Terms and Definitions
Table of Contents
- Active Money Management
- Black-Scholes Model
- Downside Exit or Stop
- ETF (Exchange Traded Fund)
- Generational Wealth
- Inverse ETF
- Market-Directional Money Management
- Passive Money Management
- Performace Disclaimer
- Quant-Based Investment Strategy
- Trade-Risk Profile (TRP)
- Trend-Line (Market-Defining)
- Upside Exit Strategy
- Volatility Range (EM)
An Active money manager promotes the concept of being better at stock picking than just ‘buying the market’ via mutual funds or large index ETFs. Stock picking strategies tend to do well in bull markets but rarely do these strategies significantly outperform the broad market. Active money management tends to exacerbate losses in bear markets. Stock pickers tend to hold on to positions too long and fail to exit losing positions quickly enough in bear markets.
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
Beta is calculated using regression analysis. It is, in effect, how a certain security's (stock) price volatility responds to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.
Many utilities stocks have a beta of less than 1. Conversely, most high-tech, Nasdaq-based stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk.
The Black-Scholes Model is one of the most important concepts in modern financial theory. It was developed in 1973 by Fisher Black, Robert Merton and Myron Scholes, who won a Nobel Prize for economics for the model in 1997, as one of the best ways of determining future price ranges based on time and historical volatility. The Turner Capital proprietary quantitative analysis computer software systems utilize a variant of the Black-Scholes Formula to determine the highest probability of likely pricing trend of equities. The results of this analysis provides a trading strategy manager with both price and time of maximizing the potential return of a trade via exit strategies for holdings.
Not every trade will move in the direction that we plan for it to move. There will be trades that move against us. The question is, "How much downside movement should be allowed before exiting the position?"
No trade moves up every day or every week, much less every minute of the day. Securities fluctuate in price almost continuously during market hours. This is called volatility and everyone understands that stock market securities have varying degrees of pricing volatility.
We have developed a "Trade-Risk Profile", along with a "Trade-Bias" based on the bull or bear or neutral condition of the market to help determine or set exit prices. The objective is to remain in a position as long as it is trending higher and does not exceed a calculated downside level of volatility.
Each security has a reasonably unique volatility range where it can fluctuate higher and lower while still trending higher. The key is to know what the downside maximum range of that volatility. We utilize a derivation of the Black-Scholes formula to determine the maximum pricing movement an equity can move lower and still be trending higher.
This maximum pricing movement, along with the Trade-Risk Profile, are used to help the manager set the exit price of all securities held in the portfolio.
ETFs are funds that track indexes like the NASDAQ-100 Index, S&P 500, Dow Jones, etc. When you buy shares of an ETF, you are buying shares of a portfolio that tracks the yield and return of its native index. The main difference between ETFs and other types of funds is that ETFs simply replicate the net gain or loss of the fund's focus; index, commodity or market segment.
The purpose of an ETF is to track broad indices, some are sector-specific, and others are linked to commodities, currencies, or some other benchmark, leading to a fund management style known as passive management. Essentially, passive management means the ETF manager makes only minor, periodic adjustments to keep the fund in line with its index or market focus. This is quite different from an actively managed fund, like most mutual funds, where the manager continually trades assets in an effort to outperform the market.
ETF shares trade exactly like stocks. Unlike index mutual funds, which are priced only after market closings, ETFs are priced and traded continuously throughout the trading day. They can be bought on margin, sold short, or held for the long-term, exactly like common stock. Yet because their value is based on an underlying index, ETFs enjoy the additional benefits of broader diversification than shares in single companies, as well as what many investors perceive as the greater flexibility that goes with investing in entire markets, sectors, regions, or asset types. Because they represent baskets of stocks, ETFs, or at least the ones based on major indexes, typically trade at much higher volumes than individual stocks. High trading volumes mean high liquidity, typically enabling investors to get into and out of investment positions quickly.
Generational Wealth is an aspect of financial planning that is geared toward passing down stable, significant financial resources to future generations.
This is also known as "Risk Capital". Risk Capital or Generational Wealth is considered that component of a client's net worth that does not negatively impact the client's desired lifestyle.
Market-Directional portfolio management is the science of matching an investment strategy with the primary trend direction of the market. Using this approach, we mathematically determine the current condition of the market, which can be in one and only one of three possible conditions: Bull-Trending, Flat or Neutral Trending, or Bear-Trending, and implement investment strategies that match the current market condition.
Turner Capital Investments is considered a Market-Directional Money Management firm that also utilizes an Active Management style when selecting equities for client portfolios.
The shares of an ETF commonly represent an interest in a group of securities that track an underlying benchmark or index. A leveraged ETF generally seeks to deliver multiples of the daily performance of the index or benchmark that it tracks. An inverse ETF generally seeks to deliver the opposite of the daily performance of the index or benchmark that it tracks. Inverse ETFs often are marketed as a way for investors to profit from, or at least hedge their exposure to, downward-moving markets. Some ETFs are both inverse and leveraged, meaning that they seek a return that is a multiple of the inverse performance of the underlying index. To accomplish their objectives, leveraged and inverse ETFs use a range of investment strategies, including swaps, futures contracts and other derivative instruments.
