Tag Archives: alt-investing

Seeking Alpha On Day 1

Summary How should a new investor begin? How can you get the fullest use out of Seeking Alpha? What have I learned in over 900 days of writing for Seeking Alpha? Seeking Alpha – Completely Unofficial User’s Guide* *See comment section for someone asking if this is an official user’s guide. Welcome to Seeking Alpha. If this is your day one using this site, here is an unofficial welcome along with my thoughts and encouragement as someone who has written on it over the course of the past few years (day 1,000 coming up shortly). You can use it as a guide with the caveat that it is simply what worked for me. My one overriding message is to think for yourself. That message holds true here as well as elsewhere on the site. Approaching The Start Line Seeking Alpha is largely about the topic of security selection. This is an interesting, important, and often fun topic. However, it is not the most important topic and does not come first. To be ready for day one investing and to get the fullest use out of the ideas on security selection, there are eight steps that are crucial to have taken. They include: paying off any bad debt, setting a careful and frugal budget, setting up any tax-advantaged accounts that you can access, funding an emergency fund, funding a down payment for a home, setting up a brokerage for taxable investments, funding your healthcare, and simplifying each aspect of your financial life. If these are not first taken care of, the topic of individual security selection is premature. Once you have taken those steps, then you are ready to approach the starting line. Protecting You From… You It is good to learn from your mistakes, but far better to learn from others. So, while you are new, it is probably best to be thoughtful about how much you are willing to expose your financial life to the ideas – even the best ideas – that you read about on Seeking Alpha and other similar sites. Some articles are designated as “Top Articles” and others as “Editors’ Picks,” but you can never safely outsource thinking for yourself or managing your own risk. How much should you risk on your favorite ideas? This is a question that you should ask yourself before you get enthused by something you read here or on similar sites. In particular, you can protect your financial life from amateur (or professional) errors by diluting the amount of resources that you give yourself access to. I fully (maybe even over-) fund the following, diverting a substantial amount of resources away from what I put to work on Seeking Alpha ideas: life insurance, cash, pre-purchasing appreciating assets that I eventually want, education for my kids, and additional capital for my kids’ investments and entrepreneurship. After those five priorities are funded, I am left with a substantially reduced amount of capital for my own ideas. This reduction protects me from me. Besides taking money off of the table to reduce my downside to an acceptable outcome, it also reduces the daily stress to have less at risk. I don’t mind if I risk turning my 21st century life into a pleasant 19th century life, but I want zero chance of turning it into a 14th century life. After the above steps, I have far less ability to hurt myself and those I most love. I have protected my downside and can go to work on my upside. Navigating The Site Profile Page Now that you are ready to start, where do you begin? On day one, I started by setting up my profile . Once you do, too, then you become a part of the Seeking Alpha community. If you are new to investing, you can begin the process of identifying what kind of investor you are. Like-minded investors can follow what you write and you can follow them in turn. Home Page The home page offers a lot of information; sometimes it can almost be too much. Except for top articles , articles are mostly organized chronologically, so they come and go quickly. Early on, I would simply read articles based on titles that interested me. Later, I was able to make judgments about who I considered some of the best writers , who I then followed and read their subsequent articles. Instablog Instablogs are less formal, sometimes fun sites that individuals set up to discuss their ideas. I use them for ideas that are not perfect fits for articles, but are still interesting to me and might be interesting to others. Since articles are organized around specific companies, Instablogs can be useful for more generalized content and content outside of the public equity markets. Premium Authors A recent addition to the site in the last few months has been its premium author program. That is where you can subscribe to what Seeking Alpha describes as: Value-added investment services from top SA contributors It is not necessary and it is not for everyone. However, you may choose to check it out. If it is not a good fit, you can subsequently cancel it and get a refund on the balance of your subscription. Incorporating Seeking Alpha Into Your Investing Strategy I am probably as enthusiastic about Seeking Alpha as anyone, but even for me, it is only a small part of my investing strategy. Even Seeking Alpha’s founder blogs on a separate site . How does it fit into other online resources and an overall financial plan? Vetting authors – how do Seeking Alpha stock picks measure up? Who can you rely on? This is a question that I have often asked myself . I have five criteria, including: money – someone who has made some, flexibility – writers without a narrow mandate, introspection – ignorance is fine if