REBALANCING LONG AND SHORT PORTFOLIOS
02/03/2012
Given the persistent high beta of the short portfolio I will be rebalancing the long and short portfolios at the market close today. The long portfolio will be 130% of equity and the short portfolio will be 30% of equity for a net exposure of 100% and a gross exposure of 160% with a long to short ratio of 4.33 to 1.
This has nothing to do with whether or not I believe the market is continuing upward, it simply reflects the beta's of the long and short portfolios. (Personally I think the market is eventually going to crash but it is always better to deal with the reality of the present than trying to guess the future).
LONG AND SHORT PORTFOLIOS
02/02/2012
I will be updating the long and short portfolios at the market close on Friday, February 3rd. I will be publishing the list of long and short stocks Friday morning, February 3rd.
LONG AND SHORT PORTFOLIOS
01/25/2012
I will be updating the long and short portfolios at the market close on Friday, January 27th. I will be publishing the list of long and short stocks Friday morning, January 27th.
LONG AND SHORT PORTFOLIOS
01/19/2012
I will be updating the long and short portfolios at the market close on Friday, January 20th. I will be publishing the list of long and short stocks Friday morning, January 20th.
LONG AND SHORT PORTFOLIOS
01/10/2012
I will be updating the long and short portfolios at the market close on Friday, January 13th. I will be publishing the list of long and short stocks Friday morning — January 13th.
EXPONENTIAL TREND LINE UPDATE
12/31/2011
I have updated the exponential trend line using earnings through September 2011 and the current consumer price index.
LONG AND SHORT PORTFOLIOS
12/29/2011
I will be rebalancing the long and short portfolios as of the market close on Friday, December 30th. The long portfolio will be 100% of equity and the short portfolio will be 60% of equity for a net exposure of 40% and a gross exposure of 160% with a long to short ratio of 1.67 to 1.
LONG AND SHORT PORTFOLIOS
12/25/2011
I will be updating the long and short portfolios at the market close on Friday, December 30th. I will be publishing the list of long and short stocks Friday morning — December 30th.
LONG AND SHORT PORTFOLIOS
12/13/2011
I will be updating the long and short portfolios at the market close on Friday, December 16th. I will be publishing the list of long and short stocks Friday morning — December 16th.
LONG AND SHORT PORTFOLIOS
11/27/2011
I will be updating the long and short portfolios at the market close on Friday, December 2nd. I will be publishing the list of long and short stocks Friday morning — December 2nd.
LONG AND SHORT PORTFOLIOS
11/14/2011
I will be updating the long and short portfolios at the market close on Friday, November 18th. I will be publishing the list of long and short stocks Friday morning — November 18th.
LONG AND SHORT PORTFOLIOS
11/2/2011
I will be updating the long and short portfolios at the market close on Friday, November 4th. I will be publishing the list of long and short stocks Friday morning — November 4th.
LONG AND SHORT PORTFOLIOS
10/29/2011
While I may regret this, I believe the extraordinary jump in the market was due to extreme short covering. As the market digests what was and what was not accomplished at the EU Summit and reality slowly seeps into the collective conscience, I believe this advance will not stand. Therefore, I am not changing anything at the moment.
LONG AND SHORT PORTFOLIOS
10/27/2011
I will be rebalancing the long and short portfolios as of the market close on Friday, October 28st. The long portfolio will be 130% of equity and the short portfolio will be 30% of equity for a net exposure of 100% and a gross exposure of 160% with a long to short ratio of 4.34 to 1.
LONG AND SHORT PORTFOLIOS
10/19/2011
I will be updating and rebalancing the long and short portfolios as of the market close on Friday, October 21st. The long portfolio will be 110% of equity and the short portfolio will be 50% of equity for a net exposure of 60% and a gross exposure of 160% with a long to short ratio of 2.2 to 1. I will be publishing the list of long and short stocks Friday morning - October 21st.
EXPONENTIAL TREND LINE UPDATE
10/16/2011
I have updated the exponential trend line using the most recent reported earnings and the current consumer price index.
LONG AND SHORT PORTFOLIOS
10/05/2011
I will be updating the long and short portfolios at the market close on Friday, October 7th. I will be publishing the list of long and short stocks Friday morning — October 7th.
LONG AND SHORT PORTFOLIOS
09/23/2011
I will be updating and rebalancing the long and short portfolios as of the market close on Friday, September 30th. The long portfolio will be 100% of equity and the short portfolio will be 60% of equity for a net exposure of 40% and a gross exposure of 160% with a long to short ratio of 1.67 to 1. I will be publishing the list of long and short stocks Friday morning - September 30th.
LONG AND SHORT PORTFOLIOS
09/06/2011
I will be updating the long and short portfolios at the market close on Friday, September 9th. I will be publishing the list of long and short stocks Friday morning - September 9th.
LONG AND SHORT PORTFOLIOS
08/24/2011
I will be updating the long and short portfolios at the market close on Friday, August 26th. I will be publishing the list of long and short stocks Friday morning - August 26th.
LONG AND SHORT PORTFOLIOS
08/08/2011
I will be updating the long and short portfolios at the market close on Friday, August 12. I will be publishing the list of long and short stocks Friday morning - August 12th.
LONG AND SHORT PORTFOLIOS
07/25/2011
I will be updating the long and short portfolios at the market close on Friday, July 29th. I will be publishing the list of long and short stocks Friday morning - July 29th.
LONG AND SHORT PORTFOLIOS
07/10/2011
I will be updating the long and short portfolios at the market close on Friday, July 15th. I will be publishing the list of long and short stocks Friday morning - July 15th.
LONG AND SHORT PORTFOLIOS
06/26/2011
I will be rebalancing the long and short portfolios as of the market close on Thursday, June 30th. I will be adjusting the long portfolio to 80% of equity and the short portfolio to 80% of equity for a net exposure of 0% and a gross exposure of 160% with a long to short ratio of 1 to 1. I will be publishing the list of long and short stocks Thursday morning - June 30th.
LONG AND SHORT PORTFOLIOS
06/09/2011
I will be updating the long and short portfolios at the market close on Friday, June 10th. I will be publishing the list of long and short stocks Friday morning - June 10th.
EXTREME vs. ASYMETRIC BETA
05/28/2011
My biggest mistake, which I have repeated over and over again, has been to focus on extreme beta in the belief that the greater the momentum the better. But by selecting stocks that are showing the greatest gains you are setting yourself up for equally strong reversals that can very easily wipe out those gains. The stronger the price momentum of the long stocks and the more they outperform the market on the way up, the higher the probability is that they will underperform the market on the way down. Likewise the stronger the price momentum of the short stocks and the more they underperform the market on the way down, the higher the probability is that they will outperform the market on the way up.
You should focus on stocks with good price momentum, stocks that have returns that are outperforming the market, but that are not the front runners. Ideally these would be long stocks that while they show decent up price momentum and are outperforming an up market, will in a down market, not give up all their previous gains and will outperform a falling market… or short stocks that while they show decent down price momentum and are underperforming a down market, will in an up market, not give up all their previous gains and will underperform the rising market. In other words, do not focus on extreme beta stocks — focus on asymmetric beta stocks .
LONG AND SHORT PORTFOLIOS
05/26/2011
I will be updating the long and short portfolios at the market close on Friday, May 27th. I will be publishing the list of long and short stocks Friday morning - May 27th.
LONG AND SHORT PORTFOLIOS
05/09/2011
I will be updating the long and short portfolios at the market close on Friday, May 13th. I will be publishing the list of long and short stocks Friday morning - May 13th.