Most leveraged and inverse ETFs reset each day, which means they are designed to achieve their stated objective on a daily basis. With the effects of compounding, over longer timeframes the results can differ significantly from their objective. Please see Regulatory Notice 09-31 and the SEC/FINRA Investor Alert for illustrations of how these discrepancies can occur.
Because inverse ETFs reset each day, leveraged and inverse ETFs typically are inappropriate as an intermediate or long-term investment. They may be appropriate, however, if recommended as part of a sophisticated trading or hedging strategy that will be closely monitored by a financial professional.
A Passive money manager promotes a buy-and-hold strategy and often uses the phrase, “In the market for the long haul.” This strategy can work well in bull markets, but can be crushed in bear markets of the type seen in 2002 and 2008. The justification used by Passive money managers when their clients are suffering through a bear market is “the market always comes back.” Even though the statement has always been true that the market eventually always comes back, it took over six years for the market to come back from the 2008 bear market; and, just for reference, it took over 20 years for the market to come back from the crash of 1929. When considering the lost years of just trying to get back to even, passive money management tends to have the highest level of risk unless you plan to live forever and never need your investment capital.
IMPORTANT: All performance-related data on this website reflectthe results of actual trades, net of Turner Capital Investments management fees. However, the economic conditions, market conditions, pricing changes, availability of securities, and availability of timing of trades, that are unique to the period of time during which the results were achieved will not likely be the same in the future. As such, the results shown will most likely not be replicated in the future. The purpose of this information is to show results of the mathematical algorithms and the decision-making process used in the management of client accounts. The results are the actual results of the trades that were made, but should not be construed to represent future performance. It is likely that given the same or similar circumstances in the future, completely different trades would be made, resulting in completely different results. Taxes are not considered in the results and would reduce the performance shown if they were included. Actual results will vary.
Turner Capital Investments (TCI) selects securities for its investment strategies based on quantitative analysis. TCI has built computer-based models (software with over 2.8 million lines of code) to determine whether an investment is attractive to hold and the timing to buy and sell the security. The strategy manager utilizes personal judgment in addition to a quantitative model.
The advantage TCI has over most other money management firms, is the TCI computer programs are not swayed by emotion and computers can obviously analyze and produce quantitative results much faster than a human can.
TCI instructs the computer software systems to perform both a top/down and bottom/up analysis of markets, sectors, industries and individual securities.
The computer algorithms provide the manager with vital information regarding trends (bull or bear), fundamental quality of a potential security and the technically derived timing of when to buy or sell a security and when to have a bull-bias, a bear-bias or a neutral-bias when it comes to equity selection and/or strategy composition of securities and cash.
The Trade-Bias is used to set the manager's trading approach. There are three distinct Trade-Bias conditions:
The Turner Capital quant-based computer system provides the strategy manager with a derived indication of which of the three conditions the market is in at any given time.
The manager uses the quant-based condition of the market to help determine how bullish or bearish or neutral a stand to take when buying or selling holdings in each investment strategy.
The Turner Capital Investments "Trade-Risk Profile" (TRP) is a proprietary algorithm designed to provide the strategy manager with an assessment of risk in a trade. The underlying assumption is that most stock market equities trade in a reasonably well-defined trading zone where the equity exhibits trends that are plus or minus the equity's normal volatility range. The TRP contains gradations of three Risk Zones: Low Risk Zone, Moderate Risk Zone and High Risk Zone.
Each of the TRP Risk Zones utilize a a Zone-specific criteria for exit strategies. These exit strategies include the strategy manager's market, sector, industry and global assessment as it may impact the future trend of the equity. It also includes a formulaic calculation of downside risk protection and a recommendation for optimum profit capture.
The Market-Defining Trend-Line is a specific, proprietary range of values along a moving average that serves as the point of demarcation for a bull-bias, neutral-bias or bear-bias.
This trend-line is proprietary to Turner Capital Investments and is derived from extensive back-testing of both bull and bear market cycles to determine the highest probability of properly identifying each of the three market conditions: bull, bear or neutral.
The key to making consistent profits in the stock market is, of course, to have a higher percentage gains in winning trades than the percentage of losses in losing trades. All Sabinal Trading Strategies have both winning and losing trades, but the goal of each strategy remains the same: highest reasonable return for the least acceptable risk.
In our Downside Exit strategy, we have a two-tiered trade trigger that will cause us to exit a trade if it moves lower than the Manager finds acceptable. This exit is formulaic in its settings.
Likewise, we have a formulaic decision-making process for exiting a trade at an upside target or, in some cases, predetermined exit date.
Based on the previous 12 months of maximum volatility, the Volatility Range (aka, "Expected Move") is one standard deviation of normal volatility that is forecast for the upcoming five trading days. If an equity's pricing trend moves against the trade by more than the normal Volatility Range, the risk is generally considered too large to continue to hold on to the position and the holding is moved into an early exit strategy.