it is not covered up, proximity – a writer close to his subject in the real world, and performance – this is the big one. In terms of number 5., where do you find performance data? While it is only a crude instrument, I have found TipRanks to be a useful supplement to Seeking Alpha. Past performance is the best predictor of success. – James Simons Executing Ideas Once you find an idea that you like, you will need a way to put it to work. So, in addition to Seeking Alpha, you will need a broker that you like and trust. My primary criterion is price with a secondary consideration for the strength of its online trading platform. It is a fairly commoditized business. Different investors have different preferences. Something to consider: if you have a significant retirement account at Vanguard, it comes with a large number of free trades. With a $1 million balance, you get 25 free trades. With a $10 million balance, you get 500 free trades. I also like Charles Schwab (NYSE: SCHW ), in part because it is able to take delivery of paper certificates, which I often use. Goldman Sachs (NYSE: GS ) has the best service, in my experience, but it is looking for clients that generate a substantial amount of annual trading commissions. Leucadia’s (NYSE: LUK ) brokerage, Jefferies is a fine compromise for smaller accounts than are of interest to GS. Interactive Brokers (NASDAQ: IBKR ) is great on price, great on its trading platform, and almost comically inept at customer service. Picture trading with a brokerage that learned efficiency and charm from the DMV. Goal A common goal is to beat the S&P 500 (NYSEARCA: SPY ) over a three- to five-year time horizon. SPY serves as a convenient standard – if you are not going to be able to beat it or do not want to try, you can always buy it instead. What is SPY and how hard has it been to beat it? Here are SPY’s major pluses, minuses, and attributes that an active investor needs to beat. “+” 1.) Performance In terms of performance, the SPDR S&P 500 Trust ETF has returned over 600% since inception. In terms of dividend growth investing, SPY has had a growing dividend over that period. In percentage terms, the SPY yield is currently under 2%. Over the long term, SPY has beat most asset classes and trounced the average investor returns. “+” 2.) Cost The net expense ratio for SPY is an extremely low 0.0945%. The extremely high liquidity in SPY shares means that you pay a tiny bid/ask spread when buying and selling. “+” 3.) Diversification SPY is diversified across hundreds of shares, so permanent impairment of capital is unlikely over the very long term. It is certain that at least one SPY component company will go bankrupt. It is unlikely that all five hundred will. In that unlikely event, you will probably have greater concerns than the return on your investment portfolio. “-” 1.) Hyperactivity How is it possible that SPY could have a multiple of the average investor returns, as shown in the above chart? Almost any passive exposure outperforms the average investor. Part of the answer is hyperactivity. SPY trades over 16 million shares per day. Which side of these trades has edgy information about the market’s direction? Most frequently, neither side does. But average investors attempting market timing frequently buy and sell at the worst possible times. Market timing efforts typically buy when markets appear certain and sell when markets appear to be uncertain. In doing so, they tend to pay a high price for the comfort of greater certainty. “-” 2.) Reconstitution There is a pronounced S&P 500 inclusion effect. Average SPY constituents cost about 9% more than non-constituents. This impact might be durable and could impact you both when you buy and sell SPY. But the SPY value including dividends is reduced proportionately. “-” 3.) Forced Selling SPY, by definition, owns equities in the S&P 500. So, when a SPY constituent member is involved in a corporate transaction that creates a security that does not qualify, then SPY’s managers have to sell it. The trading of components in and out of the S&P 500 is often constrained and sloppy. It is not the S&P 500 managers’ jobs to trade such securities with any price sensitivity. Such trading often follows the narrow, specific mandates of SPY at the expense of getting the best prices. Once you contemplate the salient pluses and minuses of SPY, you can then ponder whether or not this is something worth trying to improve upon. Even the great investor Warren Buffett favors a passive investment very similar to SPY for most of his wife’s trust. He did not select Berkshire Hathaway (NYSE: BRK.A ) (NYSE: BRK.B ) as the investment vehicle. Instead, he said: My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers. You may want to do the same with some or all of your money. Only once you have determined if you want to select securities do you need to bother with sites such as Seeking Alpha. As for me, I do some of each – some passive and some active management of my assets. Conclusion If this is your first day on the site, I hope that some of what I have learned and passed on will be of benefit to you. It took me almost one thousand days to learn. It is what I wish I knew on day one. Seeking Alpha can be a fun, useful, and lucrative part of your financial life. If you think for yourself and find ideas worth putting to work, you can both learn and profit. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital. Rangeley invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our investors, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.

