A long question came in about when to undo a defensive strategy. The reader joked that "I'm right, until I'm wrong" may not be the best plan. Click here to read the whole comment.
I can only try to answer this from the context of how I get defensive, what I have done before to get less defensive and to point out that I have no expectation of being exactly right with what I do. Some of this will also be discussed in this weeks video.
The first thing to mention is that I say at every turn that I do not make big bets. In getting defensive I start small so that if the sentiment gets whipsawed the portfolio won't. Earlier this summer I sold one stock and added about 1.5% to the double short fund with the willingness to do more if the market had deteriorated any further. Last summer I did something similar and my lead versus the benchmark unwound, this year it appears to have increased (details to come in the video) due, I believe, to the snap back in certain parts of the market.
With all of the action that transpired this summer I took very minimal action. The focus was to be disciplined to my defensive strategy while at the same time realizing that the market was in a fast panic and dumping a lot of stock into it, as some readers commented that they had done, would be the wrong trade. I commented countless times this summer that it was a fast decline and that fast declines snap back quickly.
Last year as I held the double short fund and the market snapped back the double short fund got smaller and the rest of the portfolio got bigger so in a way the position reduced itself and along the way, but I did wait a little too long before adding a couple of new names into the portfolio. The decision to add was probably more gut than anything else, so not very scientific.
The result for all of last year was about even with the market while sitting on a lot of cash and a little double short. What I said on the blog then, and this is a cornerstone to my ideas about how manage money and I have written many times, is to not let being wrong bring down your portfolio. I wrote going into last years double short purchase and after the fact the lagging a huge rally is nowhere near as bad as missing one. I lagged for a while to be sure but did not miss it.
It appears as though I am not lagging the current snap back. Going forward, I have talked about adding a financial name when the yield curve normalizes and I also have a couple of other stocks I have learned and will probably buy soon as a way of deploying the above average cash position I have disclosed having.
If this summer had devolved into down a lot, and I should say no matter what emotion you might have felt we were nowhere close to down a lot, getting un-defensive would occur when the market takes back the 200 DMA. This time around the market was down a little and the breach of the 200 DMA was short lived. I don't have an exact answer to Rick's question because the way things have played out, my not making large bets, I have not needed to have one.
I am mostly in, have been mostly in, and have more names to buy but am not sure when I will buy. The action taken this summer has left me underweight volatility and consistent with my opinion that we are very close to the end of the cycle this is where I want to be for now.
In conclusion there is some objective market indicators at work, a belief in moderation and a big picture opinion of what I think is going on. In terms of portfolio execution it has been right so far. It could start being wrong at any time. As I mentioned yesterday, and many times last summer, if the market explodes higher and I leave a few percentage points on the table being cautious (so lagging not missing) I would be thrilled.
I realize not everyone will like the answer but that's what I have.
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16 comments:
Is that what you call a plan?
You bought the double short fund, and now have no idea of how/when to exit.
Apparently the emperor has no clothes.
Rodger,
I have a question of a similar sort, I have held IBM for many years. It is now over 10% of my portfolio. The question is: Do I keep it forever (Buffet)or sell part of it? They idea, of course is to keep any individual stock at 5% (like the books, advise). The problem, of course, it seems to be like a core stock and not something you would I want sell.
Bernie,
good question, tough answer. I have sold down, not out, plenty of stocks. After this recent snap back I have a couple that probably need to be paired back. candidly, selling down is not something I think twice about.
Reducing your risk is not a commentary on the stock. If a stock you "love" weighs in at 10% because its has grown, you cut it in half and then it doubles...that seems like a good outcome to me.
TomK...follow up on post of .pdf from Mebane.
I was disappointed that there was not a discussion about midcap vs smallcap. A lot of asset models leave out mid cap and just use small cap growth. Over the past three yrs, 1,2, and 3 yr returns are better for any of the midcaps indices over the small cap indices. Using the russell indices. The 3yrrtn: 57 vs 45 %. Midcap is superior.
