06-10-2020: You're only as good as your last trade!

I got a note from one of my clients, today, that I want to share with you:

"Why is my account up when the market is down today? I'd like to talk to the manager, please!"

That client was just joking with me, but he makes a good point.

In my business, there is a saying... "You're only as good as your last trade!" The meaning, of course, is: It doesn't matter how good your trades were last week or last month or last year... It only matters how well your most recent trades performed. Did those trades make your clients money and did they result in your client portfolios moving higher and did your client portfolios beat the S&P 500.

Never mind that your client portfolios are far less risky than the market. Never mind that for the year, the client portfolios are doing better than the market. Nope... not good enough... We are continuously judged on what we have done for our clients in the most recent past (yesterday... or even an hour ago). And, heaven help us, when the Monday-morning quarterbacking starts up with what we should have done instead of what we did do. It's a good thing I love what I do... and I do.

And, guess what? I do not disagree with my clients in that regard. I would prefer to be judged on a long-term view of our performance in a risk-adjusted analysis, but I also know that the money my clients have entrusted me to manage, is paramount in their thinking. How would they know that a recent loss in a trade is not just the beginning of more and more losses? And what about those days when the client portfolio is down when the market is up? I can certainly see their angst when that happens.

The solution to this 'angst', is to get a better understanding of the process, the rules, the discipline that we follow and the fact that not all trades move up in tandem with the market. Today, for example, all 4 of our models beat the market. The Tactical Growth model was way up and our Aggressive Growth model was way, way up.

Our investment decisions are based on quantifiable trends, but the market can change in a heartbeat and, because we are trend-based, we have to wait to see if the sudden change is just a fleeting event or the beginning of the next major move up or down. We are more methodical and measured than the market. We look at trends from a weekly, monthly and multi-year perspective... not minute-by-minute or hour-by-hour or even day-by-day. Sure, if the market suddenly reverses direction and moves our holdings lower in price enough to trigger our stops, we are out in that instant. But, for us to move from bullish to bearish takes more than a short-term market reversal.

And, as I alluded to above, mitigating risk is a big, big deal. The fact that my Tactical Growth model is about a third less risky as the S&P 500, is a non-trivial fact. Most investors (not you, of course) don't consider risk in any other term than how much money they lost in the last trade. While that is certainly one aspect of risk assessment, there are many others, including the quality of holdings and the historical range of volatility in share price. We calculate risk by running a Sharpe analysis and a Beta analysis on our portfolios all the time. I include the results of this analysis in my weekly Client Letter.

Now... to my analysis of the market for today...

Uncle Sugar (the Fed, in this instance) made sure that the market knows that Uncle Sugar has the market's back. Who cares if their euphemistic Holy Grail "Balance Sheet" is carrying $10 Trillion dollars (or soon will be)... there's plenty of room to add more zeros to the right side of Uncle Sugar's bottom line anytime that they want to. Keep doling out the sugar, Jerome... it is good for all of our portfolios... for the time being.

In closing, may I, respectfully, request a little introspection on your part. What happens when (not if) the day comes when all these trillions of dollars have to be paid back? What happens to your portfolio in the next 30%, 40% or 70% market crash? What have you done to be prepared for that day; for as sure as I am writing these words, that day is coming. Every time more faux money is dumped into our economy, whether it be PPP or bond-buying or just simply giving money away, the chasm this market will one day fall in to is getting deeper. My clients don't (or should not) be overly concerned about their portfolios when that day arrives. Why? Because we prepare for it constantly; as if it starts in the next minute. We have our stops in place and we are ready to put money to work in inverse ETFs all the way down to the bottom of that chasm. I raised stops on several holdings multiple times just today. Why? To protect the unrealized gains just in case the market decides that in the next moment, the bear market of a lifetime will begin. My clients look forward (or should look forward) to a bear market as much as they do to a bull market; at least for that part of their capital that we manage.

What about your life's savings? Those wonderful mutual funds that do so well in a bull market will likely get crushed in the next bear market. Don't get caught (again?) on the wrong side of the market because the wrong side could be just around the corner.

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