Investment Strategies 03 (Jul 13 - Mar 19)

[winston]

Protect Your Downside and Earn Bigger Profits

By Ben Morris

Stocks go up. Stocks go down. Two directions. That's it.

Yet most individual investors only prepare for stocks to go up.

When they're wrong – and at some point, they're always wrong – they get worried and distressed. Sometimes, they lose huge amounts of money. It ruins retirements and major plans for the future.

This makes no sense. Why prepare for just one thing, when two things – only two things – always happen?

Today, I'm asking you to recalibrate how you think about stocks. I'm going to show you a healthier, more sensible way to invest.

Once you understand the benefits of this way of thinking – and especially once you begin to practice it – you'll likely never invest the same way again.

I call it "market-neutral thinking." Many of you have heard of market-neutral strategies. We've written about them in DailyWealth Trader (DWT). One is called "pairs trading"...

In a pairs trade, you sell one asset short (bet that it will go down) and buy another asset (bet that it will go up). You do this in equal dollar amounts.

A pairs trade is "market neutral" because its profitability doesn't depend on the direction of the market. It only depends on one asset outperforming the other asset.

Market-neutral thinking is based on the same idea... But it goes a bit further.

Here's how it works...

Imagine selling all of your stocks right now. In their place, you have cash. (Cash is market neutral.)

Now, pretend you have no idea where the stock market is headed. You know nothing about geopolitics... nothing about the global debt levels or the Federal Reserve... nothing about the outside world... nothing even about the historical trend in stocks.

You only know that some stocks do better than the market as a whole... And some stocks do worse. But for the most part, good stocks and bad stocks will all move in the direction of the broad market.

So you have your cash pile... And you don't have a clue where stocks are headed. How do you invest?

The most logical strategy would be to try to identify stocks that will outperform the market... and buy those. Then try to identify stocks that will underperform the market... and sell those short.

You would do each in equal dollar amounts. This way, it doesn't matter if the stock market goes up or down. Your portfolio is profitable if, on average, the stocks you bought outperform the stocks you sold short.

This is a market-neutral portfolio. And if you have no idea where the stock market is going, this is how you should invest.

That's your baseline.

Notice, there's no way to blame the market for losses with this strategy. You either buy stocks that outperform, sell stocks that underperform, and profit... or you don't.

Now, let's take the next step...

Let's say you think the market will go up over the next six months... But you're not too confident. Maybe you're 30% sure.

It's far wiser to be unsure and well-prepared to be wrong than it is to be overly confident and then proven wrong.

So what do you do?

Let's say you have $100,000 of your net worth allocated to stocks. You can simply buy stocks with $30,000 (30%) and hold the rest in cash. (Remember, cash gets more valuable when other assets fall... And it's market neutral.)

Or, you can buy stocks with $60,000 and sell $30,000 worth of stocks short. This way, only 30% ($30,000 out of $100,000) of your portfolio depends on the market rising for you to profit.

The rest – $30,000 long, $30,000 short, and your remaining $10,000 cash – is market neutral. If you choose your longs and shorts well, you'll profit on that portion of your portfolio no matter what happens in the market.

The same is true if you buy $100,000 worth of stocks and sell $70,000 short. Again, you have a 30% "net long" portfolio. This is a good way to express 30% confidence that the market will rise.

If you think the market is going to drop, you can do the opposite.

There are all kinds of benefits to thinking and investing like this...

I'll start with the financial.

During a bull market, you'll do amazingly well if your portfolio is 100% long. But you'll also do well – just not as well – if your portfolio has some short exposure. And when the market goes from bull to bear, you'll do far better with short exposure.

And you don't have to maintain fixed percentages long and short. If you are convinced a big bull market is starting, you may choose not to hold any short positions. If you're convinced a bull market is coming to an end, you can increase your short positions. Maybe you go 100% market neutral... or even net short, once the trend turns down.

Market-neutral-based thinking and investing has tremendous psychological benefits, too...

If your portfolio is 100% long, you'll likely see red (from losses) on every single one of your positions – day after day – during a bear market. Your stress levels will be off the charts. And you'll likely make bad decisions, like selling near the bottom.

But if you're, say, 50% market neutral during a bear market, you'll see lots of your positions increase in value while stocks are dropping. You'll still lose money. But you'll lose less.