LONG AND SHORT PORTFOLIOS - REDUX
05/01/2011
I post the long and short portfolios prior to the close so that my stock selection results can be duplicated by anyone following this web site. I am making an exception with the current portfolios this week. While I have already posted the Friday portfolio updates, after analyzing the stock selection process I have utilized over the last several weeks I believe I have found a flaw in my strategy. I have come to the realization that if you apply objective standards for subjective reasons you have taken a step down a very slippery slope. To paraphrase James Carville “It’s the base rate, stupid”.
I have decided to re-do the portfolios. While this will result in violating my rule of posting before the close, since this is Sunday, at least the new portfolios are being posted prior to the market opening on Monday morning.
LONG AND SHORT PORTFOLIOS
04/26/2011
I will be updating the long and short portfolios at the market close on Friday, April 29th. I will be publishing the list of long and short stocks Friday morning - April 29th.
LONG AND SHORT PORTFOLIOS
04/11/2011
I will be updating the long and short portfolios at the market close on Friday, April 15th. I will be publishing the list of long and short stocks Friday morning - April 15th.
EXPONENTIAL P/E
04/09/2011
The exponential P/E trend line has been updated using the S&P 500 earnings for the last quarter of 2010 and adjusted using the current CPI.
LONG AND SHORT PORTFOLIOS
03/30/2011
Since I have been going back and forth between a 1.5 to 1 long to short ratio and a 2 to 1 long to short ratio, I believe the best thing is to leave well enough alone and stay with the current long to short ratio of 1.78 to 1 with the long portfolio at 85% of equity and the short portfolio at 40% of equity. If the market goes up or if the market goes down, it seems like the most defensive action to take at this time. Basically, if you don't know what to do, don't change anything.
LONG AND SHORT PORTFOLIOS
03/28/2011
I will be rebalancing the long and short portfolios as of the market close on Thursday, March 31st. I will be adjusting the long portfolio to 75% of equity and the short portfolio to 50% of equity for a net exposure of 25% and a gross exposure of 125% with a long to short ratio of 1.5 to 1. I will be publishing the list of long and short stocks Thursday morning - March 31st.
LONG AND SHORT PORTFOLIOS
03/24/2011
I will be updating the long and short portfolios at the market close on Friday, March 25th. I will be publishing the list of long and short stocks Friday morning - March 25th.
LONG AND SHORT PORTFOLIOS
03/09/2011
I will be updating the long and short portfolios at the market close on Friday, March 11th. I will be publishing the list of long and short stocks Friday morning - March 11th.
SECOND THOUGHTS
02/21/2011
While it may not be totally kosher, given the events in Libya and the very high exponential P/E (and since the market is closed today) I have decided that changing the ratio of the long to short portfolio at this time would not be prudent so I am leaving things alone for the moment.
LONG AND SHORT PORTFOLIOS
02/20/2011
I will be updating the long and short portfolios at the market close on Friday, February 25th. I will be publishing the list of long and short stocks Friday morning - February 25th.
LONG AND SHORT PORTFOLIOS
02/18/2011
I will be rebalancing the long and short portfolios as of the market close on Friday, February 18th. I will be adjusting the long portfolio to 97% of equity and the short portfolio to 63% of equity for a net exposure of 34% and a gross exposure of 160% with a long to short ratio of 1.5 to 1.
LONG AND SHORT PORTFOLIOS
02/06/2011
I will be updating the long and short portfolios at the market close on Friday, February 11th. I will be publishing the list of long and short stocks Friday morning - February 11th.
LONG AND SHORT PORTFOLIOS
01/27/2011
I will be updating the long and short portfolios at the market close on Friday, January 28th. I will be publishing the list of long and short stocks Friday morning - January 28th.
LONG AND SHORT PORTFOLIOS
01/13/2011
I will be updating the long and short portfolios at the market close on Friday, January 14th. I will be publishing the list of long and short stocks Friday morning - January 14th.
NEW PORTFOLIO MANAGEMENT STRATEGY
12/30/2010
I plan to start a new portfolio management strategy when I rebalance the long and short portfolios at the market close on Friday, December 31st. I intend to use a gross exposure of 125% and will be rebalancing the long portfolio and short portfolio based on 10 week rolling returns of the 10 week moving averages of the long portfolio and short portfolio. As of the market close on Friday, December 31st the long portfolio will be adjusted to 80% of equity and the short portfolio will be adjusted to 45% of equity for a net exposure of 35% and a ratio of the long portfolio to the short portfolio of 1.78 to 1.
LONG AND SHORT PORTFOLIOS
12/26/2010
I will be updating the long and short portfolios at the market close on Friday, December 31st. I will be publishing the list of long and short stocks Friday morning - December 31st.
LONG AND SHORT PORTFOLIOS
12/15/2010
I will be updating the long and short portfolios at the market close on Friday, December 17th. I will be publishing the list of long and short stocks Friday morning - December 17th.
LONG AND SHORT PORTFOLIOS
12/02/2010
I will be updating the long and short portfolios at the market close on Friday, December 3rd. I will be publishing the list of long and short stocks Friday morning - December 3rd.
LONG AND SHORT PORTFOLIOS
11/16/2010
I will be updating the long and short portfolios at the market close on Friday, November 19th. I will be publishing the list of long and short stocks Friday morning - November 19th.
EXPONENTIAL P/E
11/06/2010
I updated the exponential P/E trend line this morning. The exponential earnings increased approximately $0.28 as of Friday, November 5th to $50.14.
LONG AND SHORT PORTFOLIOS
11/03/2010
I will be updating the long and short portfolios at the market close on Friday, November 5th. I will be publishing the list of long and short stocks Friday morning - November 5th.
PORTFOLIO RATIO ADJUSTMENT
10/22/2010
The long portfolio's beta has climbed and is now higher than the short portfolio's beta (I have dropped the Beta chart for the time being as it is becoming more linked with my stock selection process which I would rather not go into in any great detail).
Since the long portfolio beta is now greater than the short portfolio beta I have decided to go back to a market neutral portfolio strategy of 80% of fund equity in the long portfolio and 80% of fund equity in the short portfolio for a net exposure of 0% and a gross exposure of 160% as of the close of the market today, Friday, October 22nd.
With a high long portfolio beta, if the market finally does head down, then the shorts will not be able to cover the long portfolio losses especially if the short portfolio investment is a fraction of the long portfolio's investment. By decreasing the long portfolio position and increasing the short portfolio position I hope to counter the loses of the long portfolio with gains from the short portfolio in a down market. On the other hand, if the market continues up, then I would still expect to be able to make positive gains though I don't expect those gains to equal or exceed the market's rate of return.
My goal is to try to make consistent incremental positive gains and to try to ignore whatever the market is doing.
According to Ed Easterling, if someone were able to avoid losses in a down market, then they would only need to capture 30% of the markets upside gains to break-even. Of course, if they could eke out a positive return in a down market and then do a little bit better than 30% capture in an up market, they should be able to outperform the market in the long run. (see Ed Easterling article — Rowing vs the Roller Coaster)
LONG AND SHORT PORTFOLIOS
10/19/2010
I will be updating and rebalancing the long and short portfolios at the market close on Friday, October 22nd. I will be publishing the list of long and short stocks Friday morning - October 22nd.
LONG AND SHORT PORTFOLIOS
10/09/2010
I left Thursday morning for Kit Carson Lodge and was not able to publish the update for the long and short portfolios on Friday morning. I have finally been able to get a WiFi connection so am posting the updates today.
LONG AND SHORT PORTFOLIOS
09/22/2010
I will be updating and rebalancing the long and short portfolios on the last day of the quarter at the market close, Thursday, September 30th. I will be publishing the list of long and short stocks Thursday morning - September 30th.
