An active multifaceted approach applying multiple investment strategies and independent research to generate superior returns. A process combining fundamental analysis, technical analysis, and institutional positioning analysis taken from a top-down perspective that identifies relative strength/weakness sectors for optimal timing of investment decisions in individual equities and applying value added option strategies to enhance returns. We seek to identify high quality companies that exhibit strong fundamental trends and are not being properly valued by the market for our core portfolio.
“Approach the game with no preset agendas and you’ll probably come away surprised at your overall efforts.” -Phil Jackson
Top-Down: Although it is essential to be aware of the global macroeconomic conditions, including, but not limited to, economic data, political risks, and currency and central bank impacts, in this form of Top-Down, it is a process in identifying sectors in the market demonstrating relative strength via proprietary indicators. In order to enter and exit positions in an optimal fashion, it is important to identify the sector first as rotations among sectors occur in cycles.
Fundamental Analysis: Evaluating the fundamentals of a company is much more than looking at the various financial metrics which are giving a snapshot of either trailing or projected numbers, both equally having flaws. It involves identifying secular trends taking place across industries and then determining the companies best positioned to capitalize off these trends. True fundamental analysis involves being a forward thinker, looking for stocks in attractive industries with a leadership position in growing available markets with a strong history of execution.
The highest quality long term investments also have a wide economic moat, and a sustainable competitive advantage that makes it difficult for competitors to wear down market share, allowing for earnings stability. Similar to technical analysts, fundamental analysts can also be trend followers, observing the trend patterns in metrics such as Sales, Earnings, Margins, and Cash Flow. Furthermore, developing unique industry specific valuation/growth metrics is instrumental for comparative analysis to only be invested in the highest quality of companies. Every industry is different making it appropriate to utilize proprietary metrics with proven back tested correlations to performance to uncover the true best of breed investment within each industry.
“A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.” – Wayne Gretzky
Institutional Flow Analysis: A unique addition to our investment process is incorporation institutional options flow analysis to identify prospective investments, and be ahead of which sector/industries the money is flowing to. Large trades in the options market have historically been a great indicator of not only what direction a stock will move, but also clearly lays out a time-frame. Combining this analysis with the other processes allows us to make sure we are on the same side of an investment/trade as the “smart money.” An analysis of the implied volatility skew can also show the market’s gauge of upside versus downside expectations, and is extremely useful in stock selection.
The rationale behind this approach is similar to the concept of being involved in the stocks that institutions are buying because, in the end, a stock price is a reflection of demand. Discovering and analyzing large option trades allows us to see where the large institutions are positioning in real-time, a much better approach than the quarterly 13F filings that come with a serious lag. Institutions have the best access to research, proprietary indicators, technology and other resources that give them an advantage that smaller investment companies cannot apply economically. Although there is no guarantee that the institution will be right in the trade, it is an additional factor that can add confidence to an investment/trade we are initiating. Institutional options flow analysis allows us indirect access to all of the research/resources the large institutions are using at a fraction of the cost.
Technical Analysis: Analyzing the technical structure starts at the top and works down through to complement the investment process on every level. Starting with Intermarket Analysis and Macro market breadth gauges to aid in deciphering the health of the overall market environment and confirm the Macro sentiment and economic scenarios at the time. From there, we utilize relative strength and breadth analysis funneling down through the major sectors to the industries and then finally to the individual securities to identify the best opportunity available based on the market environment the rest of our research is suggesting. Once these opportunities are identified, chart analysis is used for more precise entries, re-evaluation points and exits. Technical analysis adds the critical component of when to act on the specific ideas generated from the rest of our research process.
“Without self-discipline, success is impossible, period.” – Lou Holtz
Managing risk is as important as choosing positions in any portfolio, but also should be matched to the strategy that is being employed. Every portfolio should be able to reduce exposure and raise cash when the macro environment warrants it, but outside of this, there are three main ways we manage risk in the portfolios we manage. The first way is through careful trade planning before ever entering the trade. This gives us our position sizing with initial stops as well as other levels to be aware of along the way for potential adjustments. This step is also where we match the sell criteria to the strategy we are employing in the trade. Second, we frequently re-evaluate each holding based on the strategy employed in the trade to make sure it is still on track with our original thesis and is still the best place we know to allocate those funds at the moment. Finally, we will also use broad market and sector hedges through ETFs to help reduce risk in the entire portfolio or large weighted segments as we identify potential risks on the horizon. We consistently employ each of these methods in our portfolios to better protect the capital we are trusted with.