Investment Process

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Make a Plan – “Failure occurs either because you didn’t have a plan, didn’t execute your plan, or the plan was faulty.”

We make a yearly plan, then review it quarterly & monthly and adjust it if necessary with written notes why.

We believe in capital preservation. There will always be opportunities. Chasing every opportunity is a path to losing capital. We follow some rules to help preserve capital:

  • No more than 33% of portfolio in one sector
  • No more than 12% of portfolio in one investment
  • Must have more than 5 investments, and no more than 25 investments at any given time. Each “investment” might have multiple positions… for example “Investment in Airlines” might consist of 3 positions in 3 separate airlines (for diversification).
  • Set yearly guidelines and follow them!

Yearly Process

Determine macroeconomic environment for the year:

  • Will this year be good for stocks? Bonds? Commodities? None? All? What is supply and demand.
  • Where is market sentiment right now? Uptrend, downtrend, pessimistic, optimistic? “Bull markets climb walls of worry”.
  • What about the U.S. Dollar & GDP? Absent growth, weak U.S. dollar better for equity markets. Weak dollar usually means strong commodities.
  • Is the Fed increasing or decreasing liquidity?
  • Is fiscal policy coming out of Washington favorable or restrictive to the stock market / certain sectors? Are certain sectors in favorable or unfavorable environments for expanding margins?
  • Are bonds strong or weak? The aggregate bond market is leading indicator of stocks by ~ 3 months. 10 year treasury yield works well. Think money flow: The demand for stocks decreases as the demand for treasuries increases. What are bond credit spreads?
  • What is global demand for natural resources such as oil, nat. gas, copper, etc.?
  • How is the global economy doing? Which countries are experiencing the greatest growth? Determine what countries to watch as a bellwether (i.e. Germany, China, Russia, Brazil, and OPEC). What is copper demand?

Based on our evaluation of the macroeconomic outlook:

  • Set maximum & minimum amount of money you are going to have in the markets during that year. This will prevent overexposure and underexposure setting limits to emotional decisions & market anomalies.
  • How much cash held in markets for opportunity / crashes / market anomalies?
  • Asset class opportunities occur only a few times per year. Some opportunities occur every few years, such as market crashes, government regulations, geopolitical occurrences, etc. How might these opportunities look this year?

Determine Asset Allocation:

  • How much should be in the “rainy day” fund?
  • How much in the markets?
  • Which markets?
  • When, where, and how to enter / exit markets?

Securities Strategies & Parameters

Set levels for “overweight”, “market weight”, and “underweight”:
  • Overweight a particular security = 8-12% in a security
  • Market weight a particular security = 4-8% in a security
  • Underweight a particular security = 0-4% in a security
  • Overweight the “market” = 5-20% in cash
  • Market weight the “market” = 20-50% in cash
  • Underweight the “market” = 50-70% in cash
  • Crisis = 70-90% in cash
  • Evaluate weightings every 1.5 months unless a large scale change in the macroeconomic environment / sector occurs.
Determining Weighting for a Particular Security: 1 to 10 Scale per Category
Overweight = 32 or higher
Market Weight = 24-32
Underweight = 16-24

 

Sector Fundamentals
•Balance Sheet
•Income Statement
•PEG Ratio
•Management Thesis
•Earning/Miss History
•P/E Multiple
Sector Macro
•Regulatory Risks/Benefits
•Secular Growth Story?
•Commodity Exposure
•Currency Effects?
Global/National
•Currency Trends
•Credit Spreads
•Geopolitical Risks/Benefits
•Emerging Markets outlook in relation to security
Technicals
•Price in relation to moving avgs.
•MACD crossovers
•S&P Oscillator Reading?
•Technical trend lines?
•RSI position?

 

 

Timing Strategies & Parameters

  • Investors are often impatient with winners and overly patient with losers!
  • Use stops for every position. Set multiple stops if entry / exit points are of largely varying prices.
  • Dollar cost average into positions
  • We prefer to trade at the end of the trading day.
  • If a position is “stopped out”, we stay out for one month, or even a quarter. Discipline is key!
  • If the viewpoint on the security or macro trends change, rethink the allocation and if position should still be averaged into.
  • All positions should be entered with a price target and an estimate of how long it will take to reach that target.
  • If the position fails to reach that target in time, sell. It’s an underperformer.
  • If the position hits the price target sooner than expected, you can:
  • Add to position, raise stop and target price
  • Sell a portion of your position and raise stop & target price
  • Maintain discipline with your targets. Do not play the “what if” game. Prices fall faster than they rise. Sell before the top.
  • Pay attention to volume. Volume signifies conviction.
  • Volume is heaviest at the beginning & end of the day
  • Quarterly GDP & monthly non-farm payroll numbers are the most important economic indicators for the stock market
  • Tech Season = August to December appreciation, Mid Feb. begins depreciation
  • Energy Season = winter heating use & 1st quarter earnings, Memorial Day driving season, 2nd quarter depreciation, 3rd quarter prep for winter.
  • Commodities, first 3 weeks of January is when funds reallocate, volatile. Stay away.
  • Mid March is when C-level executives get paid. May signal a capital influx.
  • “January Effect” no longer valid, hasn’t happened in years.

 

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