Tacking

 Tacking

Tacking allows a sailboat to indirectly sail to a desired waypoint against the wind; investors should take note of this timeless method of sailing. In many ways investors are also often fighting a wind on the way to their waypoint, but in their case the "wind" is a confluence of macro economic events and that waypoint is a financial goal(s).

Although no sailboat can sail against the wind, almost every sailor can tack in a zig zag pattern to reach their waypoint. The Absolute Alpha strategy was developed with this goal in mind, to harness ANY wind to reach a waypoint. Tacking of course is highly dependent on positioning the sails, but it is also a self-correcting mechanical maneuver which will quickly indicate if you're on a bad wind.

Investor need to consider not only their financial waypoint(s), but also the method in which they arrive. It is often said that life is "about the journey, not the destination." While that may largely be true, a destination of effervescent passive cash flow sounds quite lovely indeed...and the journey is the means of reaching that destination.

As previously posted in Sneaker Waves, it is extremely difficult to get to get where you want in a reasonable amount of time without having to deploy the lifeboats occasionally being long-only. Investors need to seriously consider an approach that is all-weather capable of tacking.

As always, it is important to look before you leap. What are the downsides to a tacking strategy? I believe the primary risk is signal risk. What signals will you use? How accurate are they? Are they dependable and repeatable? The secondary risk is the efficiency of using a strategy that may or may not trade frequently.

It has been knocked into our collective consciousness that frequent trading is a recipe for disaster. That is actually debatable...as Ray Dalio (amongst many others) is quoted as saying "Timing is everything." If the signals are good and the tacks made accordingly, then trading more is actually far, far more advantageous. 

Consider dear readers the investor who tacked successfully this year. Would she be down on par with the S&P 500 some 20%? I think not. Assuming successful signal utilization, she would have been short for most of the year and also most likely tacking into several Bull spikes.

Tacking requires accurate signals and trust in the proverbial "wind" that is pushing all of our sailboats around...a waypoint is nearly impossible to reach fighting against the wind. Since we're on the water today, my friend Bruce Lee had an excellent analogy about water that is applicable I think to investing as well. It highlights the importance of harnessing signals and changing a position accordingly. If your sailboat needs help tacking, consider throwing us a line.

"Empty your mind, be formless, shapeless like water

put water into a cup, it becomes the cup;

you put water into a bottle, it becomes the bottle;

you put it in a teapot, it becomes the teapot.

Now water can flow or it can crash. 

Be water my friend."

 

 

Investment Code

 Investment Code

A man needs a code. Fellow financial farmers we are in turbulent investment times, and it is good to rehash the importance of having an investment code. What is your code? Is it...ahem...codified? Just like an NFL coach rolling into town to take on the opposing team, investors need a game plan of how they plan to invest, what catalysts spur action, what signals indicate distress, and what their exit strategy is...the old axiom of "if it can be measured it can be managed" rings true.

Consider my Absolute Alpha strategy for example. The goal is straightforward: A positive yearly return regardless of market conditions. How will the goal be accomplished? By utilizing momentum vectors. What is the benchmark? S&P 500. How is it implemented? A standard brokerage account. How are positions added or reduced? Direct buys/sells. This is just one simple example of a codified approach.

The major goal of having an investment code is the desire to manage outcomes within a certain time horizon, risk tolerance, and achieve certain financial results. A process is only as good as the data it is fed and the constructs of its creation. Having an investment code also solidifies the standard deviations which may occur...just how volatile is your process? What does the data say? How do you plan to react to the data? 

Time and information may be the most valuable commodities of all, and having an investment code helps financial farmers glean what is and what may be...we already have a pretty good idea of what was.

June 16th for many Americans is a seminal day. It is the calendar day when you are finally working for yourself after bearing the yoke of excessive taxation and regulation for over half the year. It is a day of freedom. It is the day the Founders had once set to January 1st...obviously there has been some slippage! Nonetheless if you don't have an investment code, create one today. In many ways it will help define your financial success in the future. A man needs a code.

 

Tasty Tidbits

 Tasty Tidbits

Edwin Lefevre chronicles the life of legendary stock trader Jesse Livermore in the masterpiece "Reminiscences of a Stock Operator." It is a timeless read for Wall Street aficionados, students of the stock market, and even those with just a cursory interest in finance. If you haven't read it yet, put this book on the top of your summer reading list. Below are some of my favorite tasty tidbits. The wisdom and knowledge gleaned from this book are priceless, but Amazon will sell you a copy for about ten bucks!

