I’ve accomplished a few things in my 4 decades helping clients manage their money. I led a national trade organization for active money managers, managed mutual funds twice, created a market indicator that is used each week by 20,000 portfolio managers, newsletter writers, websites and investors.
I’ve also written a couple of books including the popular Why Bad Things Happen to Good Investments: Ways to Invest for Success in Bad Markets as Well as Good. In 1998 I teamed up with John Mauldin, and others, to write a book about Y2K (fun fact: Leonard Nimoy of Mr. Spock fame wrote our foreword), and although the book never amounted to much, John Mauldin went on to become one of the most successful newsletter writers in the world. Each week he sends his newsletter to “1.5 million of his closest friends” of which I am one.
John takes a macro approach to writing – none of us can get too specific with our advice without attracting the wrath of the regulators- sticking to generalized topics, but he clearly favors being proactive with investments. Recently, John mentioned a manager who pooh-poohs active management. Like many who take cheap shots, this man mis-states how we do things, so I wanted to address how my brand of proactive management really works.
Certainly there are investors who move all in or all out of the markets. Day traders are known for this, but in my view, it is a high-risk way to do things. Each mistake creates a double loss, first of some money, but second a loss of opportunity by missing the opposite move. It is easy to point at investors with those kinds of financial bruises and chuckle. That is not how I do it.
Rather than rolling the dice like that, I take a much more nuanced approach to investing. I don’t get rattled about every possibility. Uncertainty is always with us in this business and focusing on uncertainties is what drives many investors crazy. 95% of my investment decisions are made on what the hard data says. I look at probabilities and when they shift, my portfolio shifts too.
My portfolio construction ebbs and flows with the market. I like to play offense, since stock markets have a clear upward bias and I am an optimist by nature. But as the title of this article (which I trademarked in 2010, btw) suggests, Adapting to Changing Markets® is important. Anyone who thinks that the markets are not going to change is the biggest fool of all. If change is inevitable, it needs to be planned for and dealt with.
Investors in my Future Technologies portfolio know I have core positions that I have held for years, as well as newer, less proven holdings that I hold in smaller amounts. As a general rule, I like to let winners run, and nip any losers in the bud. If you look at a current snapshot of my portfolio, you will see very few losses and in which only small amounts of money are invested. This bias towards holding mostly winners doesn’t happen by accident, or by rolling the dice.
Earlier this year as the strong markets began to look tired, I started to take the profits of more than a dozen of our most successful holdings, banking that cash. When the market softened in March and April, I had sold about 1/3 of our holdings and moved those moneys to cash, bonds and hedges (inverse funds that are designed to move up as an index moves down), cushioning the effect of hanging onto core holdings in a declining market. As the market has strengthened since April, we have been moving back into tech stocks and done well. As of this writing on June 20th, we currently hold about 78% tech stocks and 22% cash in the Future Tech portfolio. With hedges in place, our stock market exposure is only 58% despite holding 78% stocks in the Future Technologies model portfolio (a model portfolio is what we align client holdings with).
This process is where offense meets defense in investing. As in any sport, the best teams play good defense as well as good offense. Those who push buy-and-hold schemes tend to overlook playing defense and tell their clients to just suck it up and be ready to accept losses in down markets. I prefer more sophisticated methods.
I will usually be holding at least some of the strongest stocks in our model portfolio. More in good times, but less in tougher times. Playing offense. But when market declines begin to take hold, I switch on the defensive engines, too.
A favorite risk reduction technique of mine is what I call “Free Trades.” When a holding approaches a 100% gain (and we have had several), I begin to sell it off until I have recouped our principal amount. The remaining investment is all profit, house money if you will, and our principal is better protected.
My toolbox contains a lot of other tactics that help reduce risk while pursuing profits, but my point in writing this is to tell you not to fall for the platitudes of smug pundits and financial advisers who tell you that no one can time a market. They just don’t know how to do what we here at Shadowridge can do every day, which is far more nuanced.
June had a Friday the 13th this year and I thought you might appreciate this Fun Fact from Elliot Eisenberg, the Bowtie Economist.
Stock Superstition
The Friday File: Since 1928, the stock market, on average, has returned a superbly spooky 0.09% on Fridays the 13th (Will here: This equates to a 22.68% annualized return). On all other Fridays the return is still a ghostly strong 0.05% (Will here again: This equates to a 12.6% annualized return). That’s because on all trading days the return is 0.03%, one-third the Friday the 13th average, 60% of a regular Friday return (or 7.56% annualized – WH). It’s time to start treating Friday the 13th with the financial respect it deserves!
Important Disclosure Information
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Shadowridge Asset Management, LLC [“Shadowridge]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, no portion of the foregoing content serves as the receipt of, or a substitute for, personalized investment advice from Shadowridge. Neither Shadowridge’s investment adviser registration status, nor any amount of prior experience or success, should be construed that a certain level of results or satisfaction will be achieved if Shadowridge is engaged, or continues to be engaged, to provide investment advisory services. Shadowridge is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the Shadowridge’s current written disclosure Brochure and Form CRS discussing our advisory services and fees continues to remain available upon request or at www.shadowridgeinvest.com. Please Remember: If you are a Shadowridge client, please contact Shadowridge, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Shadowridge account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) comparative benchmarks/indices may be more or less volatile than your Shadowridge accounts; and, (2) a description of each comparative benchmark/index is available upon request or at www.shadowridgeinvest.com.