LONG AND SHORT PORTFOLIOS
09/08/2010
I will be updating the long and short portfolios as of the market close, Friday, September 10th. I will be publishing the list of long and short stocks Friday morning.
LONG AND SHORT PORTFOLIOS
07/29/2010
Normally I update the portfolios every two weeks which means I would be updating the portfolios tomorrow, July 30th. Since I will be going on vacation from August 5th to 23rd I will be updating the portfolios on August 6th and August 27th. This is because I have a very hard time getting a Wi-Fi signal at the resort I will be staying at from Saturday August 7th to Saturday August 21st. Since I will be in South Tahoe from Thursday the 5th to Saturday the 7th and I can get decent Wi-Fi reception at that time, I will be able to update on Friday the 6th. The next Friday I will have the time and Wi-Fi access will be Friday the 21st. This will mean the current portfolios will be three weeks long and the next set of portfolios will also be three weeks long.
LONG AND SHORT PORTFOLIOS
07/12/2010
I will be updating and re-balancing the long and short portfolios as of the market close, Friday, July 16th. I will be publishing the list of long and short stocks Friday morning.
LONG AND SHORT PORTFOLIOS
06/25/2010
I will be updating and re-balancing the long and short portfolios as of the market close, Wednesday, June 30th. I will be publishing the list of long and short stocks Wednesday morning.
LONG & SHORT PORTFOLIOS
06/10/2010
I will be updating the long and short portfolios as of the market close on Friday, June 11th. I will be publishing the list of long and short stocks Friday morning.
EXPONENTIAL P/E
05/29/2010
I have just completed the quarterly update of the exponential P/E.
LONG & SHORT PORTFOLIOS
05/25/2010
I will be updating the long and short portfolios as of the market close on Friday, May 28th. I will be publishing the list of long and short stocks Friday morning.
LITTLE ROCK
05/23/2010
I found a Wi-Fi connection at the Little Rock Airport and I am finally able to update the web site for Friday, May 21st.
LONG & SHORT PORTFOLIO UPDATE
05/11/2010
I am leaving tomorrow for the Midwest due to a family emergency. I plan to update the long and short portfolios Friday the 14th but there may be a delay in posting due to my schedule.
RETURN vs VOLATILITY
04/28/2010
I have been second-guessing my decision to go to 25-stock portfolios. While I still believe 25-stock portfolios can result in a slightly better rate of return, it will also be at a higher rate of volatility — I am, to say the least, tired of volatility. I have been pouring over my data for the last couple of weeks and have come to the conclusion that I am much more comfortable using 50-stock portfolios.
Another change is the elimination of the “S&P 500 Trend Line” page. It dated from previous strategies and really does not add anything to what I am currently doing.
I will be updating the long and short portfolios at the close of the market on Friday, April 30th and will be publishing the long and short portfolio stock list that morning.
CAPACITY vs RETURN
04/15/2010
I constantly debate with myself. No matter how the issue is decided, I always win in the end, even if I end up destroying some favorite idea or pet theory. For instance, I began this experiment by using a value investing strategy. While I secretly long to be a value investor, I will settle for speculator, if that’s what works.
This web site is a product of that long internal debate. I have no idea where it is going — I only know it will keep evolving. I am now facing another fork in the road and have been debating the right path to take. It is a matter of choosing between capacity and return.
Until recently I had not actually been investing any money using my ideas. I had just been trying to work out my strategies, but I finally decided the time had come to put my ideas to the test. Because I definitely did not have a need for capacity, yet still wanted diversification, I decided to use long and short portfolios of 25 stocks each.
By reducing diversification I found I could increase my returns on this web site, but only if I was willing to reduce the current capacity of the virtual Hedge Synergy Fund. I have always believed that if a hedge strategy was to be effective it had to scale up to a half-way decent size, which is why I designed the virtual Hedge Synergy Fund to have at least 50 stocks in both long and short portfolios with a decent minimum market capitalization. In fact, I have striven over time to raise the minimum market capitalization while still trying to maintain the same rate of return.
It was quickly apparent that I did not want to publish both the 25 and 50 stock portfolios. While I am sure a good quant could probably rip apart my portfolios and reverse engineer my selection process, that task would be made much too easy by separating the 25 stock crème-de-la-crème from the 50 stock portfolio.
I have decided to go for the higher rate of return because I think most viewers of this web site realize that a larger capacity is possible, though with a reduced rate of return. Therefore, I will be reducing the size of both the long and short portfolios from 50 stocks to 25 stocks.
I hope I can apply some of what I learn from the 25 stock long and 25 stock short portfolios to reduce the rate of return loss when utilizing a larger capacity strategy. One way I could possibly add capacity in the future might be to lengthen the holding periods of the portfolios, since a longer holding period equals a larger capacity.
Currently I am tracking portfolios ranging from two weeks to thirteen weeks. I am trying to determine the average weekly rate of return for each of the various portfolio holding periods in order to see if there is a rate of decay in the returns over time. If, for example, I can hold a portfolio for ten weeks, then it might be possible to construct a ten-week portfolio every week, thereby accumulating more individual stock by spreading the acquisition over many time periods. Viewers who have rummaged around in the basement of this web site might recognize this as the time-blended portfolio idea I used in the beginning, when I was utilizing a value investing strategy and constructing multi-year portfolios every quarter.
LONG AND SHORT PORTFOLIOS
04/09/2010
I will be updating the long and short portfolios as of the market close on Friday, April 16th. I will be publishing the list of long and short stocks Friday morning.
LONG STOCK PORTFOLIO
03/29/2010
I will be changing the long/short portfolio ratio to 1 to 1 as of Wednesday, March 31st. The long and short portfolios will both be 80% of equity for a net exposure of 0% and a gross exposure of 160%. I also intend to bring back the long stock portfolio. Both the long and short stock portfolios will be published Wednesday morning with their starting prices based on their Wednesday closing prices.
I have also made a change to the beta chart. I have been following 60 different versions of the long stock portfolio, all with different beta profiles. When I made the decision to bring back the long stock portfolio I also decided to bring out a version that is different from the one I had originally intended to use. I have updated the beta chart to reflect the beta profile of the long stock portfolio version that I will be launching on Wednesday. While it appears to be counter-intuitive to go to a higher beta version, it seems, according to my studies, the right thing to do.
PROOFREADING
03/28/2010
While updating the web site yesterday I found that instead of posting Short Portfolio 23F last weekend I had posted a copy of the older Short Portfolio 23E instead. One of my many problems is that I am my own proofreader and I have no feedback from this web site.
The people who read my web site have no idea who I am and the people who know me have no clue I have a web site. Even the business partner I have known for over 25 years does not know this web site exists.
Actually, there are four exceptions to the above statement. First is my web site consultant who knows the HTML code on this web site much better than I do but does not understand the content. Second is a good friend from high school who knows this web site exists, but I doubt he has ever looked at it and he probably wouldn't understand it if he did. Third is my maintenance man who also occasionally acts as my copy editor but who knows nothing about hedge funds. Finally, there is my wife who knows I have spent 20 to 30 hours a week for the last 12 years working on something that has to do with a web site and hedge funds but has no interest in the subject.
For those who might be curious as to why this web site exists — my obsession with the stock market began in the late 60s when I attended high school in Kansas City and checked out a book by Joe Granville from the local library. Later, at the University of Missouri, I would spend most of my time trying to figure out the stock market by typing stock prices onto IBM punch cards and writing FORTRAN programs that were fed into a UNIVAC computer. I do have a B.S. in Finance, but I only took one stock market course, Fundamental Analysis, in which I got a D.
