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KCM MacroTrends,
KCMTX Mutual Fund,
Risk management,
Loss Protection,
Risk Averse,
Conservative Management,
Capital Protection,
Experienced Management
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Philosophy
"The way to gain wealth through investing is to recognize when conditions are favorable
and to invest more aggressively during those times. When risk is high, meaning the
potential for loss is high, we must be prepared to back off and preserve capital
for the next time conditions become favorable."
Lane Kerns
Kerns Capital Management
On Risk
We believe that the primary skill needed to manage money is Risk Management. It
is a mathematical fact that it is harder to make up losses than to make money. Therefore,
we try not to lose any.
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Mathematics of Declines And Advances
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Decline Amount
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Advances Required to Breakeven
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7%
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8%
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25%
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33%
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33%
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50%
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50%
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100%
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75%
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300%
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90%
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900%
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Look at the time it has taken Buy and Hold investors to make
up Bear Market losses.
Bear Market Break-Even Analysis
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Bear Market
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Duration
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% Decline
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To Breakeven
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Sept. '29 - June '32
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33 months
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-86.7
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25.2 years
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July. '33 - Mar. '35
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20 months
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-33.9
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2.3 years
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Mar. '37 - Mar. '38
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12 months
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-54.5
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8.8 years
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Nov. '38 - Apr. '42
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41 months
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-45.8
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6.4 years
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May. '46 - Mar. '48
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22 months
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-28.1
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4.1 years
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Aug. '56 - Oct. '57
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14 months
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-21.6
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2.1 years
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Dec. '61 - June '62
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6 months
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-28
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1.8 years
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Feb. '66 - Oct. 66'
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8 months
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-22.2
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1.4 years
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Nov. '68 - May '70
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18 months
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-36.1
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3.3 years
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Jan. '73 - Oct. '74
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21 months
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-48.2
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7.6 years
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Nov. '80 - Aug. '82
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21 months
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-27.1
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2.1 years
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Aug. '87 - Dec. '87
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4 months
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-33.5
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1.9 years
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July '90 - Oct. '90
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3 months
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-19.9
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0.6 years
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Mar. '00 - Oct. '02
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31 months
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-50.2
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4.7 years
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Consider these three Scenarios:
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NASDAQ 100 Break Even Analysis
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NASDAQ 100 Actively
Managed No Losing Years
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NASDAQ 100 Actively Managed 50% of losing years
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1990
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-10.41%
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0.00%
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-5.21%
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1991
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64.99%
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24.91%
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41.19%
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1992
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8.86%
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3.40%
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5.62%
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1993
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10.58%
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4.05%
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6.70%
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1994
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1.51%
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0.58%
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0.96%
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1995
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42.54%
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16.30%
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26.96%
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1996
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42.54%
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16.31%
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26.96%
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1997
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20.63%
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7.91%
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13.08%
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1998
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85.31%
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32.70%
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54.06%
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1999
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101.95%
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39.08%
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64.61%
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2000
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-37.65%
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0.00%
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-18.83%
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2001
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-32.64%
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0.00%
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-16.32%
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2002
9/30/02
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-47.66%
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0.00%
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-23.83%
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Average Rate of Return
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19.27%
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11.17%
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13.53%
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Actual Compound Rate of Return
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10.45%
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10.45%
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10.45%
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Percentage of Gains Necessary
to Equal Buy & Hold Return
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100.00%
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38.33%
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63.67%
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If risk can be controlled to avoid any losing years, a portfolio would have only
needed to capture 38.33% of the gains! If the losses could be limited to only
half the NASDAQ 100 losses, a portfolio would only need to capture 63.67% of its
gains to achieve the same return!
On Risk Control
We use the following methods to control risk:
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1.
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In our mutual fund, KCM Macro Trends Fund (KCMTX), we use a large number of stocks
to diversify our equity risk.
In our model portfolios, we use mutual funds rather than individual stocks and bonds
to gain better diversification. Risk analysis of individual bond issues is
highly technical and time consuming and most investors do not have portfolios large
enough to purchase a sufficient number of different bond issues to properly diversify.
The same is true with stocks.
We feel we add value by getting the big picture right. That is the hard part.
According to Investor's Business Daily, when the market is going down, 3 out
of 4 stocks go down, even the good ones.
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2.
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We try to pick investments that work in the current part of the economic cycle we
are in. This type of investment tends to hold its value better on those inevitable
days and weeks when the market trades sideways to down.
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3.
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We try to pick investments that are not closely correlated. In other words,
we like investments that are in an uptrend but are not necessarily affected by the
same market forces. In that way, when one goes down the others may go up.
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4.
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We use stop-losses. For example, we are not willing to give back all of our
gains so we sell or hedge if the price declines to a certain point - usually 3 to
8% - or to some technical support level.
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5.
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From time to time, we use a market-neutral hedging strategy. If we feel that
we hold very strong investments but the market is in a short-term correction, we
will hold the investments but add a hedge. A hedge in our case would be an
investment that goes in the opposite direction that the market is going. For
example, if we are invested primarily in small company stocks or funds, we might
buy an investment that moves in the opposite direction of the small company index.
In this way, we do not have to liquidate our holdings and incur trading fees
or taxes to protect the portfolio from losses.
If it turns out that the market correction is not short-term and is the beginning
of something worse (see Bear Market Break-Even Analysis above)
then we have protected your money. If we get it wrong and the market does
not go down, we just miss some initial gains. Remember, if we miss the losses, we
only need to capture about 40% of the gains to be ahead (see NASDAQ
100 Break Even Analysis).
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These methods have allowed us to
reduce our draw-downs and volatility. Because of this, since 2000, for the
period ending 6/30/10, our three growth accounts have out-performed the S&P 500
from 64.31% to 77.34%, and the NASDAQ from 72.51% to 85.24%, respectively!
On Compensation
We are a Fee-Only investment advisor. We take no commissions or subsidies
from anyone. We do not receive any compensation when we trade your account.
We do not get paid to sell you anything. We only increase our income by growing
your portfolio. If your portfolio decreases, our income goes down. We
have the same interest in your money that you do. Therefore, when we make
a trade, you never have to wonder whose interests we have at heart, as you might
with a commissioned broker.
On Our Money
Ninety-five percent of the portfolio's manager's money is invested in the
accounts our client's money is invested in.
Summary
Kerns Capital Management was originally founded in 1994 to help companies establishing
401(k) and employee retirement plans pick appropriate investments for those plans.
From the very beginning we received requests from individuals and plan participants
to help manage their personal money in addition to their retirement plan accounts.
After our initial few years in business, we began to ask why - with no marketing
or sales program - our client base and assets under management kept growing.
After talking with many of our clients, we found that most of our clients came to
us for two reasons:
- They thought we knew more than they did about investing because we worked at it
every day, and
- They trusted us.
We have added value because we have given our clients significantly better returns
than the market with less risk. Our personal money is invested in the same
model accounts and traded the same way as all of our client's money.
We are a "fee only investment advisory firm". This means that the only way
we can increase our income is to grow your money or keep you from losing any.
We do not get paid to sell products or make trades. You may have the finest
broker in the world, but every time they make a trade in your account do you wonder;
whose problem are they solving? Yours or theirs?
We have a proven track record for managing risk effectively in down markets, have
proven that we can capture up-market performance and have no interests that are
inconsistent with those of our client's interests. Let us help preserve and
grow your wealth.
Contact Us.
Lane Kerns
Kerns Capital Management, Inc.
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