Frequently Asked Questions

If you had to state the core element of your invest philosophy what would that be?  Our investment strategy is centered on the belief that investors are not risk adverse they are loss adverse.  Ask any investor what their acceptable risk level is and most will have a hard time saying what that is.  Ask them what their loss level is and they can answer it in a matter of seconds.  The old concept of managing risk simply by being fully diversified across all asset classes does not matter to a client who only cares about minimizing losses especially in a period where asset classes are becoming more and more correlated.  One only has to look at what happened in 2008 to understand all asset classes lost more value than their standard risk profiles predicted.  The only asset class that did not was cash.  Our strategy is to manage those loss levels.  We provide our clients an ejection mechanism so when the plane starts to go down making non-correlated asset classes very correlated nullifying diversification they can get out.  

Describe your investment process and how this makes you different from your peers?  Our tactical asset allocation strategy is a proactive management style that is focused on limiting client’s downside losses first and maximizing client’s exposure to strong market performance when risk is favorable. Our goal is to avoid big losses in down markets so we are not spending most of our time and taking bigger risk trying to recover back losses.  If we protect against big losses we can spend more of our time while taking less risk to increasing our longer term return.   We rely on a core set of technical data to alert us to any activity that may put an investor’s portfolio at risk.  While we do factor fundamental data into our decision making process we rely on our model and technical data to prevent human emotions from clouding our decision making process.  The two factors that really differentiate us from our peers is our proactive approach and the fact that we will move to 100% cash if risk levels in our indicators tell us to do so which may not match investor or market sentiment. 

Why do you feel minimizing losses is the most important factor in your investment strategy?  In a longer term bear market, which we strongly believe we are in the midst of, the ability to minimize investor’s losses will help achieve greater return over time than a portfolio manager who has really strong up years.  The reason for this is if you limit your losses not only does it take less to get back to even and start making positive gains in the portfolio again but you can do so while being less aggressive than a manager who has to make up for huge losses just to get back to even.  For example, if you limited your losses to under 10% in the market crash of 2008 then you only needed to achieve a gain of almost an equal amount to get back to even.  However, once your losses start to increase your requirement to get back to even exponentially increases to the point that if you lost 50% like some investors did in the ’08 market crash then you need to make 100% to get back to even.  So even though the market rallied over 70% from the March 2009 lows within less than 2 years it takes most investors still need an additional market gains and a longer time frame to get back to even.  Definitely not as realistic as the first scenario of where you only lost 10% and needed a little over 10% to break even.  This clearly shows it does not matter how significant your gains are in bull markets if you end up giving it all back in bear markets.   

Are you a fundamental (qualitative) manager or a technical (quantitative) manager?  Our investment management approach is driven by blending a top down macro economic view to understand longer term implications with a bottom up quantitative analysis utilizing technical tools to drive our tactical investment decisions.   The top down view is simply meant to understand the longer term picture of the economy and political environment and how it can affect the markets and specific asset classes.  This provides us our overall framework to work within.  This is a global viewpoint that takes into account international and not just domestic markets.   The bottom up view is the main driver of our management approach.  Various technical tools allow us to gauge risk levels in the markets to determine our overall exposure and then other tools allow us to focus on which asset classes, styles and sectors are showing the most strength.   This means we do not have exposure to areas of the market that are weak simply to satisfy Modern Portfolio Theory diversification.   So in simple terms we are driven by our quantitative approach but utilize our fundamental analysis to keep us within certain boundaries or tell us when we need to do some additional homework when we see a divergence take place.   

How do you help protect investors from downside risk and minimize losses?  We have two key technical indicators that we watch on a daily basis to alert us to risk levels and overall directional trends in the market.  The trend indicator tells us if the market is in a confirmed positive movement and we can be on offensive or if the trend is in a confirmed negative movement and we need to play defense and protect our portfolios.  We view risk levels in 3 zones. Green indicates risk is very low and if the trend is positive we can move through the traffic light (into the markets) safely by adding investments into equities.  Once the risk level moves to yellow and still in a positive trend we can continue to increase our equity exposure as we approach the intersection but we need to be reviewing our holdings to see if changes are needed.  Once the risk level moves to red we need to come to a stop and move to the sidelines by reducing as much risk in the portfolio as possible.   The most important factors of our downside risk protection is we believe having a sell discipline in place is far more important than the actual purchase of an investment.  Having a set exit point on every purchase allows you to determine up front how much risk you are willing to take on.  This helps provide a safety net across the whole portfolio so if the market falls apart like in 2008 there is a net in place to limit just how far you fall.   