After graduation, since I no longer had access to a computer, I spent 26 years doing other things (including a couple of years counting cards at the blackjack tables) and completely forgetting about the stock market.
It wasn't until October 1998, when I picked up a book about hedge funds to read on the plane coming back from visiting my high school friend who had moved to Little Rock, Arkansas, that I began trying to come up with a successful hedge fund strategy. I had suddenly realized I had more computing power sitting on my desk in my home office than I ever did back at the University of Missouri. Also, in 1998 it was possible to get a subscription to monthly CDs full of up-to-date stock information from companies like Market Guide Inc. — which after several acquisitions is now part of Thompson Reuters. Everything on this web site, everything I know or have thought about, all has come from reading books, blogs, web sites (such as Thompson Reuters) and research papers. There has simply not been anyone I have been able to talk to about any of this — even if there were, I am not sure it would be a good thing to talk about it.
Basically, I have not met anyone over the years who is interested in hedge funds or, for that matter, anyone who is interested in the stock market except for three people. The first is a guy I met several years ago in the course of my business who had just started a hedge fund and who I talked to for about an hour. The second was someone I met a few years ago in the course of my business who had just started a hedge fund and who I talked to for about 30 minutes. Neither one of them told me exactly what he was doing nor did I mention my web site to either one of them. A couple of weeks ago while reading "The Big Short" I was pleasantly surprised to see that the first man I referred to above features prominently in the book, and I was happy to hear that his hedge fund has made a very nice return investing in credit default swaps. The third is a guy I am aware of through my regular business who I know publishes a financial newsletter and, while I have talked to him a few times about the economy in general, I have never discussed the stock market with him.
I realized that if I ever did succeed at coming up with a decent hedge fund strategy I would have won only half the battle. The other half is to have that fact recognized. Hence this web site.
Because I have no contacts in the financial industry, marketing this web site has been a major challenge. I started with classified ads in Barron’s and the Greenwich Time. I have placed ads on various web sites. All of which have produced a small flurry of hits and then — nothing.
I have come up with another brilliant (i.e. crackpot) plan though. For the last several months I have been entering a few thousand names and addresses of employees of hedge funds, fund-of-funds, prime brokers and fund administrators into a data base. My plan is to mail out a postcard that has the "1871 to 2010 S&P 500 Exponential Value" chart on the front. On the other side will appear only the recipient's address and my own — no other information.
My hope is that whoever receives the postcard will have enough morbid curiosity to look up the web site. Like I said, my major problem is not being able to get any helpful feedback from anybody when I come up with one of my brilliant ideas.........
SHORT PORTFOLIOS
03/26/2010
Since it is the end of the quarter I will be updating the short portfolio and re-balancing the short and long portfolios as of the market close on Wednesday, March 31. I will be publishing the list of short stocks Wednesday morning.
SHORT PORTFOLIOS
03/09/2010
I will be updating the short portfolio as of the market close on Friday, March 12. I will be publishing the list of short stocks Friday morning.
SHORT PORTFOLIOS
02/23/2010
I will be updating the short portfolio as of the market close on Friday, February 26th. I will be publishing the list of short stocks Friday morning.
SHORT PORTFOLIOS
02/13/2010
While updating the exponential earnings graphs I realized that I had made a mistake in the last two quarterly updates. I had not brought the ending date forward and therefore had not incorporated the earnings for those two quarterly periods. Normally this would not have been much of a problem but given the fact that the market experienced an extraordinary drop in earnings during those time periods the calculated exponential P/E was overstated by approximately $1.50.
SHORT PORTFOLIOS
02/11/2010
I will be updating the short portfolio as of the market close on Friday, February 12th. I will be publishing the list of short stocks Friday morning.
SHORT PORTFOLIOS
01/28/2010
I will be adjusting the long/short portfolio ratio to 2 to 1 on Friday, January 29th. The long portfolio will remain invested in the Vanguard 500 index fund and will be 80% of equity and the short stock portfolio will be 40% of equity.
SHORT PORTFOLIOS
01/24/2010
I will be updating the short portfolio as of the market close on Friday, January 29th. I will be publishing the list of short stocks Friday morning.
SHORT PORTFOLIOS
01/12/2010
I will be updating the short portfolio as of the market close on Friday, January 15th. I will be publishing the list of short stocks Friday morning.
SHORT PORTFOLIOS
12/30/09
I will be updating and re-balancing the long and short portfolios as of the market close on Thursday, December 31st. I will be publishing the list of short stocks Thursday morning.
SHORT PORTFOLIOS
12/12/09
I will be updating the short portfolio as of the market close on Friday, December 18th. I will be publishing the list of short stocks Friday morning.
THANKSGIVING
11/27/09
Due to the Thanksgiving holiday and the fact that a quarterly period has approximately 13 weeks that does not divide evenly into two week periods, I will be updating the short portfolio as of the market close on Friday, December 4th. I will be publishing the list of short stocks that Friday morning.
PORTFOLIO BETAS
11/17/09
I have added a new chart to the performance web page. It shows the betas of the long stock and short stock portfolios at the time the portfolios are formed. The portfolio betas are based on the average of the betas of the individual stocks in each portfolio. I use the average of the individual stocks in the portfolios since all stocks are equally weighted when the portfolios are created.
While I have been using the Vanguard 500 index fund for the long portfolio for most of the above period (which by definition has a beta of 1.0) I have also been creating long stock portfolios along with the short stock portfolios. The chart shows the portfolio beta of those long stock portfolios (which are not published on the web site).
Even though the long stock portfolios have currently been outperforming the S&P 500 I believe the time to switch to a long stock portfolio is long past. The time to make that move was when the long portfolio beta rose above +1.0 in May.
NOTE: It wasn't until the end of October that it occurred to me to calculate and graph long/short portfolio beta using contemporaneous company data I had downloaded over the last couple of years.
At this point in time, with the rally having advanced over 65%, making a switch out of the Vanguard 500 index fund would be a mistake. With such a high long stock portfolio beta any downward movement by the market would have serious negative consequences. When the market heads back down and the long stock portfolio beta falls below 1.0, I will switch out of the Vanguard 500 index fund and into the long stock portfolio.
SHORT PORTFOLIOS
11/11/09
I will be updating the short portfolio as of the market close on Friday, November 13th. I will be publishing the list of short stocks Friday morning.
WEB SITE UPDATE
10/29/09
I have updated the web site. Basically I have removed all the rules concerning portfolio ratios and leverage. This is not because I have suddenly abandoned all discipline but because I have come to the conclusion that portfolio ratios and leverage levels should be flexible and follow general guidelines based on the current condition of the market and not a set of rigid pre-determined formulas.
SHORT PORTFOLIOS
10/27/09
I will be updating the short portfolio as of the market close on Friday, October 30th. I will be publishing the list of short stocks Friday morning.
SHORT PORTFOLIOS
10/15/09
I will be updating the short portfolio as of the market close on Friday, October 16th. I will be publishing the list of short stocks Friday morning.
SHORT PORTFOLIOS
09/29/09
I will be updating and re-balancing the long and short portfolios as of the market close on Wednesday September 30th. Due to the uncertainty of when the current rally will end I have decided the prudent and conservative thing to do is to bring back the Vanguard 500 index fund for the long portfolio. I will be publishing the list of short stocks Wednesday morning.
SHORT PORTFOLIOS
09/10/09
I will be updating the short portfolio as of the market close on Friday, September 11th and will also be bringing back the long stock portfolio. I will be publishing the list of long and short stocks Friday morning.