It eases the pain. You were expecting this. You were prepared.

All it takes is a shift in how you approach stocks. Remember... They go up and down. That's it.

Be ready for both.

Source: Growth Stock Wire

[winston]

How to invest in a mature bull market

BY TEE LIN SAY

“We like companies with cash and have good cashflow whatever the economic conditions may be.

We like companies that have a moat built around it. They have asset values which far exceed their share price”

Thin-margin firms get punished in bear markets when investors fear they don’t have enough of a cushion to survive.

They are usually over punished, so they’re over-rewarded when stocks bounce and thin-margin firms bounce bigger.

Source: The Star

http://www.thestar.com.my/business/busi ... ll-market/

[winston]

Pair Trading

How do you stay invested in case the Fed’s music carries on, while protecting yourself for when the music stops (as it always eventually does)?

My solution? The risk-reduction technique of short-selling.

That’s how I created Portfolio A:-
1. Buy shares of the SPDR S&P 500 ETF (NYSE: SPY), and
2. Sell short shares of the iShares Emerging Market ETF (NYSE: EEM)

The idea was simple…

If stocks fell… emerging-market stocks would fall further than U.S. stocks.

And, if stocks rose… U.S. stocks would rise further than emerging-market stocks.

Either way, Portfolio A would come out ahead as U.S. stocks were poised to outperform emerging-market stocks… in up and/or down markets.

And that’s exactly what it’s done.

Over the last 20 months, Portfolio A has returned 12.5%... while the S&P 500 has gained just 3.6%.

Not only has Portfolio A gained more than three times the return of the S&P 500… it’s done so with considerably less volatility.

The S&P 500 has experienced 16% annualized volatility versus just 5.4% for Portfolio A.

Source: Dent Research

[winston]

Are You Bullish, Bearish, or Confused?

By Ben Morris

You're hearing lots of different opinions about the stock market right now…

Some folks are predicting a crash. Others are calling for new highs.

So you're likely asking yourself, "Which is it? Should I be bullish or bearish?"

It's a good question. But even if you're confused, you don't need to stand on the sidelines…

As a trader, you should have a working thesis for any asset class you trade… stocks, bonds, gold, or cash.

What do you expect to happen in the short term? What could go wrong? How wrong? What should and could happen over the intermediate and long terms?

Your expectations – even if they're not 100% clear – should guide your trading behavior.

It may sound obvious. But lots of traders don't take the time to think this through. They hear a compelling idea, place the trade, and that's it.

But "the trade" can take different shapes…

For example, let's say you decide an asset is in a long-term bull market, but due for a pullback in the short term. You could just buy for the long term and forget about the short term. But then you run the risk of stopping out of your position on a pullback you expected.

Instead, you could wait for the pullback before you buy. But then, if you're wrong about the pullback, when will you buy? You might miss out altogether.

So what do you do?

One solution is to buy half of a position initially. You can buy the other half either once the pullback comes (if you're right about it) or when the asset continues higher (if you're wrong). You won't get the absolute best entry price either way, whether you're right or wrong. But that's OK…

One benefit of this strategy is that you can use a wider stop loss on the half position, without taking the additional risk that would come with a full-size position. This makes it less likely you'll stop out on a pullback.

Another benefit is that if you're wrong about the pullback, you at least have half of a position. And when you add more, your average entry price will be better than if you hadn't bought earlier.

Is this the same as trying to time the market?

No. It's the opposite. You're adjusting your trading strategy to account for one of the main risks that comes with time – market volatility.

I don't like the idea of taking large, new bullish positions right now. The risk of a sharp pullback in the market – and in most individual stocks – is too great. But by using the "half now, half later" approach, you are able to trade setups you like with less risk.

So back to the opening question… Are you bullish or bearish? Or confused?

Most folks are confused. But confused doesn't have to mean paralyzed. As long as you know that you don't know, you can work with that.

If you don't have a working thesis, though… if you don't set your expectations… you can't. You're trading blind.

My advice: Hear the bulls out. Hear the bears out. Come to your own conclusions. Then, build your ideas in to your trading strategy. It's one of the best ways for traders to gain an edge.

