This week, I had the most amazing conference call in my 42-year-long career.
It was with Doug Davenport, a protégé of legendary mutual fund pioneer Sir John Templeton — a man who has used a strategy Templeton created to beat the S&P 500 by 57 to 1 since 2007.
Below is an abridged transcript of the call. If you’re serious about growing your wealth in every conceivable investing environment, be sure to read it word for word.
Martin Weiss: Hi, Doug! It’s Martin Weiss. How you doing?
Doug Davenport: I’m well, Martin! Great hearing from you this morning.
Martin: It’s kind of hot here in Florida, but my wife and I have an empty nest. Our only son is off and about in Asia. What about your family?
Doug: My wife Claudia and I have been married 30 years this summer. She worked in the securities business and that is where we met. We have two children; my son is 26 and works for Equifax here in Atlanta and my daughter is 22 years old and her name is Caroline. She is majoring in finance and marketing at the University of Alabama and graduates this May. So we are all very excited about her getting out of college and starting her career.
Martin: Congratulations! I understand there was also another person in your life, Sir John Templeton.
Doug: Yes, we were great friends. In 1997, I received a phone call asking me to come to Nassau to meet Sir John. I thought it was a crank call from one of my friends. So it took about 15 minutes for me to realize that it actually was his assistant asking me to come to the Bahamas to meet with him.
Sir John had started a mutual fund called The Wisdom Fund. His idea was that it would emulate Warren Buffett’s Berkshire-Hathaway portfolio.
Martin: This is not the portfolio you are managing currently. But it kind of brings us up through the history, right?
Doug: That’s correct. I met with Sir John and found out he’s from middle Tennessee, just as I am. Our ancestors actually traded mules together back in the late 1800s, when that part of Tennessee was known as the mule trading capital of the world.
Sir John asked me to serve as the portfolio manager of the Wisdom Fund and also be the president of the advisory firm. It was a wonderful opportunity for me to learn from one of the greatest investors of all time.
Martin: So how did the Wisdom Fund do?
Doug: Very, very well. We outperformed the S&P by a long shot. Some years we beat Buffett in the portfolio and some years he outperformed what we did. And for the 10 years, I was awarded a 5-star rating from Morningstar for the performance of that fund.
Martin: Every one of those 10 years, 10 years in a row?
Doug: Yes. But even better, Sir John became my mentor. He was a wonderful person to know, almost like a second father — because I learned so much from him.
Martin: Why did you leave the Templeton Wisdom Fund?
Doug: Unfortunately, Sir John passed away in July of 2008, and his family decided they did not want to keep the investment firm. They asked me to sell the mutual fund for them — and I did.
I didn’t want to go with a new investment firm. I decided instead to keep Sir John’s legacy alive.
You see, after I began managing the Wisdom Fund, Sir John had also asked me to set up a different model portfolio, using a trading strategy he had created. I decided I would keep that going and have done so from 2007 until this very moment.
This trading strategy was a totally different concept from the Wisdom Fund: The Wisdom Fund was a portfolio of about 60 individual stocks. But Sir John also designed this second strategy that generated "buy" and "sell" signals for exchange traded funds.
And the results ended up being far better than those we achieved in the Wisdom Fund.
Martin: Is this something that Sir John also developed?
Doug: Yes. Sir John believed that, since we entered a secular bear market in 2000, we ought to have a portfolio that could take advantage of the market when it’s going up and ALSO take advantage of the market when it declines.
It’s important because if you buy and hold through the down periods in a long-term bear market, your performance is going to suffer.
Martin: Did Sir John pick out the exchange traded funds you’d be trading?
Doug: He picked out the asset classes that we wanted to use: Oil, gold, currencies, and U.S. stocks. It was my job to determine which exchange traded fund would best fit each asset class.
Martin: I’ve just been going over your performance figures, and they are nothing short of spectacular. Could you explain that?
Doug: It does look spectacular — and it is. But when you understand the reasons why those numbers are so good, it’s actually quite simple.
Since inception in 2007, the S&P 500 Total Return Index (including dividends) is up only 14.5 percent.
But during that same exact period, the return for my model portfolios is +830.4 percent.
So my model portfolio beat the S&P 500 by 57 to one.
Martin: Most professional money managers don’t even try to beat the S&P by two or three to one. They are content to get a few extra percentage points on it.
But you’re saying that your model portfolio — the one that you built with Mr. Templeton — beat the S&P by 57 to one.
Doug: Think about it this way: For every one dollar the average S&P 500 stock generated, my model would have handed you over $57.
If you invested, say, $25,000 in the average S&P stock on January 1, 2007, you would have $28,600-plus dollars today. That’s not a great return.
But if you had invested the same $25,000 and followed my signals for my Model Portfolio, you’d have over $232,000 today. I think most people would be far happier with that.
Martin: No kidding! When I first saw your results, I naturally assumed that you used a lot of leverage.
Doug: No. Leverage is not used. I think leverage can be detrimental to a portfolio. I just use every-day exchange traded funds that anybody can buy and sell in any brokerage account.
Martin: I also assumed that you must be day-trading or doing something very aggressive in the account.
Doug: No. Day-trading is more like a short-term guessing game. I trade on average no more than 12 to 16 times per year.
That way, you don’t have to stay in front of your computer all day. Plus, fewer trades also means lower transaction costs for your portfolio.
Martin: These kinds of results are enough to make any market pro green with envy. What’s your secret?