CHANGES
08/28/09
While I should be going to a 166% gross exposure due to the S&P 500 trend line rising above 0%, I can't bring myself to do it. If this is not a massive rally, then at the very least the market seems over due for a correction. Since I am currently situated in a fairly neutral position I have decided to wait.
BACK FROM VACATION
08/25/09
The S&P 500 trend line has risen above 0% so as of Friday, August 28th I will update the short portfolio and rebalance the short and long portfolios using 133% of equity for the long portfolio and 33% of equity for the short portfolio.
VACATION
08/16/09
Getting Wi-Fi access has been a bit problematic. I have decided to leave the short portfolio alone for the time being. I will probably not update it until Friday, August 28th. The August 14th web site update will not be up on the server until Monday, August 17th when I go down to South Lake Tahoe.
SHORT PORTFOLIOS
08/08/09
I will be on vacation until August 24th. I might not be able to update the web site next week-end do to not being able to access a Wi-Fi connection. I will probably not update the short portfolio stocks but I will rebalance the short portfolio as of next Friday, August 15th.
SHORT PORTFOLIOS
07/28/09
I will be updating the short portfolio as of the market close on Friday, July 31st and will be publishing the list of short stocks Friday morning.
UPLOAD PROBLEMS
07/26/09
I have had a problem uploading the web site but the last two weeks are finally on line.
SHORT PORTFOLIOS
07/16/09
I will be updating the short portfolio as of the market close on Friday, July 17th and will be publishing the list of short stocks Friday morning.
SHORT & LONG PORTFOLIOS
06/27/09
I will be updating and re-balancing the short and long portfolios as of the market close on Tuesday, June 30th and will be publishing the list of short stocks Tuesday morning.
SHORT PORTFOLIOS
06/11/09
I will be updating the short portfolio as of the market close on Friday, June 11th and will be publishing the list of short stocks Friday morning.
LIVE AND LEARN
05/29/09
It appears I have made a rather large error. The problem occurred several months ago when I decided I could increase leverage and go to 200% gross exposure. It is now apparent that from a margin and volatility standpoint that decision was a mistake.
In a bull market (the S&P 500 trend line above 0%) the maximum gross exposure should probably not exceed 166.66%. Since I believe the initial ratio of long portfolio stocks to short portfolio stocks should not exceed 4 to 1 and the initial net exposure should not exceed 100% this would mean a maximum bull market initial gross exposure of 166.66% with the long portfolio being 133.33% of equity and the short portfolio 33.33% of equity.
In a bear market it is probably best not to use any leverage and to keep the gross stock market exposure at 100%. A 0% net stock market exposure would then result in the long stock market portfolio being 50% of equity and the short stock market portfolio being 50% of equity (which implies that 50% of one's equity is in short term bonds). If one were to use a less negative correlated ratio of 1.5 to 1 then the long stock market portfolio would be 60% of equity with the short stock market portfolio being 40% of equity for a net stock market exposure of 20% (with 40% of one's equity in short term bonds). After an extreme sell off in a bear market one should probably use a 4 to 1 ratio which would make the long stock market portfolio 80% of equity with the short stock market portfolio being 20% of equity for a net stock market exposure of 60% (with 20% of one's equity in short term bonds).
I intend to update and rebalance the virtual Hedge Synergy Fund's long and short portfolios as of the May 29th, 2009 market close. I plan to use a 3 to 1 ratio with the long portfolio at 75% of equity and the short portfolio at 25% of equity and a 100% gross exposure. It will take a bit of time to update the Excel spreadsheets and the web site.
SHORT PORTFOLIOS
05/28/09
I will be updating the short portfolio as of the market close on Friday, May 29th and will be publishing the list of short stocks Friday morning.
SHORT PORTFOLIOS
05/14/09
I will be updating the short portfolio as of the market close on Friday, May 15th and will be publishing the list of short stocks Friday morning.
SHORT PORTFOLIOS
04/29/09
I will be updating the short portfolio as of the market close on Friday, May 1st and will be publishing the list of short stocks Friday morning.
WORKAHOLIC RECLUSE
04/09/09
Being a workaholic recluse most holidays are completely off my radar screen. It wasn't until this morning when I turned on CNBC-XM and heard the markets would be closed for the Good Friday holiday that I realized there would not be a "close of the market" on Friday.
I have been working on short stock portfolio 20B this afternoon and hopefully will have it up by this evening. I will have to base the closing prices on the close of the market today, Thursday April 9th.
SHORT STOCK PORTFOLIO
04/08/09
The next short stock portfolio update should be April 17th but since I will be out of town from the 16th to the 26th I will be updating the short portfolio as of the market close on Friday, April 10th and will be publishing the list of short stocks Friday morning. The next update of the short stock portfolio will be May 1st.
PORTFOLIO BEHAVIOR
04/05/09
While I believe that it is not feasible to predict beta asymmetry for individual stocks I do believe there is a very good probability that one can predict the beta asymmetry for portfolios of stocks based on common fundamental characteristics of the individual stocks within the portfolio and the current state of the market.
For example, as time goes on I expect the short stock portfolio’s up-beta will start to fall and move closer to 1 resulting in the Hedge Synergy Fund’s return more closely matching the return of the S&P 500 in a rising market and after a new bull market finally gets underway I believe the short stock portfolio’s up-beta will eventually fall below 1.
I also expect a change in the beta asymmetric behavior of the long stock portfolio. When I switched to the Vanguard 500 index fund in July 2008, the long stock portfolio’s down-beta had risen above 1 but over the last few months it has fallen and is back to below 1 again. At the time I switched, the long stock portfolio’s up-beta had fallen to below 1 and has stubbornly remained below 1 since then. As the bear market comes to an end I expect the long stock portfolio’s up-beta will finally rise above 1. Once that happens I will switch from being long the Vanguard 500 Index Fund to a long portfolio of 50 individual stocks.
The long stock portfolio is not currently posted on the web site. I am putting together long stock portfolios every two weeks and observing their performance but I am not publishing the results. Once I switch back to the long stock portfolio I will of course begin publishing the long stock portfolio on the web site.
NOTE: While the above proposal was a good idea, it was only based on intuitive reasoning. I was relying on the performance of the long portfolios to make my decision. Unfortunately, it wasn't until October when I finally spent some time working on the concept and created a long/short portfolio beta chart. As they say, a picture is worth a thousand words (see “Long/Short Portfolio Beta" chart on the Performance web page).
NEW COMPUTER
04/03/09
My old computer has been giving me problems for the last couple of months so I bought a new computer on Monday and have been loading all my software and data over the last few days. The timing couldn't be worse since it is the beginning of the quarter which requires a lot of Excel spreadsheet work and web site updating. I hope to have everything updated by the end of the week-end.
SHORT & LONG PORTFOLIOS
03/30/09
I will be updating and re-balancing the short and long portfolios as of the market close on Tuesday, March 31st and will be publishing the list of short stocks Tuesday morning.
INCREASING EXPOSURE
03/12/09
I believe it is time to increase the virtual Hedge Synergy Fund exposure to 80% net exposure / 200% gross exposure (2.33 to 1 ratio). I will be making the adjustment as of the close of the market, Friday, March 13th. It will take a few days to update the web site.
While I am not trying to call the bottom I do believe the market is going to bounce around a bit and perhaps have a rally sooner or later. Since a 40% net exposure has a slight negative correlation to the market, a bear market rally will result in a loss which would have to be made up by betting that the market will head back down again.
