Bright Shiny Objects Have Their Uses. Making Money Isn't Usually One Of Them.
DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
Make More With Less
There are many enemies of successful investing, but one of the primary combatants is the array of distractions right in front of your eyes.
If you think that by putting all your money into the S&P500, you might earn 7-8% p.a. plus on a total return basis over the long term. So on the face of it, you have to be a real genius with a supply of great ideas and ninja-level trade execution skills to want to pursue a very diversified portfolio. And yet the amount of time and effort that many investors put into considering and/or owning some unholy admixture of dividend stocks, growth stocks, commodities, sector ETFs, bitcoin, tech, NFTs, treasury bond ETFs, options, LEAPs, CDs, bonds, M&A arbitrage opportunities, altcoins, emerging market names, the Hang Seng, currency pairs, and so on? Truly a lot of time and energy. And if you compare that to the number of investors who beat the S&P500 time and again? No contest. The S&P500 beats most investors, professional money managers included, most of the time, over the longer term.
Now, this note is brought to you by an investment research business. You might think our interest lies in finding ever more esoteric ideas to put in front of you, bright shiny objects to attract the attention of unsuspecting newbies, the better to scoop up the good subscription fees.
One, we're a serious, SEC-regulated business in it for the long haul, whereas subscription shill operations tend to not last very long once their particular kind of trick pony is revealed as such; and two, we don't actually think this is a very good way to run money. If you want to manage a portfolio diversified across asset classes, currencies, risk profiles, time periods and such? Then you need to be either Renaissance Technologies' best quantitative analyst and top trade timing algo writer all wrapped into one (if you're doing it to make money) or a hobbyist (if you're doing it for fun, and the money is a byproduct). Nothing wrong with hobbyist investing. The 0DTE and crypto industries love hobbyist investors. You just have to know which one you are. Are you in it for the money? Or for the thrill of the new? And then proceed accordingly.
Warren Buffett talks extensively about circles of competence and the notion that the further one strays from one's own such circles, the lower one's performance is likely to be. This is very true in investing, in our experience.
We believe that the market - the S&P500 - can be beaten reliably using very few underlying instruments but by approaching these instruments with one or two execution tricks up one's sleeve. And the way we think about portfolio management runs like this, in increasing order of risk and, hopefully, return.
- Low risk/return. Buy and hold US equity indices. We believe the S&P500, the Nasdaq-100 and the Dow Jones 30 are the most suitable long-term holds, particularly if you are minded to invest regularly in them, and to re-invest dividends back whence they came. There are many ways to do this; amongst the simplest is to just own the SPY, QQQ and DIA ETFs. Many brokerage accounts allow you to set up regular investment amounts, and to set dividends to be automatically re-invested.
- Increased execution risk / better return. Buy and hold US equity indices per the above; in addition, trade in and out of inverse index ETFs to make a little extra money when markets turn down. You can over-think this form of hedged investing approach and twist yourself in knots; or you can operate on the basis that markets go up over the long term, but correct downwards only in the short term. So, be Buffett-patient with the equity indices, be impatient and eager to bank profits with the inverse ETFs.
- Increased risk of loss / better return potential. Use leveraged long and short equity index ETFs - eg. TQQQ / SQQQ. We believe the long-run dominant trend to be up, so, again, patient on the long side, but eager to bank gains on the short side.
- Diversification beyond indices. Use sector ETFs, using the Wyckoff Rotation method - invest when the sectors are unpopular and sell when the sectors are in vogue. Examples include XLK (technology), XLV (healthcare), XLRE (real estate) and so on.
- Individual company earnings risk vs. significant capital gain potential. Invest in single-stock names, be that in the short term or long term, focusing on the company's fundamental performance and the stock's technical positioning.
These are the strategies we employ in staff personal accounts, and here in the Inner Circle service. Not featured: crypto, DeFi, NFTs, SPACs, merger arbitrage, micro caps, or any other out-there ideas.
Used correctly - which is to say analyzed fundamentally and technically, and trades executed well - we believe the above strategies capable of beating the S&P500 year in, year out. Without the "it could all go to zero" kind of stress that comes with the bright shiny objects that folks like to chase all over the Internet. Because sat underneath each of the instruments above are large, stable, US-based, liquid issuers of the securities in question. And risk management in these names can take many forms - position size control, patience, direct hedging, stop-losses, you name it. So we believe that controlling the downside is in the gift of the investor, as is cashing in the upside - you're not sat around hoping that the SEC does this or doesn't do that, or that this or that acquisition completes as you hope, or the hundreds of other stressors that come as standard with out-there stuff.
Thanks for reading our work.
If you've yet to join the pay side of this service? Our prices go up on 1 December, so now's a great time to join us. You can do so right here:
If you're already a paying subscriber here at Cestrian Inner Circle and you'd like to move from a monthly to an annual membership? Save money by doing so before the end of November. Prices rise 1 December.
Alex King, Cestrian Capital Research, Inc - 1 November 2023.