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What If I Had Stayed Away From The ‘Sell’ Button?

Summary Does it pay off to sit on one’s hands and do nothing? I wanted to know and carried out a brief review of my past sell decisions. Holding clearly outperformed selling, but selling seems to have lowered both, returns and risk. Never look back? With regards to closed positions I used to follow a strict ‘never look back’ policy, because I considered it unhelpful to spend time thinking about what could have been. Recently, I broke with this paradigm. Not because I like to kick myself, but rather to test which of the following competing concepts would work better for me: Monitoring all holdings closely and trying to optimize capital gains and portfolio structure by selling when the time has come (whenever that may be) Sitting on my hands and doing nothing while accumulating shares. It may not have been a conscious decision, but I happened to follow the former approach in the past. I felt not looking after the portfolio might be irresponsible. However, when looking after the portfolio I found there were always reasons to worry. Typical reasons to sell were: Concerns about the respective company’s business model Immediate issues with unclear outcome (e.g. accounting issues, legal disputes) Perceived lofty valuations Then I wondered: What are the worst losses that I managed to avoid through trading and what are best opportunities that I missed out on? Would I be better off if I stayed hands-off? Looking back Past sell decisions can help to find answers to these questions. If you are happy to gain valuable, but potentially painful insights, you might want to carry out a review as follows: Put together the data on all positions that you ever closed. Establish the respective cost base of these positions and the profit/loss that you realized when you closed the positions. Look up the current prices of the securities you sold. Calculate what your former holdings would have been worth today. Compare with the realized profit/loss. Results This is what I did and here is what I found as I went through the 32 trades that are on my records of the past four years: I made a profit on 29 positions. The average gain was 16% with the largest gain being 58% (these are total, not annualized gains in local currencies, including all trading fees, but no dividends). I made a loss on three positions. The average loss was -19% with the biggest loss being -33%. The average profit across these 32 trades was 13%. Comparing the realized profits and losses with current prices, I figured out that I made 15 good exit decisions (=current prices are below the prices at which I sold) and 17 poor exit decisions (=current prices are above the prices at which I sold). All three stocks that I sold at a loss were among the good exits. Also, pulling the plug on my long-term government bonds in late January this year turned out to be a good move. A further pattern is that it was mostly a good idea to get rid of the more speculative plays (special situations, turnarounds). The biggest loss that I managed to avoid was -56 percentage points (=my realized profit was 9% and I would be under water by -47% now had I kept the stock). The poorest exit decisions were taken more than two years ago. Today, I find it difficult to understand what made me sell, since I cannot remember any red flags. The best explanation I can offer is that the share prices did not go up as I expected and I lost patience assuming that I missed something in my assessment. In that situation I was almost looking for black cats in dark alleyways. The biggest gain that I missed by selling was 300% percentage points (=my realized profit was 1%, but the stock has gained a further 299% since I have sold). Had I kept all the positions that I sold the total gain would have been 37% rather than 13%. Conclusions The interpretation of the results is not straight forward. Given the overall bull market for stocks and bonds in recent years, it had to be expected that keeping would win over selling on average. My brief review did only compare selling against keeping. It did not compare keeping against reinvesting of realized proceeds. Also, of course, I did not consider time frames in that I only looked at overall returns not at annualized ones. Still, there are some conclusions that I find useful: When I sold it was due to concerns (or fear if you like). The ‘never look back’ policy implied already that I could miss out on opportunities by selling, but I never realized by how much missed opportunities can outweigh risks in total even when some of the risks do eventually materialize. Being lazy, I was actually hoping to find evidence that a complete hands-off approach would be superior to my trading activity. Things turned out to be a bit more complicated, though. It feels reassuring that I proved to be right whenever I closed a position at a loss. The best and worst performers in my current portfolio have returned +191% and -17% respectively so far which compares against +300% and -57% among my past holdings. Although it was not an outspoken goal, I do feel more comfortable in the current range that seems to offer a more limited downside. Apparently, I could not expect the portfolio to be low maintenance, when (some of) the stock picks were not. Now that I have eliminated the stocks that were a bit too exciting for me, it may have become easier to stay away from the sell button. Stocks In order to keep the focus on method and results, I decided not to mention specific stocks above. If you are curious about the stocks behind the numbers, here is a small list: Largest realized gain: Novartis (NYSE: NVS ) Biggest realized loss: Finavera ( OTC:FNVRF ) Biggest avoided loss: Power REIT (NYSEMKT: PW ) Biggest opportunity I missed: Royal Wessanen ( OTC:KJWNF ) Best performer in my current portfolio: I.A.R. Systems ( OTC:IARSD ) Worst performer in my current portfolio: HCP (NYSE: HCP ). Disclosure: I am/we are long IARSD, HCP. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Lipper Closed-End Fund Summary: July 2015