Is This The Right Time To Bet On Volatility ETFs?

The U.S. stocks finally managed to cross all hurdles that came in their way in the past few weeks with a sharp rise in yesterday’s trading session. Both the S&P 500 and Dow Jones industrials average posted their biggest one-day gains in more than a month. Though these gains were broad-based, the rally is unlikely to last long as a large number of concerns have already built up. Despite the impressive one-day gain, the S&P 500 index has been trading in a tight range of around 6.5% this year and the stocks in the index are moving at an average of 18%, the narrowest in two decades. In fact, the index has been moving under 1% over the past six weeks, representing the longest stretch of calm since May 1994. In addition, about 59% of the stocks closed above their 200-day moving averages at the end of last week, the lowest in eight months, according to Bloomberg . This suggests that the market breadth (higher number of stocks advancing versus declining) is deteriorating, signaling some pullbacks in the weeks ahead. Further, the current economic fundamentals are signaling huge volatility and uncertainty for the coming months. This is because a raft of upbeat economic data and an accelerating job market after the first-quarter slump are raising speculation of a sooner-than-expected (as early as September) rate hike for the first time since 2006. On the other hand, downward revision to first-quarter GDP growth, sluggish consumer spending, and falling consumer confidence for two consecutive months raises questions on the health of the economy. Yesterday, the World Bank cut its growth outlook for the U.S. from 3.2% to 2.7% for this year and from 3% to 2.8% for the next. Moreover, an aging bull market, lofty stock valuations, a strong dollar, and the Greek debt drama are weighing on investor sentiment. Apart from these, the yields on 10-year Treasuries have been rising, reaching the highest level since September 30, 2014 at 2.478%. All these factors might keep the fear levels up. Added to the concern is the sliding transportation sector, which is alarming the broader stock market. According to the century-old Dow Theory, any long-lasting rally in the Dow Jones Industrial Average should be accompanied by a rally in Dow Jones Transportation Average. It seems both indices are on the diverging path given that the former has added nearly 1% in the year-to-date time frame against the 8.5% decline in the transportation index. This signifies that the stock market might not stay healthy going forward and see a sharp fall anytime soon. In a woe-begotten backdrop, investors could look into volatility products that have proven themselves as short-time winners in turbulent times. They can use these products for hedging purpose to ensure safety when the stock market starts plunging. Volatility ETFs in Focus Volatility in the stock market is best represented by the CBOE Volatility Index (VIX), also known as fear gauge. It is constructed using the implied volatilities of a wide range of S&P 500 index options and tends to outperform when markets are falling or fear levels over the future are high. A popular ETN option providing exposure to volatility, iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX ), sees a truly impressive volume level of about 44 million shares a day. The note has amassed $1.2 billion in AUM and charges 89 bps in fees per year. The ETN focuses on the S&P 500 VIX Short-Term Futures Index, which reflects implied volatility in the S&P 500 Index at various points along the volatility forward curve. It provides investors with exposure to a daily rolling long position in the first and second month VIX futures contracts. The two products – ProShares VIX Short-Term Futures ETF (NYSEARCA: VIXY ) and VelocityShares Daily Long VIX Short-Term ETN (NASDAQ: VIIX ) – also track the same index. VIXY has $152.7 million in AUM and sees good average daily volume of 1.3 million shares, while VIIX is the unpopular of the two with just $11.1 million in its asset base and sees moderate volume of more than 81,000 shares per day. The former charges 85 bps in annual fee, while the latter is costlier charging 0.89% annually from investors. The three products lost less than 2% over the past one month. Another product – C-Tracks on Citi Volatility Index ETN (NYSEARCA: CVOL ) – linked to the Citi Volatility Index Total Return, provides investors with direct exposure to the implied volatility of large-cap U.S. stocks. The benchmark combines a daily rolling long exposure to the third and fourth month futures contracts on the VIX with short exposure to the S&P 500 Total Return Index. The product has amassed $3.8 million in its asset base while charging 1.15% in annual fees from investors. The note trades in a moderate volume of 111,000 shares per day and lost