1. Top Down Investing An Individual Point of View

2. Passive vs Active Investing

Passive:

• Efficient market theory, supported by Nobel Prize in economics research, says you cannot beat or time the market, and the best you can do is remain fully invested with a portfolio engineered to give you market returns at the least possible cost. Seewww.indexfunds.com

• Ironically, efficient market theory requires that a large percentage of market participants engage in trying to beat the market for it to work

Active:

• The investor/trader believes that by taking some form of action, he can beat the market.That action relies on an edge which may be fundamental or technical in nature, and generally represents the action driven by a specific theory of how the market works, a specific point of view, a specific timeframe, and/or a combination of these

• Ironically, there aremore theories than there are traders

3. Fundamental vs Technical

Fundamentals:

• belief in the power of numbers and analysis to establish an objective value for stock price

• buy the stocks with the greatest difference between intrinsic value and current price.

• the market is a weighing machine.

Technicals:

• all information is factored into the current price already;

• prices follow patterns which have tendencies that repeat and which can guide us into favorable conditions

• Human emotions affect price as much as intrinsic value andrational calculations

• The market is a voting machine

Combination:

• Blend the strategies to achieve the best of both worlds

4. Fundamental Approach

Beliefs:By analyzing business models, financial statements, market conditions, I will be able to identify companies with a competitive advantage, project their earnings forward, and then determine if they are trading at adiscount to their net present value.

5. Fundamental Approach

Motto:I will open 1000 oysters to find a pearl

Advantages:

• To the extent you are numbers and math based, you reduce subjectivity

• Stock screeners are available free, and cut down the work load

• The number crunching is not complicated just extensive, so it is easily done by computers

• Consider outsourcing the research and filtering to professional value pickers or professional growth pickers

• In the long run the market is a weighing machine and value will rise to the top

6. Fundamental Approach

Problems:

• A lot of number crunching

• Trust in the integrity of numbers

• You are going up against Harvard MBAs and quant shops

• Large cap records are complicated and also subject to interpretation

• Small caps have the most volatility and are subject to the most market risk going forward which may not be reflected in historical financial records

• Markets and assumptions change faster than financial reports

• Harder to aggregate sectors and regions than individual stocks

7. Technical Approach

Beliefs:By analyzing historical patterns of price action and applying statistics we can find conditions that are favorable for buying and selling.Emotions play a large part in market decisions and these emotional decisions are reflected at key moments in many price patterns which can be used to our advantage.

8. Technical Approach

Motto:History repeats itself

Advantages:

• To the extent you are numbers and math based, you reduce subjectivity

• Stock screeners are available free, and cut down the work load

• The number crunching is not complicated just extensive, so it is easily done by computers

• Consider outsourcing the research and filtering to technicians

• In the short run, the market is a voting machine, and psychology becomes more important the shorter the time frame

• Easier to analyze and trade sectors and regions which have specific characteristics and patterns for their respective tickers

9. Technical Approach

Problems:

• A lot of number crunching

• Analysis paralysis

• You are going up against Harvard MBAs and quant shops

• Reliability of patterns

• Degrees of freedom & curve fitting

• Discipline required to follow a system through drawdowns

• Chasing the perfect indicator

• Can lack an anchor to a realistic model of market action

10. Bottom Up Approach

Look at individual cases and search for value and opportunity one company at a time

Look for the unique, the undervalued the over looked, the misunderstood, the anomaly

Find your opportunity and wait for the market to come to you

You dont have to understand the whole market, you just have to understand 1 unique story to have an edge

Supported by a lot of analysis and anecdotal evidence

11. Top Down Approach

Given the weight and influence of institutional money, most of the variation in stock price (75%) is a function of the overall market conditions and then the sectorsthat companies are in

Only a fraction (25%?) of the variation in a companys price is a function of the company itself

Therefore it makes sense to look at broad market and sector conditions first and make wise asset allocation decisions, and not get lost in the weeds where you are inefficient

Supported by a lot of analysis and anecdotal evidence

12. A market assessment

Should include at least the following:

• Enough frequency to identify trends within your action timeframe

• Early enough identification of trends to make action meaningful

• Disciplined and comprehensive

• Identifies strong and weak areas in the market

• Based on a philosophical model of how the market works

• Assumptions and beliefs identified

• Robust enough to work in all market conditions

• Establish a framework for action

13. So what? Now what?

How do you navigate?