How do you know where to invest when you feel the market is safe?  The two most important factors of our investment process is that we are proactive tactical managers and momentum (relative strength) driven.   This means we are constantly assessing (ranking) the markets and our individual investments to determine are we holding the strongest investments.  If an investment we hold has weakened and another investment we do not hold has strengthened we will make a change in the portfolio.  We first perform some fundamental analysis to reduce our area of focus and time frames.  Our ranking is based upon relative strength which simply determines where the big (smart) money is moving in and out of the market because we want to follow that.  Investors have to accept that today the smart money (institutional money manager, hedge fund managers and pension fund managers) control about 80% of the market movement.  A large percentage of their trading is being conducted by computers that rely on pre-programmed algorithms that some very smart mathematicians, physics and others have spent hundreds of millions developing.  We are not looking to outsmart them but we can put a flashlight on where their money is moving into because we want to be there as they drive the prices higher.  Likewise if they start to pull money out then we want to get out before the price really starts to fall apart.  Relative strength is a very simple formula that provides an early indicator to this movement.   

How much trading activity occurs in your account? We are not day traders or high frequency traders.  While we are active managers and make changes as the markets change we look to minimize trading activity.  Our goal is to stay invested as long as our indicators tell us the risk levels are appropriate.  However, if we get warning signals we will move to 100% cash and only reinvest when the risk levels are safe again.  This can cause 100% turnover in the portfolio.  Another reason we like relative strength is it is focused on intermediate to longer term trends which limits the movement of investments.   

Can the average investor implement your strategy?  In theory they could as we do not rely on any black box formula or proprietary models.  We believe in not trying to boil the ocean by following so many indicators and tools that it becomes difficult to manage.  We believe in following a few key indicators and following a simple methodology.  Most of our risk measures and technical tools we rely on are available to the public.  Where the average investor may have trouble is determining how to combine the different tools to follow the methodology.  We also believe it is very hard for the average person to follow a rules based decision methodology and not let their human emotions get involved.  If this were the case most investors would be able to achieve the performance of the top mutual fund managers they invest in.  However, in most cases they let their human emotions control their decision making process and buy in at the top when greed is in control and then sell at the bottom when fear takes over.  We are very disciplined in following our methodology to enable us to take profits when everyone is becoming greedy and be safely sitting on the sidelines (in cash or fixed income) before fear and panic take control.   

You talk about a simple 3-step methodology.  Can you explain that?  While its true that no one can predict the stock market, there are technical tools that let you measure risk levels within asset classes to determine when it might be appropriate to gain exposure for maximum growth or when risk levels suggest limiting exposure to minimize possible losses.  Our three part management approach assesses these conditions on an ongoing and proactive basis to make adjustments in portfolios to match market conditions as they change.   

Step 1 – Our first step is to gauge the market trend and risk levels utilizing a few key technical analysis indicators to determine whether the market is in a confirmed uptrend and we can be on offense or when the market is in a definite downtrend and we need to be defensive.  We review this daily and adjust our exposure to asset classes accordingly. 

Step 2 – Our next step is to identify asset class leaders and individual leaders within those asset classes utilizing relative strength technical analysis.  We believe you have to implement fundamental analysis to limit your focus but utilize technical analysis to drive the final decision since studies show that today approximately 15% of a stock’s movement can be attributed to its fundamentals.  We believe utilizing relative strength as a core technical tool allows us to only give exposure to those asset classes, styles or sectors that are performing and avoid exposure to those that are underperforming the markets.  Unlike modern portfolio theory that demands exposure to all areas to diversify risk we believe risk should be controlled more actively and directly through ongoing exposure management.   

Step 3 – Our final step is our well defined systematic sell discipline that removes emotion based investing from the equation.  We have always believed buying is the easy part and where most people lose their gains is in not knowing when to sell.  We strongly believe in having set exit points on all positions owned to reduce exposure when asset classes or overall market conditions weaken to allow us to take on a more defensive position. Not only does this allow us to protect profits but it provides a safety net to our investor’s portfolio. These safety measures may result in missing out on short term market gains but are critical to allowing us to satisfy our primary goal of avoiding big losses when markets turn bad.  This is why it is also critical in Step 2 to only invest in areas of relative strength to help capture as much market return as possible when equity exposure is warranted.  

What do you think are the most critical points an investor needs to understand about investing today?  The most important point that an investor has to accept is we are no longer in the secular (long term) bull market that made up the 80s and 90s.  We are probably about halfway through a secular bear market.  Once you understand this you have to accept that strategies that thrived in long term bull markets such as buy and hold, modern portfolio theory and the efficient market may actually hurt you in a long term bear market.  Now that we are a global economy events that happen halfway around the world have an immediate impact on us and vice versa.  This means that high impact events that cause market crashes are happening more frequently and asset classes that were non-correlated and provided protection during these times are now very correlated and can hurt you. The other critical point to understand is the shift of the markets from being fundamentally driven to a technically driven market.  This does not mean you cannot be successful through fundamental investing but you need to have a long term view and the ability to withstand large drops in the value of the investment and overall account.  With high frequency trading controlling market movement and volume investors need a different strategy and we believe we have developed a successful approach.