commitment. In large part this long term relationship is based on my management style of not risking my own money in situations that T Theory predicts will be losing situations over the long term. I believe we have been very successful and Paula and I would welcome your interest in our program.
As part of our continuing relationship we offer Monthly Reports on our results and outlook going forward. A sample copy is provided for your review on the next page. Now that we are into a web world we have moved forward to weekly Sunday audio reports of client account specifics and outlook for the next few weeks. A recent report for clients is presented below. Just click on the Downloadlink and the audio message should play.
American Shareholders Sample Jan 3 2010 Sunday Audio Commentary Download AmsharAudioUpdate20100103
Thank you for your time and attention. We welcome your consideration of American Shareholders as a partner in achieving your own investment goals.
Terry Laundry, Founder and Chairman American Shareholders Investment Corporation
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