How do you choose?

What works?

What does a reasonably accurate assessment of the market look like?

If you had one, what would you do with it?

14. Choices everywhere

Given a reasonably comprehensive, accurate, objective assessment of the market:

What should I do?

• Buy strength?(on breakouts or pullbacks?)

• Buy weakness?(on breakdowns or bounces?)

• Sell strength?(sell breakouts?)

• Sell weakness?(can I borrow the stock?)

15. A set of beliefs and a conclusion

Tortoise beliefs:

• Institutional money moves the markets

• Money follows performance, like mice follow cheese

• Movement occurs in patterns, like the seasons

• There are more trend followers than counter-trend players by number and capitalization

• Institutions favor inactivity and safe trend following, and at a minimum: diversification, due to fiduciary responsibility

• Weekly analysis will identify patterns of institutional money movement in time to seize opportunity and prevent disaster

• Top down approach is an efficient way to analyze world markets for an edge

• Technical and fundamental approaches both have merit, but the shorter your time frame the more important technical analysis becomes

• Buying strength is the most reliable method, most aligned with institutional preferences

• The longer the time period of holding, the less important holding out for a more favorable entry becomes

• Price is objective, everything else is a forecast and an opinion

Tortoise conclusion

• Individual investors have an edge in flexibility, agility, and freedom that allows them to meet their personal investment objectives

16. Picking a set of markets

Cover the world market, so that no macroeconomic opportunity goes unnoticed

Use Exchange Traded Funds as research tools and trading instruments because:

• Tax efficient

• Very cheap (cheaper than Vanguard cheap)

• Variety

• • Broadbaskets (world indices and regions)

• • narrower sectors & styles

• • individual countries

17. Analyzing markets

Many ways to do it

• Relative strength

• Point and figure charts to indicate sector statistics

• Price relative to 200 day moving average

• Volume patterns

• Elliot waves

• Phases of the moon

Tortoise Index: price performance over multiple time periods, with an emphasis on near term

18. 7 regions of the Tortoise world market model

Simple enough to grasp at a glance

Broad enough to cover the world and identify edges

You can drill down for individual countries & US styles

Emerging markets EEM Europe EZU Latin America 40 (large caps) ILF European/Australasian index EFA Asia (less Japan) EPP Japan EWJ US S&P 500 Index SPY Name Ticker 19. Weekly Regional performance

Tortoise Index concept:

• Compare each region against all ETFs for each time period

• How did the region do compared to the best and worst?