nearly 3.5% in the trailing one month. AccuShares Spot CBOE VIX Fund Up Class Shares (NASDAQ: VXUP ) debuted in the volatility space last month. It provides direct access to the spot price return of the CBOE Volatility Index, or VIX and charges 95 bps in fees per year from investors. The fund trades in a small volume of about 48,000 shares a day on average and is down 0.4% since inception. Bottom Line These products are suitable only for short-term traders and have been terrible performers over the medium or long term. This is because most of the time, the VIX futures market trades in ‘contango’, a condition in which near-term futures are cheaper than long-term futures contracts. Since volatility ETFs and ETNs like VXX must roll from month to month in order to avoid ‘delivery’, a contango situation can eat away returns over long periods. Original Post

Trend Following Doesn’t Work For Stocks

Summary Applying classic trend following models to stocks is very dangerous. If however you are willing to adapt and move to momentum strategies, your chances will greatly improve. Classic trend following will fail on stocks. Stocks have many unique properties that must be taken into account. Momentum strategies provide a solution and a much higher success probability than trend following. There’s a good reason why most professionals who apply models similar to trend following to stocks call them momentum models. It’s not just a clever rebranding, it’s really a very different game. To blindly cling to trend following as a religion, disregarding any real world evidence and attacking anyone presenting ideas that differ to the trend following mantra is not only unprofessional, it’s outright dangerous. I bet you’re wondering about the title of this article. After all, I do employ quantitative models based on trend following logic on single stocks in quite large scale myself in my business. Some models that I’ve been using for many years produce very attractive returns on single stocks. So why am I writing such a provocative title? It’s not only to get you to click on it (though that worked, didn’t it?). It seems as some people stop reading after such a headline, and simply go on an all out counter attack, without bothering to read or understand the rest. Well, I’m guessing they’re no longer reading, so let’s get down to the real deal. If you apply a standard trend following model on stocks, you will lose. The operative word here being ‘standard’. Trend following on futures is quite easy in comparison. It’s much more complex to model strategies on equities. Most people simply ignore the difficult parts and hope for the best. That’s not an advisable course of action. Doing really proper strategy modeling on stocks may be outside of the budgets and technical capability of most retail traders. Even if you get your models right, you can’t treat stocks like futures. There are a few key differences, that require you to adjust your expectations and approach. Stocks are cash instruments and need to be funded. You have a clear limit to how much exposure you can take on. You do not have a pool of cash anymore to be placed in govvies. You cannot have your client fund his managed account at 20%, putting up 200,000 for a million notional. Stocks are a very homogeneous group. The internal correlation is massive. They will all go up and down at the same time with some small variation. In a bull market, they all go up. In a bear market they all go down. Diversification becomes much less important. You end up mainly trading beta anyhow. That can be ok, but if you’re under the delusion that you’re a great stock picker for buying high beta stocks in a bull market, you’re in for a nasty surprise when the bull leaves the field. Stocks are prone to rapid vola expansion in bear markets. Your neatly calculated risk measurements goes right out the window real quick. Suddenly all those stocks that were doing so nicely all fall down hard at the same time. As you start entering shorts on new lows, the stocks tend to make huge, albeit temporary, jumps up. As you’re forced to shut down positions not to blow your portfolio up, they fall back down. The short side of the single equity game is a veritable nightmare for standard trend following models. Modelling strategies on equities properly require total return series and dividends details. You need to analyze the total return series, trade the price series and have logic in place for how to handle the dividends when they come in. The potential for survivorship bias in single stock strategies is massive. If you run a strategy on the S&P 500 stocks for ten years back, base on the current S&P500 constituents, you’ll get an extremely distorted picture. Many of those stocks are in the index because they had a massive price increase. They were not in before. They wouldn’t have been on