Tag Archives: earnings-center

Adding To Positions: A Simple Rule

I want to share a simple rule that has worked well for me over the years. I’ll explain the how and why, and then wrap up with some thoughts about when this rule might not be appropriate. So, imagine you are in a position, and then, for whatever reason, you know it’s right . In fact, it’s so right that it’s time to add to the position, and so you do. Now, think about what happens if the trade turns out to not be right, or to not develop as you expected – what do you do? Here’s the rule: if you add to an existing position and it does not work out as expected, you must get out of more than you added . Simple rule, but effective. To put numbers to the idea, say you are long 5,000 shares of a stock. As the trade moves in your favor, you get a signal to add to the trade (and that “signal” could cover many possibilities.) So, you add 2,000 shares. Somewhere down the road, the trade does not work out, and probably is under the price at which you added. Now, you know the right thing to do is to reduce the position size, and you must do so, but how much do you sell? Answer: more than 2,000, and probably more like 4,000 than 2,100. You now hold less than the original position size, and you’ve booked a loss on part of the position, but you’ve also reduced your risk on a trade that was not developing as you thought it might. One of the classic trading mistakes is to have on a winning trade, add inappropriately, and have that trade become a losing trade. For some traders, being aggressive and pressing when they have a good trade can add to the bottom line, but there is a tradeoff: when you become more aggressive you do so by taking more risk. The psychological swing – going from aggressive to wrong – can be one of the most challenging experiences for a trader, and many mistakes happen in this heightened emotional space. The rule of exiting more than you added is a simple rule, but it protects you from yourself. Now, no rule fits all styles of trading all the time. There could be styles of trading for which this is inappropriate, (for instance, when we add planning to scale in as the trade moves against the entry.) However, for “simple”, directional technical trading, this rule might be helpful in many cases. So much of the task of trading is just about avoiding errors and mistakes, and correct rules lead to good trading.

Lazard Explains Benefits Of Multi-Factor Smart Beta

Smart-beta strategies attempt to provide better risk-adjusted returns by using measures other than market capitalization to weight portfolio holdings. Historically, these alternative weightings have produced higher Sharpe ratios, a measure of return per unit of risk, and this is why they’ve earned the “smart” moniker in the view of their advocates. Smart-beta strategies can be considered as occupying the middle-ground between active and passive investing, with rules-based methodologies (like passive investing) that nevertheless deviate from broad market benchmarks (like active investing). Distinct smart-beta strategies and funds can either be “single factor” or “multi-factor,” as explained in Lazard’s December 2015 Letter from the Manager: A Better Kind of Beta , which reviews five such “factors” before going on to make the case for multi-factor investing in general, and Lazard’s own multi-factor strategies in particular. Style Factors A “factor” is any consistent characteristic that academic research has shown explains the risk or return characteristics of stocks. Common style factors include: Value – Value-investing is championed by the most successful investor of all time: Warren Buffett. But “value” can be defined in a number of ways, and not all measures are as likely to produce superior results. In Lazard’s view, a combination of “cyclical” (such as price-to-book) and “defensive” (such as cash flow) measures provides the most consistent exposure. Momentum – Stocks going up tend to continue going up – and vice-versa. At the same time, what goes up must come down – the question is “when?” Lazard recommends using measures other than simply price momentum to judge market sentiment – including macroeconomic data releases. Low Volatility – Low volatility stocks have added appeal in the wake of the financial crisis, but Lazard thinks this factor can best be exploited not by allocating specifically to low-volatility stocks, but by targeting low volatility in portfolio construction. Lazard’s process identifies low-volatility companies with attractive fundamentals. Quality – Lazard’s take on “quality” compares a company’s (paper) earnings and (actual) cash flow. Accounting rules and the market’s short-term focus may put undue emphasis on the former, whereas an analysis of a company’s cash flow may provide a more accurate estimate of its earnings strength. Growth – While “momentum” is a growth measure determined by share price, the “growth” factor considers a company’s financial statements. Lazard’s approach is designed to identify stocks that are well-positioned to experience above average growth in the future. Multi-Factor Advantages Multi-factor investing offers the advantages of diversification and flexibility. Although individual factor indexes have outperformed since 1988, returns are cyclical and different factors outperform at different times. Diversified multi-factor investing thus works to mitigate volatility, which can limit account drawdowns. Multi-factor investing also promises the benefit of flexibility, wherein outperforming factors can be emphasized. Single-factor and passive cap-weighted investing has no such flexibility. Lazard boasts of its own “multi-factor pedigree,” with “a set of balanced style criteria” that have been researched and refined over the past two decades. The firm has been implementing multi-factor approaches in live portfolios over the entire in period, in a variety of global-, regional-, and country-specific scenarios. In fact, Lazard was doing smart beta before smart beta was even known as smart beta – Lazard used to call it “quantitative” or “systematic” investing. “Not all smart-beta strategies are created equal,” according to Lazard, and in the firm’s opinion, exposure to several factors provides far greater consistency of performance over both the long- and short-term. Lazard’s own multi-factor strategies have “the benefit of the skill and long-standing experience” of the firm’s multi-factor selection, combination and diversification, as well as ongoing research and risk monitoring. For more information, download a pdf copy of the letter .

Focus On Less Leveraged Companies When The Markets Get Squirley

By Eric Bush, CFA, Gavekal Capital Blog 2015 is looking like one of those years in the stock market where it feels like investors have wasted a lot of time and effort for nothing. We have undoubtedly had a lot of ups and downs, both literally with stock prices and emotionally for investors, and all we have gotten in return is a market that is basically flat (intraday, the S&P 500 is a whopping 48 bps higher YTD). We all know that even in a flat market, however, there are pockets of the market that have done well (i.e., growth counter-cyclicals ) and that have performed poorly (hello to energy stocks and to our friendly neighbor to the north ). For investors who think a more volatile market is here to stay for 2016, it may be helpful to focus their attention on companies with less leverage. This strategy paid off in 2015. In the scatter plot below, we plot median YTD performance (y-axis) against median long-term debt (LTD) as a % of total capital. We are looking at industry groups for both emerging market and developed market companies. As you can see, companies with lower overall levels of long-term debt as a percentage of its total capital tended to have higher equity returns this year. In fact, if we look at equity returns over the past four years, we see that this relationship continues to hold. We would be surprised if in 2016 more liquid companies didn’t continue to dominate their more leveraged peers. (click to enlarge) (click to enlarge) (click to enlarge) Disclosure: None.