• Ranks on a 1-100 scale proportional to best and worst

• Combine into a single easily understood measure on a 1-100 scale

• Identifies strong regions, can drill down into strong countries and sectors

Note how performance of EEM amd EWJ (vs the S&P) are rewarded by the Tndx

32 6.29% 1.18% 5.40% -2.06% -1.84% -1.44% -1.46% -1.78% S&P 500 SPY 46 52.08% 19.09% 12.87% -1.63% -4.35% -2.50% -1.28% -0.66% Latin America 40 ILF 45 7.40% 0.98% 6.59% 2.58% 1.24% 0.61% -1.98% -0.61% MSCI EMU Index EZU 80 26.24% 23.47% 16.05% 7.99% 6.12% 4.56% 1.81% -0.95% Japan EWJ 30 9.16% -2.20% 3.16% -1.89% -2.88% -2.24% -2.69% 0.55% Pacific less Japan EPP 47 11.92% 5.37% 8.05% 2.57% 0.99% -0.08% -1.61% -0.62% EAFE index EFA 62 32.37% 11.64% 14.39% 3.59% 2.38% 1.32% 0.86% -0.89% Emerging Markets EEM Tndx %40wk %20wk %10wk %5wk %4wk %3wk %2wk %1wk FundName Ticker 20. World Market Model US Indices: each of these Exchange Traded Funds is liquid and are traded like stocks on the AMEX, with the important distinction that they can be shorted on a downtick DIA SPY QQQ IJJ MDY IJK IJS IJR IJT Value Blend Growth Large Mid Small 21. World Market Model DIA SPY QQQ IJJ MDY IJK IJS IJR IJT EWJ EPP ILF EFA EZU EKH TLT RWR LQD Regional indices from around the world: each of these ETFs is liquid and are traded like stocks on the AMEX, with the important distinction that they can be shorted on a downtick. These ETFs add important overseas regions as well as a set of miscellaneous sectors that are not correllated to US equities Japan Asia, less Japan Longterm Treasuries Corporate bond index Real estate index a mix of Europe/ Asia European largecaps European index Latin America 40 large caps 22. World Market Model DIA SPY QQQ IJJ MDY IJK IJS IJR IJT EWJ EPP ILF EFA EZU EKH TLT RWR LQD EWG EWK EWL EWN EWD EWO EWP EWQ EWU Country indices from around the world: adds in the next layer of detail with individual countries and additional key stocks (NEM and PD) for commodities. BEARX NEM PD IYM HOV EWH EWM EWS EWT EWA EWY Australia South Korea Hong Kong Malaysia Taiwan Singapore Sweden Germany Belgium Switzerland Netherlands Austria Spain France UK EWC EWW EWZ EEM Canada Brazil Emerging markets Mexico Home builders Gold Basic Mat Metals Bear Fund IFN India 23. World Market Model DIA SPY QQQ IJJ MDY IJK IJS IJR IJT EWJ EPP ILF EFA EZU EKH TLT RWR LQD EWH EWM EWS EWT EWA EWY EWG EWK EWL EWN EWD EWO EWP EWQ EWU BEARX NEM PD IYM HOV IFN EWC EWW EWZ EEM BZF 24. Tortoise Strategy

Method:

• Top down, technical analysis

Basis of analysis:

• Price performance comparison

Benchmark:

• each sector against all other sectors

Time period:

• Weekly

25. Tortoise World Market Model 26. Details 27. Tortoise method summary

Top Down analysis

• Mutual funds

• ETFs

• Regions

Calculations

• Tortoise Index

• Consistency

• Asset allocation

Reports

• Benchmarking

• Fund families

• NLNTF "stars"

• ETF "stars"

• Regions

• ETF swing trading

Goals

• Consistency

• Discipline

• Routine

• Simplicity

28. So what? Based on 100K portfolio So far, consistent outperformance 85.60% 20.40% 27.90% 98.10% N/A 1999 % -36.10% -9.80% -6.03% 26.60% N/A 2000 % -31.13% -12.12% -5.62% 9.88% N/A 2001 % -38.41% -23.35% -16.89% -8.62% N/A 2002 % 43.54% 22.19% 21.34% 22.71% N/A 2003 % 7.82% 7.73% 2.50% 10.42% N/A 2004 % $104,810 $103,500 $99,655 $127,728 $109,161 2005 $Value 4.81% 3.50% -0.34% 27.73% 9.16% 2005 YTD% -2.51% -1.87% -1.67% 1.07% -1.22% This Week % NASDAQ (QQQQ) S&P 500 (SPY) DOW (DIA) Tortoise Mutual Funds Annual Passive ETF System Weekly Bench Mark - as of Dec 31, 2005 29. Roadmap Passive Active Fundamental Technical Combination Top Down Bottoms Up Action Management Assessment Markets Assessment Markets Management Assessment