1) "It takes a man a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market, and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation."

2) "After spending many years on Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who where right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance."

3) "Another lesson I learned early is that there is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again."

4) "There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!"

5) "Speculation in stocks will never disappear. It isn't desirable that it should. It cannot be checked by warnings as to its dangers. You cannot prevent people from guessing wrong no matter how able or how experienced they may be. Carefully laid plans will miscarry because the unexpected and even the unexpectable will happen. Disaster may come from a convulsion of nature or from the weather, from your own greed or from some man's vanity; from fear or from uncontrolled hope. But apart from what one might call his natural foes, a speculator in stocks has to contend with certain practices or abuses that are indefensible morally as well as commercially."

Many readers will notice distinct similarities in Livermore's trading philosophy utilizing momentum signals and the Absolute Alpha strategy launched on June 6th.  Absolute Alpha acted on the preponderance of Bearish market signals at launch and has steadily added more cowbell over the ensuing week, including today. Bearish signals remain constant and intact. Livermore would probably LOVE trading in our era.

Investors today have many advantages that Livermore didn't have in his day; nearly real-time quotes and execution with almost universal free trading, nearly limitless data sources, and even the ability to limit risk via index trading rather than speculation in individual stocks or commodities. So although the game may have changed, most (all?) of the behavioral characteristics remain the same; fear & hope drive the investing world. 

 

Absolute Alpha

Absolute Alpha

What better day to launch a new investment strategy than D-Day? 78 years ago today, America launched the largest offensive the world has ever seen to help defeat Nazi Germany and the Axis powers. Men dropped from the sky, motored on boats, and stormed the beachheads of Normandy. By sunset, blood-red tides lapped the sands...but we were victorious.

D-Day marked the beginning of the end of World War II. Nearly every freedom we enjoy today was defended and secured that day through enormous sacrifice. Much of this "paid-up capital" came at the cost of lives unlived. Thousands that day, and millions of progeny this day are not with us because of past battles. And almost every meaningful battle in history had at its core the fight for truth: What is right? What is wrong? What is the truth?

What better way to pay this sacrifice forward than a search for the truth? One of the greatest challenges investors face is trust. Indeed, a hallmark of our era is the collapse in public trust in both government and various "experts" of all types. Who do you believe? What are their qualifications? What is their track record? These questions beget another: Why should we care?

Traditionally, stock return estimates are predicated upon using macroeconomic variables, financial ratios, and to a large extent, data provided by corporations themselves. The summation of these forces has formed the bedrock of the financial industry throughout the world. CNBC, Bloomberg, Wall Street Journal, etc., etc. 

The list of established mediums of "trust" is long. Absolute Alpha strives to relieve investors of dependence on traditional stock market "trust" such as financial commentary, corporate messaging, or even Government reassurances. These data may or may not be accurate. Absolute Alpha is interested in sustained market movements, regardless of direction. Commentary, forecasting, and assurances be damned, Absolute Alpha seeks the truth!

The Absolute Alpha trading goal is simple: Seek a positive yearly return (absolute alpha), regardless of market conditions. Consider the chart below showing the performance of the S&P 500 from Jan '22 until May '22:

From a pure date-to-date perspective the S&P 500 was down 13.85%. Yet look closer and you will see something else entirely. Buried in this chart is an abundance of "truth." Rather than struggling with emotional turmoil experienced on a regular basis worried about whether XYZ will beat earnings, or how many units were sold, or if FDA approval was granted, investors can potentially benefit from a broad market approach focused solely on momentum vectors.

As previously discussed, Absolute Alpha's goal is to consistently produce alpha, regardless of market conditions. But how? By being on the right side of longer-term momentum vectors. In the chart above there are MULTIPLE (most likely infinite) vectors during this 5-month snapshot. The trick is capturing as many sustained momentum vectors as possible, while limiting downside losses by being late to a trade.

If we were to "cut" this chart into various date ranges there would be both negative and positive momentum vectors whose cumulative absolute total would far exceed the negative 13.85% value if timed correctly. Why not capture alpha on BOTH the upside and downside? Simply put, when the wind changes, a sailboat tacks. Investors need to do the same. Therein lies the truth.