Source: DailyWealth Trader

[winston]

Where to Find Stocks That Triple in a Year

By Dr. Steve Sjuggerud

Since 1962, a total of 1,700 stocks (not including the tiny ones) have tripled in a 12-month period…

If we wanted to find the next stock to triple in 12 months, what should we do?

I say we should crunch some numbers to find out what stocks that triple in a year look like.

Fortunately, that work has already been done for us, by a few guys that I respect as much as anyone. I'm talking about the O'Shaughnessys.

Let me tell you why I trust them, and what they discovered about stocks that triple…

I consider "What Works on Wall Street" one of the most important books in Wall Street history.

No, it's not a thrilling page-turner. But it's full of numbers – very important numbers.

The author, Jim O'Shaughnessy of O'Shaughnessy Asset Management, tested every major strategy for investing in stocks over the last 50 years.

Here's how he did it… He had access to the deepest U.S. stock market database. And he tested every well-known stock-investing strategy (and many that were not so well-known) to find out what really works. He shared his results with the world in his book. (Thank you, Jim!)

Jim's son, Patrick O'Shaughnessy, is a chip off the old block…

He works with his dad as a portfolio manager at O'Shaughnessy Asset Management. Like his dad, Patrick likes to crunch numbers.

Earlier this year, Patrick wrote a blog post called "Stocks That Triple in One Year." Patrick did the math and found that 1,700 U.S.-traded stocks have tripled within one year since 1962 (excluding those less than $200 million in market value, adjusted for inflation).

He found that stocks that triple in a year have three things in common:
1. They are clustered around specific dates/markets,
2. They are concentrated in certain sectors, and
3. They are, on average, small and expensive at the start of their run.

When I saw these shared characteristics, the first thing that came to my mind was the dot-com era of the late 1990s. Back then…
• Many stocks soared in 1998-1999. (That's No. 1 – a "cluster" of big winners.)
• These big winners were almost exclusively tech stocks. (That's No. 2 – concentrated in a sector.)
• They were small and wildly expensive (because they had no earnings) before they soared. (That's No. 3.)
The dot-com era was a classic example of what Patrick discovered. But it wasn't the only "cluster" of occurrences…

He also found that the cluster of big winners in the U.S. typically happened after a dramatic fall in the stock market.

The most recent example was in 2009. After stocks fell dramatically in 2008, a specific cluster of stocks tripled within the following year.

So… which sector in the U.S. historically has the most winners? By far, the tech sector…

Patrick's research uncovered a surprising conclusion:

Even if you remove 1997, 1998, and 1999 from the sample, tech still has the most three-baggers. Recently, it has been all biotech companies.

To maximize our chances of finding a stock that could triple in the next 12 months, we should follow Patrick's formula. We need the following…
1. A market/sector that has fallen a lot to give us the optimal setup.
2. A look at tech and biotech, as that's where the most winners have come from.
3. A specific focus on the smaller companies. In short, Big Tech companies like Microsoft (MSFT) aren't likely to triple within 12 months.

Patrick sums up what he learned:

Your best odds (if history repeats) are in technology or biotech stocks, many of which are hard to understand and have binary outcomes… You'll probably have to buy with little to no margin of safety because these companies tend to trade at very expensive valuations. Good luck, you'll need lots of it!
(You can read more from Patrick right here.)

Right now, the place we should be looking for triple-digit gains is in small-cap biotech companies. Today, they meet all of Patrick's criteria…
1. They're down 50% peak to trough since July 2015,
2. They're in the sector where most winners have come from, and
3. They're the smaller names, not the Amgens (AMGN) of the world.

As Patrick says, good luck – you'll need lots of it – to find a stock that triples. But fishing in the small-cap biotech pond might be your best chance of landing the big one…

Source: Daily Wealth

[winston]

The Best Investment Strategy for a Market Like This

By Alexander Green

PowerShares S&P 500 BuyWrite Portfolio (NYSE: PBP).

This exchange-traded fund writes calls against the stocks that make up the S&P 500. Over the past year, the fund has delivered a total return about 6% better than the flat index.

True, the fund fell 28% in 2008, but that was eight points less than the broad market.

In other words, you can expect the fund to do better than the S&P 500 in years that the market is largely flat or down. But it will lag in big up years because – remember – the best-performing stocks within the fund will be called away.

