04-13-2020: Navigating a Totally Undefined Landscape

I am very pleased with today's performance of our 5 investment strategies. It isn't often that a bullish investment bias is rewarded with gains on a day when the market drops more than 1%. That was nevertheless the result in both our Tactical Growth and ULTRA-MAX strategies. Our ULTRA-MAX strategy was up 1.74% today where we hold two 2x bull-biased index ETFs that were betting on a move higher in the market (a 2x bet where one was down and the other up almost 2.5%). The strategy also holds TSLA, which boomed higher by more than 15%, lifting the entire strategy well into the black for the day. 5 of 6 positions in our Tactical Growth strategy were higher today, as well, with the big winner: AMZN (up +6.33%).


Generating a profit in a totally undefined economic landscape, that is not only undefined, but radically changing weekly (if not daily), is not easy. This is not an excuse. It is simply, a fact.


I could be like 95% of all asset managers and say, "We don't go in and out of the market. We are in it for the long haul. The experienced, well-seasoned investor knows that buying high quality stocks and holding on to them in good times and bad times will eventually be rewarded. We never go to cash. Rather, we rebalance from time-to-time where we sell the weak positions and add to our strong positions. This is how the smart money invests in the stock market. This is how Warren Buffet invests and he's the greatest portfolio manager in history!"


Sounds like a good story doesn't it? And, it does work great in a bull market. But, in a bear market, the buy-and-hold strategy becomes a hold-and-lose strategy. Portfolios can be virtually wiped out. If you lose 50%, you have to make 100% just to get back to even. How long did it take you to make the last 100% gain? Think about it. Warren Buffet epitomizes the buy-and-hold investment strategy; but his vaulted Berkshire-Hathaway shares dropped 30% when the market tumbled just a few weeks ago. Losing 30% of a $340,000 per share stock is a non-trivial loss. Buy-and-hold can result in life-changing losses and that is simply a matter of fact and not conjecture.


And, think about this... if you lose 50% in this market and if the market comes back (after we finally get the economy back to work) at 10% per year thereafter (not a guaranteed event), it will take you 7.2 years to get back to even. How many 7.2 years do you have left?


But... how in the world do you invest in a market that is down nearly 30% in a 3-week period and then back up over 20% in the next 3-week period? And, take right now, as an example... do you really have any idea whatsoever, how the market will behave in the next 3 weeks? What if the market booms higher by 10% or 20% or more? What if, on the other hand, the market drops 10% or 20% or more... maybe a LOT more. Do you really think a buy-and-hold, close your eyes, rebalancing action (designed to hide investment mistakes, by the way) will make you money or lose you money if the market plummets in the next month or two?


Many of our erstwhile representatives in Washington are throwing out the "depression" term. Is it a political scare tactic or do they think it is a real possibility? Hard to say, based on the track-record of the politicians throwing that term around.


The problem... the real problem... is there is no time in history that a complete shut-down of the global economy occurred. At no time in history have so many people been put out of work in such a short period of time. At no time in history has the Fed pushed trillions of dollars into financial instruments to keep the bond market (among other financial underpinnings) from collapsing. At no time in history has the federal government pushed trillions of dollars into large AND small businesses to keep them afloat. And, on top of all of that, no one knows if any of this relief money (it's not stimulus money) will work or not. No one knows how much more money is going to be thrown at companies to help restart our economy. No one knows what the unintended consequences are for dumping trillions of dollars into the economy with no direct return of that money coming back. No one knows if all of this 'free money' is going to cause massive, uncontrollable, inflation in the near future.


So... How does an investor navigate this market? How can you have a plan that has any hope of surviving, much less, actually thriving in this economic landscape comprised of so many unknowns and no predicate to refer to?


It is not easy, but it can be done. And, as simple as it may sound, it is based on solid, mathematical principles, rules and discipline. One thing is for sure... we can measure market trends. Granted, these trends can be confusing, but they can, nevertheless, be measured. By closely watching the pricing trends of markets, sectors and individual equities, directional trends can be detected and can be used to manage a profitable investment strategy. This does not mean every trade works to perfection. But, it does mean that you can avoid being on the wrong side of the major trends in the market. Short term trends that can whipsaw from bullish one day to bearish the next, can rarely be capitalized upon, but that is why I also use downside protection through volatility-based stop loss settings. I assume every trade in play could experience a sudden trend reversal. This is why I use stops (which by the way, buy-and-hold advisory firms almost never use and that is why they can often suffer massive losses). I know how much a trade can move against me in the upcoming week and still be in an up-trend. It is math and statistics and rules and discipline and above all else, ignoring talking heads, pundits and guesses about the future.


This market, right now, is without question, the most difficult to navigate in history. But, that doesn't mean that math does not work; or trends do not exist; or rules are to be ignored; or jumping from one idea to the next should replace the discipline needed to follow the plan and yet be nimble enough to change as the data change. This is the key to being in the right strategy at the right time when the next major move in the market is underway. This is our approach and it is working quite nicely!

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