Happy Fourth of July! Isn't it wonderful to have a day set aside to celebrate this amazing country's independence? I am proud to be an American! I am sure you are, as well!
I am fortunate to have an amazing R&D team (our 'Skunkworks') that loves to chase the various (sometimes crazy) ideas that I come up with. Let me share with you one of their projects that we put the team on a little over a year ago...
One of the primary objectives of our quant-based algorithms is to preserve capital by converting unrealized gains into realized gains at almost the first hint of a pull back in the market. If a holding gets to more than 3.5 standard deviations above the 200dma, we dramatically raise our stops or simply sell, to take that profit from unrealized to a realized gain. If the total market begins to roll over, we look at each holding and move stops up above basis if at all possible, to 'virtually' lock in a profit. If the trends of the market, a holding or the Sectors begin to weaken, we are quick to take risk off the table by selling and do our best to preserve capital and capture profits.
My clients like this approach, and for the most part, it tends to serve us well; particularly in nice long-term bull or bear markets... but... not so much in whipsaw markets. Whipsaw markets have a propensity to 'look' like the wheels are falling off, only to magically recover shortly after we have stopped out of holdings. This is not a huge deal, because there is nothing to keep us from getting right back into the market, but there are times that it seems obvious that if we had not sold when we did, the end result would have been better.
You might well be saying to yourself, "Ok... Mike... why not simply not be so darned aggressive on moving to cash?" The answer is, "Most of my clients abhor losing money and are extremely risk averse." And, many of my clients (you know who you are) want us to be "nimble" and not wait to get out or back in the market. Not all, mind you, but many of my clients fall into that category. So, it behooves me to use stops aggressively when the market is showing signs of dropping.
About a year ago, I put my team on a project to use our quant-based algos to build a great portfolio (just like we use in all of our model portfolios that all of our clients follow), but with one major exception... I told the team to use much different stop loss algorithm. I wanted to see if, by widening the stops and by not being so "nimble" with regard to short-term market gyrations, we could get a model design for higher net worth clients (who are less risk averse) that would have the propensity for much higher returns.
You will see the detailed results of this model in my upcoming Monday Client Letter, but the bottom line is, this model is up nearly 20% year-to-date! KEEP IN MIND THAT PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RETURNS! And, it has been amazingly profitable in this COVID-19 world.
I call this strategy, the "Turner Quant Advantage (TQA)" portfolio.
This TQA model uses the same algos to find stocks to buy that we use in all of our portfolio models, but it uses MUCH wider stop loss algorithms.
The TQA is FAR less sensitive to short-term swings in the market. It is FAR less oriented toward converting unrealized gains into realized gains. And, with that in mind, it is FAR less sensitive to losses in unrealized gains... let me explain what I mean by that statement.
As of this writing, the new Turner Quant Advantage portfolio is up +19.50%, year-to-date and is invested in 18 positions. But, if 100% of all the stops were triggered in the upcoming week (virtually impossible, but not entirely impossible), the portfolio would be barely positive for the year. Of course, if such an event were to occur, the market would be down 30% or more. Still... that is a huge hit to the total 'value' of the portfolio if all stops trigger at the same time.
With a year under our belt, making real trades with real money, I am offering this new strategy (the Turner Quant Advantage portfolio) to new and existing clients, effective immediately.
The minimum TQA account size is $1,000,000 for new clients. I will grandfather existing clients into the strategy for $500,000. Clients in this strategy will have to sign form that stipulates that their net worth is sufficient to handle the risk in this model and that they understand the potential draw-down could be in excess of 20%.
Below is the 'formal' description of the Turner Quant Advantage strategy:
This managed account strategy invests in stocks and ETFs that are considered the strongest in their respective peer groups. Holdings must show the propensity for growth and exhibit a strong bullish pricing trend.
The investment strategy is aggressive in both bull and bear market cycles and has the option to move completely to cash in transition markets. In bear markets, the strategy will focus on 2x and/or 3x index leveraged inverse ETFs.
The strategy does not use margin, does not hold short positions and is suitable for both tax-deferred and taxable accounts. No options are used in this strategy.
This is not a tax-efficient strategy and it is not diversified. Buying and selling actions are predicated on the results of our proprietary quantitative algorithms. The average age of holdings in the portfolio is generally less than 90 days.
The objective of this strategy is capital appreciation in both bull and bear markets and capital preservation in transition markets. Stop loss settings are maintained on all holdings. Stops are determined by a quantitative analysis of each holding’s volatility, level of unrealized gains and trend of the major indexes and the holding. Exit transactions can occur at anytime.
In closing: With our economy in deep trouble; More people unemployed than in the Great Depression; COVID-19 on the rise; One of the most heated presidential elections in history coming at us like a freight-train; Political division worse than I have ever seen in my lifetime; and, Our national debt at such an unheard of size, one has to wonder if we are not mortgaging our children, greatgrandchildren and great greatgrandchildren's lives. It seems like the fabric of our great nation is being ripped apart. And, in the middle of all of this, the stock market is oblivious to what is happening, and just keeps climbing this great wall of worry.
The good news is, we know this current trend in the market will continue until it doesn't. We know that our stops will get us out before too much damage (relatively speaking) is done in the next great bear market.
The key is staying in sync with the market. Bullish in bull markets and bearish in bear markets. But... the REAL key is how we will handle the (almost) inevitable bear market, which could dwarf 1929-1932. I know we will be ready with our inverse ETF strategy.