In short, this is not a good strategy for a young or rip-roaring bull market. But in a late-stage bull market like this one, it can deliver higher returns with a lower level of risk.

Source: Investment U

http://dailytradealert.com/2016/05/17/t ... like-this/

[winston]

The Best Investing Strategy You've Never Heard Of

By Dr. Steve Sjuggerud

Yesterday, I shared the best investors you've never heard of.

Today, we'll look at the best investing strategy you've never heard of.

I LOVE this strategy... Here's why:

1. It has beaten the stock market... with less risk than the stock market.

2. It had only one losing year in 40 years – and that was a loss of 0.6% in 2008, when everything else fell 30% or more.

3. It's so simple a monkey could follow it... It takes five minutes of work a month.
With those three things going for it, how could you NOT want to know how this works?

The beauty of this strategy is its simplicity...

You don't need to know anything about interest rates, price-to-earnings ratios, elections, wars, or anything else. You don't need to know anything about "the fundamentals" at all.

All you need to know is that if the black line is above the blue line, the trend is up. That's it. Take a look...

When the black line is above the blue line, you want to own stocks. When the black line is below the blue line, you want to be out of stocks. Simple.

The black line is the stock market. The blue line is the "trend" line. (Exactly what the trend line is isn't that important. But in this case, it is the stock market's 10-month moving average.)

When the black line is above the blue line, you typically make money in stocks. Specifically, stocks went up at a double-digit compound annual rate when they were above the blue line. When the black line is below the blue line, you typically lose money in stocks.

This is the stock market portion of the strategy. But you do the same thing for other kinds of assets as well... You use the exact same signal (the 10-month moving average) to determine whether to be in or out of bonds, commodities, or anything else.

In short, the strategy only looks at five asset classes. You either own them or you don't. So you could theoretically be 0% invested.

My friend Meb Faber literally wrote the book on the strategy. (You can read his white paper on it, covering the years 1973 to 2012, here.)

As I write today, Meb's system is 100% invested. Here's how it's allocated:

• 20% U.S. stocks,
• 20% foreign stocks,
• 20% bonds,
• 20% real estate (REITs), and
• 20% commodities

Again, from 1973 to 2012 – the time frame his white paper covers – this strategy beat the stock market, with much less volatility. It only had one losing year – a small loss in 2008.

Best of all, it takes five minutes a month to implement...

If the trend is up in each asset, you own it. If the trend is down, you don't own it.

Sticking with the trend works far better than most people can imagine. Meb's simple, fantastic system is yet another example of it...

Source: Daily Wealth

[winston]

SEC Filings

All big investors that are managing over $100 million are required to publicly disclose their holdings every quarter. They have 45 days from the end of the quarter to file that disclosure with the SEC. It's called a form 13F.

While these filings have become very popular fodder for the media, what we care more about is 13D filings.

For a refresher: The 13D forms are disclosures these big investors have to make within 10 days of taking a controlling stake in a company. When you own 5% or more of a company's stock, it's considered a controlling stake.

In a publicly traded company, with that sized position, you typically become the largest shareholder and, as we know, with that comes influence.

Another key attribute of this 13D filing, for us, is that these investors also have to file amendments to the 13D within 10 days of making any change to their position.

By comparison, the 13F filings only offer value to the extent that there is some skilled analysis applied. Thousands of managers file 13Fs every quarter. And the differences in manager talent, strategies and portfolio sizes run the gamut.

With that caveat, there are nuggets to be found in 13Fs. Let's talk about how to find them, and the takeaways from the recent filings.

First, it's important to understand that some of the positions in 13F filings can be as old as 135 days. Filings must be made 45 days after the previous quarter ends, which is 90 days. We only look at a tiny percentage of filings—just the investors that we know have long and proven track records, distinct approaches, and who have concentrated portfolios.

Through our research and nearly 40 years of combined experience, here's what we've found to be most predictive:

1. Clustering in stocks and sectors by good hedge funds is bullish. Situations where good funds are doubling down on stocks are bullish. This all can provide good insight into the mindset of the biggest and best investors in the world, and can be a predictor of trends that have yet to materialize in the market's eye.

2. For specialist investors (such as a technology focused hedge fund) we take note when they buy a new technology stock or double down on a technology stock. This is much more predictive than when a generalist investor, as an example, buys a technology stock.