Since you seem to be more familiar with Mebane's blog, do you see where he has backtested his simple timing model with multiple asset classes, such as you use in your strategies, all within a single portfolio? He has indicated to me that he has done such and only re-balances once a year with very good results. Is this evident in his blog for us to see?(Great blog, I'm just having a little trouble focusing)
I sure wish that you encourage him to backtest your strategy #3. Very similar to his except, if i understand it, once an asset class recovers over the 200dma, it gets refunded...which strikes me as a very clever way of re-balancing. If the 10month ma was used and additional re-balancing was only once a year, what an easy port to manage. Couch potatoe can still be doing some tactical allocating with very little effort. I think Mebane would have a great .pdf on his hands to backtest it...or has he done this already?
Rodger,
I have a dumb question....Seems like every article I read is recommending buying commodities but when I plot DBC against SPY it certainly doesn't encourage me to buy DBC. Just what am I missing?
Ron
In this recent snap back I am concerned about the very low volume, and think that this factor may speak to coming danger. Any commemnts
ok, well I don't own DBC but the articles about commodities should be about correlation benefits. looking at the chart of DBC versus SPY i see periods where the corrleation is low and periods where it is high, so a mix. I have had the same question about gold's utility in this regard but i still own it for now.
if you are looking for a "winning pick" I would think you would need to go narrower. That is not my advice just an observation of to win here as opposed to protect equities.
low volume concern? there are plenty of reasons to be concerned about the health of US equities. Sentiment wise i am bearish ( here the word bearish is convenient to use, referring back to my other post).
I have a small safeguard in place to that concern, an insurance policy of sorts. Despite what anyone thinks the market has been strong, too much insurance becomes a problem. If you are simply concerned to protect a lot of down side then being concerned is approproaite, if you are short in a big big way you have made a big bet and I am not sure how one would get out from under that.
I too bought a modest insurance policy in August--a double short--and it is down about 10%. While this loss might freak out some folks, I am very comfortable with it. You always buy insurance for peace of mind. You never know when it will come in handy.
Norm
10%--not that different than the amount the XLF is down from its high.
over the last 3 months, XLF and SDS have had completely opposite paths to the same 5% loss. Kind of interesting
when you buy a short fund like QID, SDS, etc. how much do you buy to hedge your portfolio or sector?
How long do you hold it and do you have an exit strategy, selling part or sell stops?
OK Roger.....dumb question number two for today (but who's counting!).
Folks here are talking about "buying insurance" by taking a small position in a double short fund. Sounds good, but it seems to me that one would have to take a rather substantial position to offset say a 10-15% drop in the S&P500 to offset one's portfolio losses. Again, what am I missing?
Thanks again, Ron
Ron, this will of course be in the eye of the beholder.
I bought 3% of SDS last summer. After a little further decline the market took off and SDS dropped to 2%ish and I did not sell. This summer I added more which took it back to 3%-ish. If the market rockets from here SDS will become smaller. If I capture most of the lift I may not need to sell. Selling it might just be a gut call.
3% neutralized 6% of the portfolio. that combined with overweight utils, ma bell-like telecom and staples combined with underweight financials all served to blunt the impact of the market dip this summer. I did not rely totally on just one thing.
I am not trying to miss the entire decline that would entail neutralizing the entire portfolio which leads to getting whipsawed.
If the market would have kept going down I would have added a little more slowly. I disclosed having done the calculation to buy more SDS but the way things worked out I did not need to.
A couple of down 8% in down 12% markets will compound nicely for anyone over time.
This is much different than trying complete offset a decline. That is not my goal.
one more thing, to the extent you care i have covered all of this in more detail in past posts if you care to look.
one more thing, to the extent you care i have covered all of this in more detail in past posts if you care to look.
I would like to read more. Can you give me a link or is there some way to search for it. Thank you Roger.
click the portfolio strategy label or do a search at the top of the page.
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