The best investment strategy you will ever find is not the one with:
- the highest return,
- the lowest Sharpe ratio
- the lowest maximum drawdown
- the strategy currently beating the market
- the strategy that worked best in the last bear market
I have a little secret. In in all my years of running the Stockradar portfolio the heart and soul that has been a constant in driving returns has been the good ‘old boilers’ of the industrial sector, especially during corrective phases. Words I’d use to describe these stocks are safer, less volatile, steady, solid, often high yielding with more consistent trend behaviour but alas they can be somewhat boring compared to the fascination with gold, mining and the odd biotech and technology stocks. The latter we really have to leave to the US market, as that is where the real biotech and technology stocks are.
Building a weight of evidence is always the aim when making a case either way for a price move by a stock.
Sometimes the evidence is strong and generates a clear signal whilst at other times when it’s not as clear then a neutral stance is the safest route. It’s that simple but ‘seeing’ the evidence clearly and for what it is without tainting with your own biases is difficult at times. That’s why we build rules to control our biases and influence over what the price action might bring. Detaching yourself is a real discipline. These rules are built, developed and fine-tuned over time, that allows you to develop good rule-based arguments that control your trading (and yourself) and that will generate consistent results. These rules will have an objective that you have set out to achieve. Then from a quant perspective it is a matter of overlaying the rule based template on stock price behaviour and repeatedly and automatically responding to the signals generated. That ‘consistent’ process equals ‘consistent’ outcomes. Market conditions will dictate, to some degree performance and your rule-based trade plan also needs to be able cater for that whether its generating profits or simply maintaining a cash (safe) position that is not losing your money. Sometimes that is the best place to be.
Stock selection, trade and portfolio management are numbers games. Try not to think about stock picking, broker advice, fundamental analysis, all of which may have a place in people minds but that’s not what we do so lets for a moment just be singularly focused on one defined strategy that achieves an objective. The numbers give a somewhat predictable outcome if we are true to the repetitive processes we set out. Many of us find it hard to make the jump and blindly follow a ‘single focus’ process when we are distracted by other things such as media noise. We need to close that door to focus clearly, especially as it not a part of our decision making process. The current market is a classic example of the worry that can distract our focus and with that goes a weak market index to exacerbate concerns. But that doesn’t have to roll into our methodology. In fact it is exactly why we have such a methodology to remove the dark cloud effect it can over our trading. We should be able to trade with confidence and enjoy it. If our method is effective then why should we worry? If opportunities are there we must take them and not let fear control or override us.
Investors are tetchy and they’re worried. Stock markets in the US are at an all-time high, and the ASX/200 is touching two-year highs at 6000. We worry about three things. How high can the market go, when and by how much is it going to fall and what should we be doing? We asked the same questions early in 2015 as the market touched a high at 6000, and again in early 2016 as the market hit a low of 4800. The third part of that question, what should we be doing now, does not change. Many of us are loaded up with equities to different degrees and at Stockradar across most portfolios you will be about 60 invested and have a cash cushion of 40%, depending on your degree of aggressiveness. We must be able to navigate the ups and downs of the stock market with confidence and be in the optimum position no matter what the market delivers.
My recent coverage on portfolios (Stockradar Blog and the Radar Newsletter) has been an exercise in highlighting what’s on offer, the pros and cons of various approaches and perhaps what’s not on offer but should be. I have addressed many issues regarding performance against benchmarks, portfolio concentration with regard to spread of stocks, equal versus market cap weighting and the active versus passive debate. The absolute argument seems to have been left out of this debate for some reason but I’ll get to that later as today I want to discuss skewness. Trying to set an objective to cater for all the various nuances of managing a portfolio of stocks is impossible just like trying to target too many objectives for a portfolio such as out-performance or index performance, compound growth, absolute growth or trading returns and capital safety. So the two things to think about are, what are we trying to achieve, and how are we going to get there.
92% of all actively managed stock mutual funds have failed to beat their benchmark over the last 15 years, according to S&P Dow Jones Indices. Stated another way, only 8% of thousands of fund products have been able to do what they were supposed to have been able to do.
‘The 10th man’ is a great ‘think outside the square’ website. As the title above states the following is a recent article on the long-term effect of negative interest rates.
Two things happened recently:
Why have passive funds attracted so much money recently?
It’s a very simple equation. One is that only 25% of active managers are good enough to outperform their benchmark. That’s good but it also means 75% of fund managers are charging fees far to high for the underperformance they are delivering and are thus losing funds under management. Then only 5% continue that performance of 3 years. That leaves a very small pocket of fund managers that provide a good service for fee arrangement for you. AFR journalist Philip Baker describes it as fund managers ‘dirty little secret’. Why people give poorly performing managers their money I have no idea. It must be something to do with crowd behaviour I think.
How strong is the relationship between the consistent new highs being set by the US stock market and the huge ETF inflows?
As we know from previous commentary in the Radar Newsletter there is an ETF ‘force’ that is causing stocks to be elevated to levels that that are artificially, abnormally and dangerously higher than the market would normally take them. This significantly heightens downside risk.