Doug: Sir John personally gave me the proprietary trading strategy that identifies the beginning and end of major pricing trends. That’s simply trend-following.
He also instructed me to use the strategy with just five exchanged traded funds that give us broad exposure to oil, gold, currencies, and the stock market.
Martin: Which ETFs do you work with?
Doug: For gold, the best exchange traded fund is GLD.
Martin: Right, everyone knows that one.
Doug: For oil, I use two different oil markets. I look at the USO, which is for West Texas crude, the U.S. oil market. And I look at BNO, which covers the oil that Europeans trade, Brent North Sea Oil.
For the euro, the best ETF is FXE.
For the S&P 500, it’s the granddaddy of all the stock index funds — SPY.
And of course, we also use the inverse versions of each of these funds.
Martin: That’s great diversification. But tell me: How do your trading signals work? They seem to be a key to the whole success of this.
Doug: The approach is very good at keeping you in the majority of a trending market — then getting you out before the trend changes. My approach is designed to catch about 80-85 percent of a market move.
When my system generates a buy signal for one of these exchanged traded funds, you would simply buy that particular exchange traded fund.
When it generates a sell signal, you would either go to cash or go short using an inverse ETF, depending on how strong the signal might be.
The best part is this approach is totally objective. The market tells us what to do — not vice-versa. Thus, it eliminates the emotional component that costs so many investors money.
The beauty is that it will let me make money no matter what the market conditions are. When stocks are rising and when they’re falling, we can make money. And it doesn’t depend on my personal opinion of what I think the market will do.
Martin: The key here is to achieve good performance even in bad times. And looking at your track record, it seems that the performance in bad times is especially impressive.
Doug: I would like to give you some examples of that.
Martin: Please do.
Doug: Let’s look at how the portfolio performed during the five worst quarters since inception in 2007:
In the first three months of 2008, the S&P 500 fell 9.4 percent. I was up 10.5 percent.
In the final three months of 2008 — and we all remember what happened in 2008 when Lehman went under — the S&P fell 22 percent. I was UP over 55 percent.
In the first 3 months of 2009, the S&P 500 fell 11 percent. My model portfolio was UP 11.9 percent.
Martin: I can see why you’re beating the S&P by such a wide margin. Because it’s in those kinds of quarters that the S&P gives it all back!
Doug: Correct. Now go to the second quarter of 2010. The S&P fell 11.4 percent. I was UP 10.7 percent in that same time period.
Finally, consider the third quarter of 2011. The S&P fell 13.9 percent. Once again I had positive performance. I was UP 18.8 percent in that same period of time.
Martin: That’s great! Earlier, we talked about your overall performance over the six-year period. And we said your model beat the S&P by 57 to 1. That’s a total return of 830.4 percent versus the S&P’s total return of only 14 percent and a fraction. Is that right?
Doug: That is correct, Martin.
Martin: So what I want to do now is look at your cumulative performance period by period — to make sure that it was consistent over time. Can you do that for me?
Doug: Sure. In our most recent year, 2012, the S&P 500 total return index was up 16 percent. I was up 28.5 percent.
Now, go back two years. The S&P was up 18.4 percent. I was up 90.7 percent.
For the last three years, the S&P was up 36.3 percent. I was up 142.9 percent.
For the most recent four-year period, the S&P was up 72.3 percent. I was up over 248 percent.
Then, going back five years, the performance includes 2008, the big down year for the S&P. So that reduces its gains to just 8.6 percent. We were up over 630.9 percent.
And in the full six years since we created this model portfolio, the S&P is up about 14.6 percent. I am up 830.4 percent.
If you had invested $25,000 in the average S&P stock when I began this model portfolio, you would have had about $28,637 today.
Your total gain would be $3,637.
But if you had invested that same $25,000 in this model and followed every trading signal in a timely manner, your total gain would be $207,600.
That’s $203,963 MORE than the average S&P 500 stock could have given you during that same period.
Martin: Typically, people who are good at bear markets are not very good at bull markets. But you also beat the S&P by a wide margin when it was going up.
Doug: Yes, that’s correct. Think about 2009 when the S&P 500 rose 26.5 percent for the year. Our positions jumped 43.2 percent in that up market.
Martin: And for all of the years since you have been beating the S&P?
Doug: That’s correct.
Martin: Doug, you know how I feel about the dangers that are still on the horizon. So for me, this is absolutely a must in any track record.
I don’t care how good someone is in a bear market, they also have to be good in a bull market. And the reverse is especially true: Unless you can handle a bear market, you can lose it all.
I want someone who can make money both in bull markets AND in bear markets. But in all our years of searching, you’re the first professional money manager who has achieved that.
You have demonstrated excellent performance when the market was plunging and then did it again when the market was rallying.
Another important factor I see here is consistency. So can we go down to a quarter-by-quarter review of the model portfolio to make sure that there was no missing pieces there?
Doug: Yes. Our model portfolio shows a gain in 23 of the 24 full quarters since inception. The only quarterly loss was in the second quarter of 2007, when we were down about 1/100th of 1 percent. That’s a loss of about $2.50 on a $25,000 position.
And the next quarter, we came roaring back with an 8.3 percent gain, beating the S&P 500 by more than four to one.
Martin: Is it OK if someone from our staff — myself or someone else — calls you periodically to have a conversation like this one for our readers?
Doug: I’m more than glad to do that.
Martin: Thank you very much Doug! I will talk to you soon.
Doug: Thank you, Martin.
Martin: Goodbye for now.