3. The bigger the position relative to the size of their portfolio, the better. Concentrated positions show conviction. Conviction tends to result in a higher probability of success. Again, in most cases, we will see these first in the 13D filings.

4. New positions that are large, but under 5%, are worthy of putting on the watch list. These positions can be an indicator that the investor is building a position that will soon be a "controlling stake."

5. Trimming of positions is generally not predictive unless a hedge fund or billionaire cuts a position by 75% or more, or cuts below 5% (which we will see first in 13D filings). Funds also tend to trim losers in the fourth quarter for tax loss benefits, and then they buy them back early the following year.

Source: Forbes

[winston]

An incredibly simple, rarely used way to book 170% gains

by Dan Steinhart

Look for markets, industry groups, and sectors that have fallen for three years in a row.

Buy them. Big average gains will follow.

Source: Casey Research

http://thecrux.com/an-incredibly-simple ... 170-gains/

[winston]

To Become an Elite Investor, You Must Master This Skill

By Mike Barrett

"How many piano tuners are there in Chicago?"

We've come a long way since Nobel laureate Enrico Fermi first posed this question to his physics classes at the University of Chicago's Institute for Nuclear Studies (now named the Enrico Fermi Institute).

Thanks to the Internet, I suspect many of you already have an answer. I found one in less than a minute – it turns out, there are 56.

Back in the late 1940s, Professor Fermi's students weren't so lucky. Even the Yellow Pages were still a couple of decades away from mass production.

So how do you develop a credible answer to a seemingly impossible question? Today, I'll explain how he did it... and show you how this ability helps you as an investor...

Professor Fermi was prompting his students to take the only plausible approach: break the "impossible" question down into smaller pieces or questions you can answer. Then, assemble the pieces back together to solve the original (seemingly impossible) problem.

Author Phil Tetlock provides an excellent illustration of how he'd approach an answer – without relying on external sources – in his book, Superforecasters – The Art and Science of Prediction.

First, Tetlock estimated there were around 2.5 million people living in Chicago. Second, he guessed only about 2% of the population (50,000) even owned a piano. Third, he estimated that pianos need to be tuned once a year – which, he figured, would take about two hours. Lastly, Tetlock estimated that a piano tuner would work the usual 40 hours a week (about 1,600 hours per year, taking into account driving time.)

Now, Tetlock had enough data to produce an answer. If there are 50,000 pianos in Chicago, that's 100,000 piano-tuning hours of work. If the typical piano technician works 1,600 hours per year, that means there must be about 63 piano tuners in Chicago (100,000 / 1,600).

Earlier, I mentioned I'd found the answer to be 56. So Tetlock's "Fermi-izing" got him incredibly close to the actual number – even though it was nothing more than five layers of educated guesses.

Similarly, a big part of our job as investors is imagining how investment theses we've previously formed might change in the future. Nothing about this is easy.

For instance, back in February, we advised our Extreme Value subscribers to lock in gains on their successful investment in insurance company Lancashire Holdings (LRE.L). Although we thought highly of the business, the release of fiscal fourth-quarter results altered our view of how the story was changing relative to our original investment thesis.

Briefly, gross insurance premiums in the energy sector had declined a hefty 53% compared with the previous year. With oil prices below $50, Lancashire's energy clients were doing whatever they could to preserve capital – even if that meant buying less insurance.

The problem for Lancashire: This particular type of insurance was very profitable and fueled a large annual special dividend. Now that it was unlikely to come back any time soon, we concluded net cash from operations for the year likely wouldn't be enough to pay a substantial special dividend – something that investors had gotten used to, and that represented a significant source of their total returns.

In short, arriving at answers to seemingly simple questions – is Lancashire likely to pay a special dividend this year, and should we continue to hold? – required us to consider several interrelated issues separately. That way, we could assemble our conclusions back into a final answer: No, LRE was unlikely to have the financial means to pay a special dividend, and no, we should not continue to hold. We closed out of Lancashire for a 34% gain in around 18 months.

As you confront difficult challenges in your analytical work as an investor, remember, even the most puzzling questions often become "solvable" when divided into pieces you can grasp.

As this becomes second nature, you'll find yourself in elite territory among your fellow investors.

Source: Daily Wealth