By Tom Roseen While for the third consecutive month equity CEFs suffered negative NAV-based returns (-0.72% on average for July) and market-based returns (-1.96%), for the first month in three fixed income CEFs were able to claw their way into positive territory, returning 0.45% on a NAV basis and 0.82% on a market basis While the NASDAQ Composite managed to break into record territory in mid-July after a strong tech rally following Google’s surprising second quarter result, as in June advances to new highs were generally just at the margin. Despite signs of improvement in Greece’s debt crisis and on China’s stock market meltdown, investors turned their attention to second quarter earnings reports and began to evaluate the possible impacts slowing growth from China and the global economy will have on market valuations. The markets remained fairly volatile during July. At the beginning of the month rate-hike worries declined slightly after an inline jobs report and soft wage growth were thought to give policy makers an excuse to postpone rate hikes until December. The Labor Department reported that the U.S. economy had added 233,000 jobs for June. And while the unemployment rate declined to 5.3%, most of it was due to people leaving the labor force. With the Chinese market taking back some of its losses and the Greek debt saga appearing to be closer to a resolution, European stocks rallied mid-month. However, later in the month disappointing earnings results from the likes of Apple (NASDAQ: AAPL ), Caterpillar (NYSE: CAT ), and Exxon (NYSE: XOM ) and commodities’ continuing their freefall placed a pall over the markets. Concerns over slowing global growth and the Shanghai Composite’s recent meltdown weighed on emerging markets, sending Lipper’s world equity CEFs macro-group (-1.52%) to the bottom of the equity CEFs universe for the month. While plummeting commodity prices weren’t much kinder to domestic equity funds (-0.80%), investors’ search for yield helped catapult mixed-asset CEFs (+0.77%) to the top of the charts for July. With China suffering its worst monthly market decline in six years, crude oil prices closing at a four-month low, and gold futures posting their worst monthly performance in two years, investors experienced bouts of panic and sought safe-haven plays intermittently throughout the month. At maturities greater than two years Treasury yields declined, with the ten-year yield declining 15 bps to 2.20% by month-end. For the first month in four all of Lipper’s municipal bond CEFs classifications (+1.10%) witnessed plus-side returns for July. However, domestic taxable bond CEFs (-0.13%) and world bond CEFs (-0.98%) were pulled down by investors’ risk-off mentality. For July the median discount of all CEFs narrowed 2 bps to 10.50%-worse than the 12-month moving average discount (9.13%). Equity CEFs’ median discount widened 41 bps to 11.15%, while fixed income CEFs’ median discount narrowed 58 bps to 9.86%. For the month 46% of all funds’ discounts or premiums improved, while 51% worsened. To read the complete Month in Closed-End Funds: July 2015 Fund Market Insight Report, which includes the month’s closed-end fund corporate events, please click here .

Do Your Alternative Investments Have The Right Fit?

By Richard Brink, Christine Johnson Investors who chose alternatives for downside protection in recent years have been frustrated with their performance. We think the problems were an unfavorable market environment and the unique challenges of manager selection for alternatives. In May 2013, the market’s “taper tantrum” in reaction to announced changes in U.S. monetary policy pushed bond yields up; stocks stumbled briefly before continuing to pile up strong returns. For many investors, this heightened concerns about extended market valuations and an impending interest-rate increase. Taking a page from the typical playbook, many investors looked toward long/short equity strategies and nontraditional bonds as ways to protect against potential market downside. But in 2014, playing defense didn’t pay off: U.S. equity markets gained another 14% and bond yields fell. Long/short equity strategies, on average, returned 4%. That experience left many investors disappointed with alternatives-both equity-oriented and fixed income-oriented. It hardly came as a surprise when investors shifted money out of alternatives early in 2015, moving it into core fixed-income funds and international equities-mostly through passive exchange-traded funds (ETFs). The Long-Term Value of Alternatives We think investors were right in looking to alternatives for protection against potential downturns. Alternatives have provided better returns than stocks, bonds or cash over the past 25 or so years, with less than half the volatility of stocks ( Display ). And long-term data show that incorporating alternatives in a traditional portfolio may enhance returns and reduce risk. If that’s the case, what went wrong in 2014? We think the problem was twofold. First, a good portion of alternatives’ poor performance stemmed from the multiyear, largely uninterrupted bull-market run. This extended rally rendered the long-term benefit of “hedging” with alternatives somewhat moot. Second, many investors bought the right idea of alternatives: participation in all markets with downside protection. But in many cases, they didn’t buy the specific behavior in an alternative that was the best fit for their portfolio and risk/return preferences. It’s not an easy selection process. There are thousands of different alternative strategies to choose from and a lot of dispersion among managers within alternative categories. It’s not enough to simply buy a top performer from a seemingly relevant category. It’s critical to have specific characteristics in mind: Exactly how much downside protection do you want? And how much participation in up markets are you looking for? Once you know your objectives, you can start doing the homework to zero in on a strategy and manager that aligns with them. What’s in an Alternative Category? Everything One of the challenges to finding the right fit is that alternative categories have a lot more variety than their traditional equivalents. They just don’t provide as much help in narrowing down the decision. Take Morningstar indices. They have about 40 different categories for traditional, or long-only, equities. There are categories for different geographies, market capitalization ranges, styles and even sectors. For long/short equities, there’s only one category. If an investor wants to find the right long/short equity strategy, it takes a lot of legwork to uncover the one with the best fit. Without that, investors are at the mercy of manager dispersion. Three Levers That Create Manager Dispersion What creates such big dispersion among alternative managers? We think three levers are at play: style, market risk and approach. We talked about the first lever already: the traditional style buckets of geography, investment approach, market capitalization and industry/sector make for a lot of differences. The second lever is how much overall market risk and sensitivity a manager has-a lot or a little-and how much it varies depending on conditions. The third lever is the approach a manager uses to create the portfolio’s overall market exposure. For example, does the manager use cash, market hedges or short positions in individual stocks? What mix of these instruments does the manager use, and in what environments? All three elements and their combinations can vary to define your experience with a specific alternative manager’s approach. Conducting three-dimensional research to gain a clear understanding of the levers-and which settings are best for you-is the key to choosing the right alternative manager. And the need to make that choice is rather pressing today, in our view. There aren’t a lot of broad cheap areas in capital markets today, and we expect more modest returns and higher volatility ahead for both stocks and bonds. Relying on broad market returns alone isn’t likely to be as rewarding in the years to come, and alternatives can play a key role in enhancing a portfolio’s risk/return profile. The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.