Mean-reversion and market timing can indeed work – Terry Steffen

terrysteffenNew Covestor portfolio manager Terry Steffen, founder of Grand Rapids, Michigan based SA Advisory, has spent the last 25+ years in the financial services business. SA Advisory is an independent registered investment adviser that uses technical analysis to make asset allocation decisions and to select stocks.

Terry manages the new Covestor Conservative Sector portfolio, which “strives to produce consistent results by hitting singles instead of home runs. It is a mean reversion strategy that buys liquid sector-based Exchange-Traded Funds (ETFs) on short-term pullbacks.”

We had the opportunity to ask Terry a few questions about himself and his strategy.

Q: What a is mean-reversion strategy?

A: In its simplest form, mean reversion is the effort to buy low and sell high. More specifically, when an asset price drops fast, it is likely to recover at least some of the drop as its price tries to achieve equilibrium between buyer and sellers.

How did you arrive at the technical, mean-reversion strategy that you use? Did you try other strategies over the course of your investing career?

I was looking for a strategy that had the potential to produce profits in all market conditions. I used many active trading strategies over the years and often found that they would fail because they were overly optimized. I’ve watched a highly publicized mean reversion strategy continue to work well 15 years after its introduction.

This of course does not mean it beats buy and hold year after year. When the market goes up fast with very few pullbacks (like in 2013), buy and hold will most likely outperform mean reversion.

Why do you use only sector ETFs for this strategy? Why not use individual stocks or non-sector ETFs?

Sectors work well together because they have very little overlap and often revert at different times. This creates more opportunities for a strategy like this.  I measured the risk/reward trade-off of various instruments before deciding to use sector ETFs.

One often hears investors being warned against any type of market timing. Do you disagree with that completely, or agree with it in specific circumstances?

Tell that to investors in the Japanese Nikkei index in 1989! I think it’s easy to make a case for or against timing depending on your agenda. My father used to say: “Figures don’t lie but liars can figure”.

Who were your mentors/sources of inspiration for developing your investing strategy?

I belonged to a software user group for several years where I came to know some very bright people from all over the country. The user group has since disbanded, but a handful of us still keep in touch and share investing strategies and ideas regularly.

I used to enjoy Louis Rukeyser and I stopped watching CNBC after Mark Haynes died. Neither of these gentlemen took themselves too seriously and were never afraid to question the so-called “experts”.

Do you ever update your algorithm? If so, how often do you do so, and what (outside) signals are you looking for to know it’s time to update your (inside) signals?

So far I have not, but I’m constantly reading and testing new ideas for improvements.

Terry, thanks for your time.

My pleasure.

The reader should not assume that any investment strategies identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.