If the market does make new lows then obviously a 40% net exposure would result in a slightly higher return than an 80% net exposure but the cost of getting there could result in a large drawdown if there is a significant bear rally. As the reader is probably aware, to offset a given percentage loss, one has to make a larger percentage gain. At the moment I am more concerned with preserving the gains I have racked up during this bear market than striving to achieve more positive down market returns.
An 80% net exposure in a rising market should result in the NAV showing a positive gain, albeit a gain that is less than the market. In a falling market the NAV will probably show a loss but it still should outperform relative to the S&P 500.
While it gives me a great deal of satisfaction to make positive returns when the market heads down, it does cause a bit of pain to lose money when the market rises. Given that the bear market is now approaching its later stages, I would be just as happy to make a small gain when the market rises and to know I have lost less than everyone else when the market falls. The time for being bold is past, now is the time for being prudent.
NOTE: My timing was impeccable, it was the execution that was wanting — the leverage was too high and the long/short portfolio ratio was too low.
SHORT STOCK PORTFOLIO
03/06/09
I will be updating the short portfolio as of the market close on Friday, March 13th and will be publishing the list of short stocks Friday morning.
SHORT STOCK PORTFOLIO
02/23/09
I will be updating the short portfolio as of the market close on Friday, February 27th and will be publishing the list of short stocks Friday morning.
SHORT STOCK PORTFOLIO
02/10/09
I will be updating the short portfolio as of the market close on Friday, February 13th and will be publishing the list of short stocks Friday morning.
SHORT STOCK PORTFOLIO
01/28/09
I will be updating the short portfolio as of the market close on Friday, January 30th and will be publishing the list of short stocks Friday morning.
SHEER STUPIDITY
01/16/09
I came down with a cold at the end of October which I tried to ignore. By New Year’s Eve it had developed into a sinus infection and bronchitis. I finally broke down and went to the hospital and was given antibiotics and a decongestant with a nice dose of codeine.
When you find yourself going to work and taking 3 hours to do what normally takes 30 minutes you should hopefully figure out that you are not exactly in the best shape for making decisions. Somewhere along the line I got the overwhelming desire to select a group of stocks that were the complete antithesis of my normal stock selection process. Then I went one further by deliberately increasing the portfolio risk in the middle of rising market volatility.
While it may not be totally kosher, I have decided to have the virtual Hedge Synergy Fund reflect the original long and short portfolios selected on December 31, 2008. Since the plan is to update the short portfolio every two weeks I have put together a new short portfolio as of the close of the market Friday the 16th.
I am more interested in the performance of my portfolio strategy than I am in the results of my state of mind (or lack of same). If there is a lesson here it is this: do not make any major decisions, investment or otherwise, if you are physically and/or mentally impaired (and don't wait two months to go to the hospital).
REDUX
01/09/09
I went to 40% net exposure even though I believed that the bear market had not run it's course to try to limit the damage of the upside volatility of the short portfolio. I have since come to the realization that there might be another approach to preventing the short portfolio from wrecking havoc on the upside. Therefore I will be going back to 0% net exposure as of the close of the market Friday, January 9th.
SHORT STOCK PORTFOLIO
01/05/09
I will be updating the short portfolio as of the market close on Tuesday, January 6th and will be publishing the list of short stocks Tuesday morning.
SHORT STOCK PORTFOLIO
12/28/08
I will be updating the short portfolio as of the market close on Wednesday, December 31st and will be publishing the list of short stocks Wednesday morning.
SHORT STOCK PORTFOLIO
12/08/08
I will be updating the short portfolio as of the market close on Friday, December 12th and will be publishing the list of short stocks Friday morning.
SHORT STOCK PORTFOLIO
11/26/08
I was planning to update the short portfolio Friday, December 5th but due to the extreme volatility of the last few days I believe it might be prudent to update it as of the market close Friday, November 28th. I will publishing the list of short stocks Friday morning.
SHORT STOCK PORTFOLIO
11/18/08
I will be updating the short portfolio as of the market close on Friday, November 21st and will be publishing the list of short stocks Friday morning.
SHORT STOCK PORTFOLIO
11/02/08
I will be updating it as of the market close on Friday, November 7th and will be publishing the list of short stocks Friday morning.
SHORT STOCK PORTFOLIO
10/16/08
I will be updating it as of the market close tomorrow, Friday, October 17th.
INVESTING VS. GAMBLING
10/14/08
Some losses are due to mistakes and some are simply due to the natural order of things. If you are making correct investment decisions any losses with be offset by future gains and in the long run you will be fine. If on the other hand you make a blatant investment mistake, then that loss is permanent. Do it enough times and you will badly underperform the market.
It became quite obvious to me on Monday that while the long stock portfolio had outperformed the market when it was falling I had not done enough due diligence to determine what would happen in a rising market.
If I had stayed with the Vanguard 500 index fund I would have broken even as of the close of the market on Tuesday. While that does not sound great compared to the 11% rate of return for the S&P 500 it was the goal I was trying to achieve during a bear market correction.
While I could have simply waited until Friday hoping that with “luck” there would be a market reversal resulting in my recouping the loss — that would have only compounded my mistake. To try to rely on luck to break-even after a loss is not investing… its gambling. It is best to acknowledge one’s mistake and move on.
JUMPING THE GUN
10/14/08
Last week I had no problem making the decision to go to 40% net exposure. On the other hand I agonized all week about replacing the Vanguard 500 index fund with a long stock portfolio. It wasn't until about an hour before the market closed on Friday, October 10th, that I made the decision and published the long stock list.
It now appears I jumped the gun. My goal was to try to retain my gains and simply break-even on any market corrections and I would have come close to meeting it had I continued to go long the Vanguard 500 index. While I had observed the 9/30/08 long stock portfolio outperform the market when it was heading down, I had not waited to see what would happen when the market headed up.
I believe it is best to correct a mistake as soon as possible. Waiting around hoping for things to “work out” is never a good idea. While the gap between my long portfolio stocks and the S&P 500 may narrow by the end of the week, the fact is the long stock portfolio did not respond the way I anticipated.
It is now Tuesday, 2:30 PM (EDT) and while I have no idea at the moment how the day will end but keeping with my plan to announce changes prior to the close, I will close out the long stock portfolio and go back to the Vanguard 500 index fund based on today’s closing prices.
WEEKLY UPDATE
10/11/08
The weekly update for 10/10/08 is up. It will take a while though to update the web site to reflect the changes to the net exposure and the new long stock portfolio. I will hopefully have them up by later today or tomorrow morning at the latest.
FRIDAY NIGHT IN THE HIGH SIERRAS
10/10/08
It is now 8:45 PM and I am at 7,000 feet with the ground covered with snow. I have just downloaded the closing prices and need to get out of the lodge before they close the doors. I will update the web site software on my laptop tonight and then will upload it to the server tomorrow morning. It has been one hell of a week and one hell of a day.
PHASE TRANSITION
10/10/08
I have been tracking a series of monthly portfolios of long stocks since I switched from a long stock portfolio to going long the Vanguard 500 index fund on July 17th. As of September 30th the long stock portfolios have under performed the S&P 500 by over 15%. It has become more and more apparent that when the S&P 500 300/20 day trend line signals the beginning of a bear market (which occurred January 22, 2008) it is probably a good idea to substitute the S&P 500 index for the long stock portfolio.
This of course leads to the question — when does one re-establish a long stock portfolio? Of course, once the S&P 300/20 day trend line signals a bull market, one should definitely re-establish a long stock portfolio but the initial goal should be to try to move back into a long stock portfolio prior to that event.
