Our Investments Fall Into Two Buckets

1. Tactical (Technical)

For these trades, we have a specific price target to take profits, and a stop to protect our downside. In simple terms, we try to pick stocks/ETFs that have the highest chance of going up in price.

2. Strategic (Fundamental)

Occasionally, we believe we have an insight into a company or theme and are willing to make a five to ten-year investment to see if we are right. We are looking for businesses that have the potential to dominate their category and create a product or service that is not easily replicated. This analysis is more qualitative in nature. 

To help us analyze the fundamentals, we use three frameworks from Warren Buffett, Peter Thiel, and Geoffrey Moore. 

Read about them here.

A quick word about Technical Analysis (TA)

No one can agree on what technical analysis is. Therefore, it gets dunked on and dismissed by a large swath of investors.

In our view, it shows you, visually, where buyers and sellers have shown up in the past. That's it. It's just a tool. When people say it doesn't work, they're right, it doesn't work; ALL OF THE TIME. But neither does any other form of analysis.

Technical analysis helps us to (i) Find favorable risk/reward setups. (ii) A place to exit if we are wrong. And (iii), a place to take profits. That's it. Nothing complicated.

In addition...

Technical analysis travels across different investing styles. Two of the most popular factors for quants are Value and Momentum.

In the TA world, we call Value "buying at support," and Momentum, "buying breakouts." Of course, it's not that simple, but that's the general idea.

And unlike quants who diversify across hundred of stocks that fit the Value or Momentum profile, we use TA to curate the stocks we think have the highest ceiling. In other words, instead of a 200-300 stock portfolio like quants, we choose the 20 names we believe offer the best risk/reward.

We expect companies to adapt to changing environments, why not investors?

Just as we expect companies to adapt to changing environments in order to stay competitive. We too must adapt to the current market reality. Not what we want that reality to be.

TA helps us do this. It helps us to remain flexible, so we are agnostic to whether value, growth, or momentum is the flavor of the month. We don't care.

We want to invest in mispriced securities, whether they are value, growth, or momentum. And we believe a combination of fundamental and technical analysis will help us do this best.

In the future, we believe data/quants + human judgment, will produce the best results. And that is what we are working towards.

Our Two Model Portfolios (Coming Soon)

Macro Portfolio

  • Objective: To construct a portfolio using index, sector, sub-sector, and international ETFs that will outperform the S&P 500.  We will hold between 5-10 ETFs; equally-weighted.
  • Strategy: It's a mean reversion strategy. We use technical analysis to time our entries. We have specific price targets to take profits, and a stop to protect our downside.
  • Time frame: One-year minimum. We will hold until we believe the upside potential is limited.

Long-Only Equity Portfolio

  • Objective: To construct a portfolio using large & mid-cap stocks that will outperform the S&P 500. We will hold between 10-20 stocks; equally-weighted.* 
  • Strategy: We use both technical and fundamental analysis. We believe the best trades will be when the two align.
    • We try to avoid: Bad balance sheet companies in dying industries, going through disruption. Although sometimes, stocks in this group can have hair ripping rallies, as the market, being forward-looking — becomes less pessimistic — and re-rates them higher (i.e. assigns them a higher multiple). 
    • Our preference: To buy category leaders that have macro tailwinds at their back and have fallen because they didn't meet the lofty expectations foisted on them by investors. But in the end, still have the potential to remain one or two in their category and sell a product that is not easily replicated.
  • Time frame: One-year minimum. We will hold until we believe the upside potential is limited.

*Like we mentioned at the top of the page, occasionally, we have an insight into a company we believe has the potential to be a top 100-200 company in a decade. If so, we will put on a larger position.

How we (You) Can Win

We run concentrated portfolios. Therefore, they will have greater volatility than traditional portfolios that hold hundreds of names. We believe this is a trade-off we must make in order for us to achieve above-average returns.

In addition, investing ideas are not evenly distributed throughout the year. Most of the time, we will be sitting on our hands; waiting for our FAT PITCH.

In the end, we believe concentration, patience, taking a long-term view, and a willingness to be flexible, key to outperforming in today's environment.

 

Happy trading:)

Caleb