my philosophy/strategy

My philosophy…

They say “no one can time the market.”  I went to a top business school, worked for some of the biggest and best Wall Street firms, dealt with huge institutional investors and the top consultants around the world.  I can’t remember anyone ever advocating market timing.  Clearly it doesn’t work.

So, how are we averaging about 10% per month using market timing?  Our unleveraged model portfolio that simply bought and sold short the S&P 500 at identified tops and bottoms gained 119% in the recently completed first year [see: results] with no negative months or even weeks.

After 25 years on Wall Street, I left the business to try my hand at writing and producing.  I paid little attention to the economy or the markets.  After losing a bundle in the real estate crash, I turned to my neglected equities portfolio.  I needed it to do some heavy lifting: outstanding returns, preferably with low risk.  But how?  Three-fourths of all money managers underperform the S&P 500.  How could I do any better?

I started from scratch, tossing out most everything I (and nearly everyone on Wall Street) had been taught: balance sheets, cash flow statements, industry analysis, etc.  It’s not that they never matter.  But, if so many are focusing on them and so few are outperforming their benchmarks…

I studied every outside-the-box technique I came across, experimenting with many of them.  I made lots of mistakes but took a lot of notes, and tried to learn from them.  Ultimately, I found a combination of techniques that really works for me: Chart Patterns, Harmonics, Analogs, RSI Channels and traditional Technical Analysis.  It takes a lot of hard work and many hours of staring at a jumble of squiggles on a monitor, but it works for me more often than not.

My philosophy?  In the end, I discovered that strong performance isn’t about seeing the same things everyone else sees more clearly.  It’s about focusing on the right things to begin with.  As Galileo is reported to have said 400 years ago:

“All truths are easy to understand once they are discovered; the point is to discover them.”

My strategy…

The strategy is fairly straight-forward: focus on determining where markets are going (the hard part) over the next few hours, days or weeks and invest accordingly.  That means I’m direction-neutral; I don’t care whether the market is going up or down.  I just want to be on the right side of it and capture most of the moves most of the time.

In strongly trending markets, this might mean swing positions that last several days or even weeks that earn 3-5% or more.  In choppy markets or where the direction is unclear, I might trade several times daily and pile up a bunch of 1% gains.  Earning 2-3% per week is a great return over the course of a year.

I’m neither a bear nor a bull.  I’m a realist.  I might question whether stocks should be going up.  But, there’s no profit in shaking my fist or screaming at my computer.  Invest accordingly and square it with the Grand Unified Theory later.  And, therein lies the real strength of my strategy.

Making good decisions, ditching bad ones…

If you buy AAPL at $700/share because you think the new iWatch will be the next big thing, and the stock slips to $675, should you hold on?  What about $650, or $600?  What does your research say?  At what point do you decide you were wrong and just sell your shares?  What about shorting it?  Does that ever make sense?

With my strategy, if I buy AAPL at $700 because a Gartley Pattern suggests it could go to $775, but it drops instead to $690, then I was wrong about that pattern governing prices.  I don’t care whether the product’s release will be delayed, or whether Samsung is coming out with a competing product, or when the next Mass Coronal Ejection is expected.

All I know is that the reason I went long the stock is not working.  And, I usually know right away.  My biggest losing trade in the past 15 months was -1.6%.  And, if my stance is wrong, I typically switch sides.  If I shouldn’t be long, chances are I should be short.

CNBC probably devoted 100 hours of airtime to AAPL’s decline this past year. Ever hear any talk of the obvious Head & Shoulders Patterns or price channel?  Selling AAPL short when the first H&S Pattern completed would have earned 23% by the time it bottomed out in April.

Even if you waited for it to exit the equally obvious price channel, you’d still have made 13% (using a variety of tools, our calls were much better (HERE and HERE.)

It’s not foolproof; markets are frequently manipulated managed in such a way as to “bust” some of the more obvious patterns.  But, if I use stops (I do) and don’t get emotionally attached to a viewpoint (I don’t), I get most of the trades right most of the time — which is good enough to earn excellent returns.

Is it right for you?

It depends on your goals and how much time and effort you want to devote.

If you’re a day trader who wants multiple set ups throughout the day with input on Chart Patterns, Harmonics, Analogs, RSI Channels and traditional Technical Analysis — we’ve got you covered, especially if you want to learn the techniques and not just follow instructions on an occasional email.

If, on the other hand, you’re a swing trader who wants to stay properly positioned relative to key patterns, Fib levels, etc., I post a “Current Position” page that provides my current orientation.  The daily posts provide more detail and are the first to be updated in the event something changes.

While you’ll have a more active social life and deeper tan than someone sitting at their computer all day, you’ll miss the absolute tops and bottoms more often.  And, in choppy, volatile markets (I’m talking ’bout you, April 2013) you might end up flat during a month in which more active traders did very well.  But, a little over half our returns (averaging 5% per month) have come from swing moves, and that ain’t shabby.

If you’re a buy and hold type, you could still benefit from this site.  Wouldn’t it have been nice if someone had told you in advance about the meltdowns in July 2011, Apr 2012, Sep 2012 and May 2013 or the big rallies that began in June 2012 or Nov 2012?  Our members knew (click the dates for the actual posts.)

I won’t get them all right.  No one can.  Some forecasted downturns never materialized, and some rallies fizzled sooner than expected.  We switched sides and moved on.  Again, my goal is to be right on most of the moves most of the time and not get worked up over the inevitable misses.

This isn’t a tax-efficient technique.  But, most people would take great returns with ordinary tax rates over ordinary returns with modestly better rates any day of the week. Your accountant might look askance at the increased trading activity, but will hopefully change his tune once he does the math.

And, last, it’s optimized for unleveraged equity transactions — not options or futures.  Many of our trades come at key turning points.  If SPY doesn’t head down after you short it, you might get stopped out for a small loss – most have been under 1%.  If, instead, you bought out-of-the-money puts, you could easily lose most or all of your investment.

If you don’t have the time, energy or interest in managing your own investments, I am developing a hedge fund for Accredited Investors that will use the same techniques I’ve been writing about and using to trade my own portfolio for the past two years.  More info is available HERE.


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