I believe to accomplish this one needs to wait for a major phase transition. That is, it is probably best to use the S&P 500 for the long position of the hedge fund until there is a significant rotation out of the bubble stocks that existed at the beginning of the bear market.
I am not advocating trying to time the market but simply pointing out that one needs to be cognizant of the changes taking place within the underlying trend in the long stock portfolio. The best way to do this is to simply establish a paper long stock portfolio once a month and observe its performance.
It is important to make sure that there has been a significant change out of the original long stocks that existed at the beginning of the bear market. Once one is fairly confident of a change in the underlying long stocks and that they appear to be outperforming the S&P 500 it may be safe to then substitute a portfolio of long stocks for the S&P 500 index.
Due to the recent changes in the market, the energy and commodity long stocks are mostly gone and have been replaced by financial's and services. Based on the current market conditions and the performance of the current long stock portfolio I have decided to switch from the Vanguard 500 index fund to a long stock portfolio with the beginning prices based on today’s closing prices. You can find the long stock selections at the following link Long Portfolio 18.
NET EXPOSURE ADJUSTMENT
10/09/08
As of Thursday, October 9th the S&P 500 is down 41.86% from its high set on October 9th, 2007. During that same period of time the virtual Hedge Synergy Fund is up over 24% (accompanied by a bit of volatility). The probability is that we are closer to the bottom than the top and I believe that now is the time to adjust the net exposure.
According to my calculations the short stock portfolio is about twice as volatile as the S&P 500. By increasing the long/short portfolio ratio I believe it is possible to not only better position the virtual Hedge Synergy Fund for the eventual end of the bear market but to also decrease the volatility of the NAV. At this point in time I would be more than happy to just break-even if the market keeps falling. I am more interested in being able to take advantage of any bear market corrections and to try to capture some upside return when the bull market finally gets underway.
I believe it would be prudent to go to a 40% net exposure with the long portfolio at 120% of equity and the short portfolio at 80% of equity for a gross exposure of 200%. This is not only a change in net exposure it is also a change in the 180% gross exposure that I have used for the last couple of years.
The reason I originally settled on a 180% gross exposure was to keep the level of initial margin above 50%. This of course was based on the SEC rule of having a minimum of 50% margin in a brokerage account when using leverage or to short stocks.
As most of you are aware it is very possible for a hedge fund to exceed that limit by borrowing outside of the brokerage account. Because the margin fluctuation of the virtual Hedge Synergy Fund has only strayed slightly below 50% on just a few occasions I believe that using a little more leverage is well within the limits of risk. While I am aware of the deleveraging process going on all over the world, I believe that a leverage ratio of 2:1 for a long/short hedge fund is not excessive.
Since my goal is to announce stock selection and changes to the portfolios at least by the morning of the day I establish the beginning prices (using the closing prices on that day) I will re-balance the long and short portfolios based on tomorrow’s closing prices (Friday, October 10th) and will update the web site over the week-end to reflect the change. Since I will be back at my favorite resort in the High Sierra for their closing week-end it will be a bit of challenge since the Wi-Fi signal at the lodge is rather iffy (the resort is rather rustic with no cell phone coverage or phone/cable lines in the cabins).
WANTS AND NEEDS
10/03/08
The current short portfolio does not contain all the short stocks I want but it does contain the short stocks I need. You might have noticed that there are five stocks that are on the SEC banned financial stock list. These short stocks appeared in the prior short stock portfolio and I have brought their closing dollar positions over to the new short portfolio.
Starting with the current short portfolio I have decided to try to publish the new updated stock portfolios the night before or at the very least several hours prior to the market close that marks the beginning of the new updated portfolio. Due to the fact that it takes a while to update the web site every time I update portfolios it will be a challenge but I believe it will help in establishing the credibility of my stock selections. The beginning prices will be added after the close.
ASYMMETRY
10/03/08
I have been studying the past behavior of long and short stock portfolios using the data I have gathered over the last four years. I have come to the conclusion that the long and short stock portfolios should be updated using different time intervals.
While a long stock portfolio can probably go up to three months between updates the short stock portfolio should use a much shorter time period. This is based on three things.
The first is based on the fact that since the long run trend of the market is up a long portfolio of stocks, especially in a bull market, has the wind at its back and can run a lot longer than a short stock portfolio that is swimming against the tide.
The second is while the short stocks in a bear market should theoretically be helped by the downward market momentum it is not necessarily the case. This is due to the fact of the high volatility of bear markets. A good example of the behavior of bear markets is the following;
300-point rallies in the Dow happen in bear markets
“We're in a very confusing atmosphere. People didn't really know what to make of a 300-point rally in the Dow the other day, but my main message was that 300 point rallies from the Dow don't happen in bull markets. In fact, they never happened in the bull market from October '02 to October '07, but it has happened 6 times in this bear market and happened 12 times in the last bear market. You don't get moves like that in bull markets. As Rich Bernstein has said time and again, "This is the hallmark of a recession and a hallmark of a bear market."
David A. Rosenberg, Conference Call Notes, published under the title “The Elusive Bottom” at Investor In Sight, August 2000
The third has less to do with stock selection and performance than with the nature of short stock returns. When one goes long there is a positive feed back between percentage returns and absolute dollars gained or lost. If a long stock goes up then for every given percentage increase in price there is an ever larger amount of absolute dollars earned. For every given percentage decrease in price there is a smaller and smaller absolute amount of dollars lost.
The exact opposite happens when one shorts a stock. For every given percentage increase in price there is an ever larger amount of absolute dollars lost and for every given percentage decrease in price there are smaller and smaller absolute dollars earned.
By periodically equal weighting the stocks, any short stocks that have been rising in price but are still remaining in the short portfolio after the update will at least have their positions trimmed back. Any short stocks that have been falling in price will have their positions increased which will help with future dollar returns if they continue to fall.
Whether it is due to going against the market trend in a bull market, fighting the volatility of a bear market or simply to re-balance the short stocks, the short stock portfolio should be updated every two to three weeks.
When updating portfolios during the quarter I will use the closing balance of the prior portfolio as the beginning balance of the new updated portfolio and will equally weight the stocks of the new updated portfolio but will not do any re-balancing between the long and short portfolios. At the end of the quarter I will not only update the portfolios I will also re-balance the long and short portfolios as I have done in the past.
To simplify the web site updating I will be grouping the portfolios by series. That is I will continue using a numbering system based on a quarterly time period with the updated portfolios within the quarter then designated by letter. For example the first portfolio of the fourth quarter of 2008 will be Portfolio 18-A, the second portfolio will be Portfolio 18-B etc., with the first portfolio of the first quarter of 2009 being Portfolio 19-A and so on.
UPDATE
09/30/08
Normally I would update and re-balance the portfolios today since this is the last day of the quarter. Given the SEC ban on shorting financial stocks I plan to wait until Thursday to see if the ban will expire. Whether it expires or not I will update and re-balance the long and short portfolios on Friday.
A BLACK SWAN
09/19/08
What does one say? Early Thursday afternoon (EDT) I was up over 11% for the week — at the opening the next morning I was back to even. I find that rather significant. Not the fact that I was up 11% at one point but, given the events of the last few days, that I ended the week just about where I had started.
I am debating whether I should wait until October 3rd to update the short stock portfolio since I wish to hold onto my short financial stock positions as long as possible. If it do update on the last day of the quarter, any financial stocks in my current short stock portfolio that are on the SEC financial stock list that still remain after the update will retain the exact dollar amount from the previous portfolio. If I decide to wait until October 3rd to update and the SEC extends the ban, I will follow the same formula.
SHORT PORTFOLIO
08/29/08
Since the short portfolio was last updated just two weeks ago on 8/15/08 I have decided to wait until Friday September 5th to update it again.