your radar when they had those returns. Check your data. Applying standard trend following models on single stocks is dumb. It doesn’t matter whether you use breakout channels, moving averages or other indicators. Toggling parameters up and down won’t help. People who say that you should apply standard trend models on stocks also tend to be the people who lacks experience with professional trading or quant modeling but don’t let that stop them from selling defunct trading system to unsuspecting retail traders at a few thousand bucks a pop. The most common arguments for applying standard trend following models on stocks is based on anecdotal evidence and classic fallacies. The first kind would be to point out that some hedge fund seems to be doing it with good results, without of course knowing anything about how they have adapted models for stocks, or to point out that someone’s cousin got rich doing it. Hedge funds certainly don’t run standard trend models on single stocks, though the often simplify the marketing pitch by calling it trend or momentum strategies. I can assure you that real hedge funds are a little more sophisticated and are fully aware of the special situation in stocks. As for the cousin, well, going on anecdotal evidence anything is possible. Apparently there are people who made gazillions trading on financial astrology too. The fallacies are usually about mentioning stocks that went up a few thousand percent, and how trend following models totally would have captured this. Disregarding of course the probabilities of having covered that stock when it was a small cap, the many times you would have been shaken out along the way, the allocation to this stock compared to the many that did less well etc. A massive simplification of the real world. This argument concentrates on the position level, and on the pro side we’re just concerned with portfolio level results. Does trend following really not work on stocks? If you’re willing to adapt your models and do something closer to momentum trading, you’ll do just fine. But the return expectations cannot be the same as for futures. Not that it’s necessarily lower, that’s not the point. But you’ll be much more dependent on the overall state of the equity markets. You can’t expect to make a killing in 2008 because you were supposedly short all the stocks. Would be nice if the real world worked like that though. How do I know that standard trend following does not work on stocks? Besides the common sense arguments of having lost the advantages of diversification and leverage, there’s quite a bit of actual, empiric evidence. I do this for a living. I have no reason to say that something works or does not work, unless that’s based on experience and research. I’ve modelled thousands of iterations of trend following models on every major index in the world. I’ve arrived at models that work and models that don’t. Standard trend models don’t. So what can be done to make trend following work on stocks? 1. Don’t go short. Kill the short leg of your strategy. Replace it with a short index overlay if you have to. 2. Take the state of the overall markets into account. You can’t keep going long in a bear market and expect to gain. 3. Build a ranking methodology to pick the best stocks. Don’t trade the stocks you read about in the news or heard about from your friends. Automatically analyze a large number of stocks and have the best ones selected. 4. Single stock vola can change dramatically over time. Rebalance your position sizes. 5. Trade fewer stocks with larger positions. Yes, that’s right. Counter intuitive isn’t it? Don’t be fooled into thinking that you’ve got more diversification with 50 stocks than with 20. They’re all beta bets and you just need to get the individual event risk down to reasonable levels. Beyond that, further diversification will worsen your results. Don’t believe me? Run a few hundred iterations of your model and tell me what you find. 6. Expect to have great returns in bull markets and aim to make your strategy lose as little as possible in bear markets. Religious dogma about a trading methodology is not helping anyone but system salesmen. It’s dangerous to view yourself as a trend follower. A much more pragmatic way would be to look at yourself as a systematic trader. Investigate what works and how it works. Trend following is a great concept but be very aware of its limitations. Adapt your rules to reality and overlay satellite strategies where needed. Hard work, quantitative modelling, research and pragmatism will get you to your goal. My new book details how to go about constructing a robust equity momentum strategy and offers a complete methololgy for implementing it. Released in June 2015, Stocks on the Move is now available in paperback and Kindle. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.