Investing Strategy

So I have been typically a Long buy and hold equity investor, through stock picking, with varying degrees of success. It worked well in the last decennia when everything virtually went up, regardless what you picked, but the recent crash opened up my eyes to both multi-asset and factor based investing.

I joined a risk management firm, who truly opened up my eyes. They guy who runs it is a former hedge fund manager, so you get a hedge fund approach plus their quality of research as well. It’s mind blowing.

Am still learning their Process, but subscribed to some of their services. One of their main tool is Risk Ranges, which using fractal maths forecast a probable high and low for the day, against which you can make decisions.

Their ethos is not about valuations, gut feeling or hype, but purely cold hard data. It’s not about whether something is good or bad, but whether it gets better or worse - rate of change. Volatility, price and volume all come into that equation.

So in essence, I have now started to tentatively run my own little global hedge fund.

Their core model is GIP - Growth, Inflation and Policy. That drives a 2x2 model that outlines the economic conditions - we are now in “deep” quad 4, where both growth and inflation decelerate; also known as “deflation”.

They backtested 20 years of data, so against each of their economic Quads they propose a theoretical multi-asset portfolio that performs best against those economic conditions, with a split of Long and Short options.

You then apply two A/B tests, to determine your course of actions:

What should I do in this economy?
A - which asset classes does this Quad like (ie Long them) or doesn’t like (ie Short then)
B - do they have the right realised and implied volatility, or is that too high and are they “uninvestable” as volatility is too high?

Once you know that, you know which asset classes you should Long/Short today. You then do the second A/B test:

Which of these asset classes does the market want me to action today?
A - Do they have the right trend - ie are they bullish and retain an upward momentum?
B - Are they at the right side of their Risk Range? So if they forecast that the XLP will have a likely low of $56.38 for the day, you only buy if the price approaches that, so you will have plenty of upside left.

Based on all this I build a spread sheet that is becoming my cockpit to their approach. I glanced at it yesterday and instantly knew my actions for the day:

  • XLP consumer staples had the right volatility, implied volatility and transitioned to a Bull trend, with a neutral Relative Strength Index. During the day it got close to its lower Risk Range, so I bought some and then it bounced back up.
  • XLV health care is approaching the right volatility regime and has the right trend, so is under consideration, but it’s Risk Range was off so I held off buying for now.
  • XLI industrials remains volatility with a bear trend and a continuing downward momentum. It was also high at its top risk range, so I day shorted it and took 2% profit.
  • TLT long term treasuries are a core holding for a Quad 4 portfolio, all the signals are right but they were at the top end of their risk range as yields are dropping, so I sold some, and bought gold instead which was dropping close to the lower end of its risk range.

Just to give you a flavour of how it works. I basically rotate asset classes in and out as economic AND market conditions changes, and Short those that look especially bad.

Had I followed their portfolio before the crash, I would have lost 2% max. In reality, they warned all their subs about the crash and most moved into pure treasuries, gold, US dollar and cash so took no -30% hit, and hrough Short most made a significant profit on top of it.

The only problem is that commissions and exchange rates are prohibitive to rotate too often. The guy who runs it tends to increment his holdings with 25bps, so he trades often 100 times a day.

Unlike the USA zero commission isn’t the norm here yet, so am really waiting for RobinHood to get their act together and launch here! For now I hold longer than he does, and then I want at times given the volatility.

Once we’d have something like RobinHold, my portfolio will be 70% multi asset long, 20% long stock picking, 10% short CFD/Options.

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Fantastic write up, thank you for sharing and in so much detail!

A very interesting approach and a nice way to rotate between indexes and remove individual company risk (to a degree.)

Before speaking with @Truman_Du and learning more about this long term fundamental stance I was definitely more on the trader side of things than investing.

As such I very much appreciate this dashboard, one of things I was missing was a way to assess multiple sectors and industries to strike, I was limited to individual firms I already knew or looking for outliers based on technicals. :chart_with_upwards_trend:

My old approach was based on intra-day trading looking for brief changes in momentum. Looking for the point when the bid and ask got too close and an explosive correction (relative, would be 5/15 second candles) would happen, based off the momentum I would take a side I expected the correction to face. This was back when I ran the XO side of the business and was responsible for the equity/fund platform as well as the CFD whitelabel. Which did give me some extremely useful discounts.

For the traditional long equity platform I still had to pay commission but it was very margin tight, but given everyone else was paying £10 a trade it was a massive step up! I still had to pay the full wack on FX which was annoying. We ran a trading frequency report and I was the second most frequent trader on our platform, 400~ trades compared to 650~.

I used the CFD platform for commodities. Oil mainly.

That’s all in the past, it was a fun but not particularly efficient strategy. It did provide gains but the stress and effort versus a longer term play wasn’t worth it. I did some brief option trading where I would write options and collect premiums. Again high effort where the profits could easily be cut down. It was making small 2-3% gains with little risk, but the margin call requirements were high, which meant I had a lot of unused capital (funny story, I got my option trading book stolen from me when our post was raided, I had to call crime stoppers and explain what book they were looking for, I had to order it again as they never recovered it :cry:)

These days I am still very much momentum driven but more based on the fundamentals and analyst predictions. I like to look for mid cap or larger with high momentum and not the worst value in the world, but I avoid cheap stocks as I don’t like “unknown” risks, I prefer the risk of will they hit expectations or achieve what they set out to do, rather than risks like “we just changed CEO and they are scrapping the old strategy.”

I do lean towards higher quality companies but the primary driver for me is momentum.

We spoke about gold before and you mentioned it’s more like a currency, which I do agree with. Currency I don’t mess with. Whenever I have currency queries I take it to @yuchen.xia and hope he let’s slip what on earth I need to do and then promptly not do anything and complain about it. Currency and Value stocks are two things which I’ve had painful experiences with sadly. :violin:

I still keep 10-20% of my ISA for casino bets where I want to pounce on an emerging trend or shorter term movement, but I limit myself with this. If they do well I tend to trim it back and the gains into my longer term plays.

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You’ve been on a fascinating journey.

I won’t become an intra day trader, I simply don’t have the time for it, nor the expertise. Still got a day job and a family!

Which is the main reason why I build this dashboard, as now I get daily new data from the risk management company and it takes me 5 minutes to manually enter it, whilst google sheet updates everything else constantly and links it all together.

Then takes me 15 minutes to optimise my portfolio, and I suspect many days the best action is not doing anything. For now I keep a closer eye on it, as I am learning the process but also given the crazy volatility in the market. Once we get out of this, investments will become significantly longer-term.

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