CONTEMPLATION
08/15/08
Last week-end I had already spent a week running around like mad getting organized and packed for a two week vacation in the mountains. I was also simultaneously trying to put together a new short stock portfolio.
Now that I have spent a week hiking the High Sierra during the day and sitting on the deck of the cabin contemplating the lake at night I have had time to think about strategy. Looking at the current short stock portfolio I am not totally satisfied with my selections. Although the new short stock portfolio has done OK this week I believe that given the current market conditions I should make some changes. Therefore I will be starting a new short stock portfolio effective August 15th.
SHORT TERM TRENDS
08/08/08
Given the volatility of a bear market and the quickly changing trends I believe it would be prudent to update the short stock portfolio every month.
HUMBLE PIE
07/18/08
The current extreme volatility has caused me to look back to the beginning of this experiment and to think about what I had originally set out to achieve with my investment strategy. My first objective was to try to outperform the S&P 500 in a bull market and the second was not losing money in a bear market.
I believe I have lost sight of the latter objective due to my taking outsize risks in order to try to obtain large positive returns in a bear market. What I should be striving for is simply not losing money in a bear market and if I happen to make a small positive return then so much the better.
In analyzing the situation, I believe that a long portfolio of stocks in a bear market will more than likely produce a negative return. While the long stock portfolio will probably produce a negative return it still may be possible for the long stock portfolio to outperform the S&P 500.
Even if a long portfolio of stocks can, over the long run, outperform the S&P 500 in a bear market it more than likely will do so with extreme volatility. I have come to the conclusion that it is probably better to forego striving for a few more percentage points of return rather than suffer large pendulum swings of gains and losses in trying to achieve that extra bit of return.
Having two uncorrelated and volatile portfolios vis-à-vis the S&P 500 in a bear market can lead to three different scenarios: both being positive thus achieving a high return, one being positive and the other negative leading to a hedged return or both being negative leading to a large negative return.
I must admit the idea of simply using the Vanguard 500 index fund for the long portfolio during a bear market is starting to make more and more sense. By using the Vanguard 500 index fund for the long portfolio, one is then using only a single partially correlated portfolio — the short stock portfolio.
If the S&P 500 is going down the short stock portfolio is more than likely going down. If the S&P 500 is going up then the short stock portfolio is more than likely going up. I am not saying they will always be traveling together but there is a very high probability that they will do so most of the time. The only major variable then is which one is going up or down faster and how much of a differential in the two rates of return.
Therefore, as of 7/18/08, I will be closing out the current long stock portfolio and going long the Vanguard 500 index fund. My expectation is that this should reduce volatility and hopefully produce a modest positive absolute return.
STOP LOSS
07/09/08
Recently I spent several weeks analyzing stop loss limits on quarterly portfolios which were constructed using my current investment strategy and utilizing the three and half years worth of stock data I had accumulated since I began this project (I download and save over 120 pieces of financial data on 3,000+ stocks on the last day of each quarter which gives me a contemporaneous snap shot of historical financial data on a quarterly basis). I found had I used stop loss limits I would have had a lower rate of return due to the lost opportunity cost of the stocks that rebounded being greater than the projected savings from the stocks that continued to lose money. This was not just due to the fact we were in a bull market during most of that time since the same results applied to both the long and short portfolios. Of course, because I update stocks quarterly I have the advantage of being able to use the last day of the quarter for comparison purposes which might make other studies of the subject a little more problematic since one needs a definitive ending date to play the “what-if” game.
While I do not use stop loss limits on individual stocks I did believe in applying the stop loss concept to the returns of the long portfolio, short portfolio and the NAV. With the NAV down I seriously considered closing out the long portfolio. I then decided to go back to the data I used to analyze stop loss limits on individual stocks. I applied the same stop loss limits to the individual portfolios. In three and half years the two worse cases were when the NAV was down 14.73% but ended the quarter down 12.14% and the other was when the NAV was down over 16.97% but ended the quarter down 2.95%.
While I find this hard to say, I now believe the best course of action during a quarterly period is let what ever happens, happen. Any stocks showing a loss can be replaced at the end of the quarter. While this can lead to a certain amount of volatility, I believe using stop loss limits creates too great a drag on the overall rate of return.
CORRECTION
07/04/08
Having been under my high water mark for a little more than a year I resorted to an easy formula to calculate fund fees, .375% times investor equity. When the NAV finally broke through and set a new high though I overlooked changing back to a 20% performance fee on the excess over the high water mark. Therefore while the virtual Hedge Synergy Fund gross return for the six week period from May 16 to June 30 is 27.13% the NAV is actually 22.77%.
You may have noticed that the long portfolio is not doing very well. While I am not interested in the performance of individual stocks I am interested in the overall performance of the long/short portfolios and the NAV. Since the short portfolio is doing OK and is helping absorb some of the long portfolio loss I will let the long portfolio go as long as I believe it is prudent. If the situation continues to deteriorate then I will update the long portfolio. While it is important not to wait too long it is also equally important not too panic too soon. A conundrum inside a contradiction.
DIVERSIFICATION
06/30/08
In a little over 6 weeks (May 16, 2008 to June 30, 2008) the virtual Hedge Synergy Fund NAV gained 27.13%. While I am pleased with the return I am not very happy with the volatility. I believe that more diversification is required to try to reduce volatility and risk. Therefore, starting with Portfolio 17, I am increasing the number of stocks in the long portfolio and short portfolio from 25 stocks in each portfolio to 50 stocks in each. All stocks are equally weighted with each representing 2% of portfolio value.
Because of this I will need to expand the number of potential stock candidates by lowering the market capitalization threshold to $770 million. This threshold will vary in the future depending on the increase or decrease of the market’s total capitalization.
WEB SITE CHANGES
06/13/08
Since I am no longer using the time-blended portfolio strategy I think it might be a good idea to simplify the web site. I have decided to consolidate the time-blended portfolio strategy articles, graphs and tables on a single web page. For an explanation of the time-blended portfolio management strategy prior to May 16, 2008 please see "Time-Blended Portfolios".
SHORT PORTFOLIO
05/21/08
While I believe that the changes I have made will result in better performance in the long run, I am not totally satisfied with the short portfolio stock selection. Since my main concern is volatility, I have been analyzing the historic volatility (beta) of the current short stocks. I have come to the conclusion that it would be better to have a diversified selection of short stocks with lower betas.
Even though Portfolio 16 has a rather short portfolio period which will be ending on June 30th, I have decided it is not worth the risk of having a short portfolio of stocks that I am not comfortable with in terms of volatility.
Therefore I have put together a new short stock portfolio. To keep things simple I will not re-balance the long and short portfolios but simply use the May 21st ending balance of the existing short portfolio as the beginning balance of the new short portfolio 16.
CHANGES
05/16/08
I have decided to make some very major changes in the Virtual Hedge Synergy Fund. Since last summer it has been rather apparent that I have been experiencing a great deal of volatility. I had hoped that I could reduce volatility by using a series of time-blended portfolios. Unfortunately it has not worked out that way.
Therefore, instead of utilizing 8 two year portfolios selected quarterly, I plan to use a single long portfolio and a single short portfolio each consisting of 25 stocks which will be updated on a quarterly basis. Any stocks experiencing large losses will be replaced.
One other change is to concentrate on larger cap stocks. The minimum market capitalization for the long stocks will be four billion dollars and the minimum for the short stocks will be two billion dollars.
While I am publishing the new portfolios immediately, it will take a while to update the various articles on the web site to reflect the new investment changes.
ARCHIVES