Thursday, December 1, 2011

Investing Philosophy

I've updated my investing philosophy in a more comprehensive manner (see here)

I like to call the fundamental strategy, core & edge. Keep core positions and trade around the edge.
  1. At heart I like solid fundamental stories showing excessive growth (bottom up analysis); which generally leads me to mid caps or larger small caps.
  2. Use macro economic views (top down) to focus on what groups to favor or disfavor
  3. I use simple (basic) technical analysis to hopefully provide entry / exit points
  4. I have both long and short positions; the weightings are based on viewpoints of the market at the time
  5. Cash is not evil; it is an effective tool in bear markets
  6. Time frame is dependent on the type of market - I tend to be a trend trader and like to focus on relative strength. Keep a close eye on all aspects in 2013.
I'd highly recommend subscribing to and reading the Daily Market Recaps on for daily insight and reviews. If you are looking for an online broker to open a new account, secondary trading account, or roll over your 401k to an IRA then has in-depth broker reviews and tools. You can find some of the bigger firms on there like the TD Ameritrade review, ETRADE review, Scottrade review, TradeKing review, OptionsHouse review, optionsXpress review, and tradeMONSTER review.

I wrote my original six item philosophy nearly 3 years ago and had never updated until now.  For those interested in something fleshed out better I'm bringing over a portion of the new website called 'Investment Process' which hopefully better explains the thinking behind the 40,000 foot strategy.  Those who have been reading FMMF day after day, month after month will be able to figure it out just by watching in real time but for those newer or who visit the site less often here is what I have.   It is a bit wonky, but it is difficult to describe something to an audience compromised of anyone from (a) very little exposure to markets to (b) sophisticated traders - and everyone in between, so hopefully it strikes a balance and is generally understandable to all audiences.


Unlike many mutual funds which hold 75-250 individual positions, the Fund will generally contain a portfolio of 25-35 positions.  In terms of size of company, the fund will usually focus on equities in the $250 million to $25 billion market capitalization range, although some exceptions will occur.   A portion of the portfolio will be reserved for 'long' positions (those that benefit from rising asset values); against this a portion of the portfolio will will either be held in cash and/or 'short' positions (those that benefit from dropping asset values).  Exchange traded funds (ETFs) that focus on commodities, currencies, broad baskets of stocks, or bonds also are utilized.  Through this mix the fund's intent is to be relatively uncorrelated with the general market on a day to day basis.

Decisions on what proportion of the portfolio should be invested in the market, and which specific securities are utilized, are based on a three pronged approach
  • (i) 'top down' macroeconomic analysis
  • (ii) 'bottom up' company and sector analysis, overlaid with
  • (iii) technical analysis.

Taken individually:
  1. Top down macroeconomic analysis entails an assessment on general economic trends.
  2. Bottom up company or sector analysis focuses on finding secular or cyclical themes both within a broad sector of the market, or specific companies.
  3. Technical analysis (also known as 'charting') is a discipline for forecasting the direction of prices through the study of past market data, primarily price and volume.

More specifically a framework of how to position the portfolio in terms of broad weightings is based on a combination of macroeconomic analysis and index technical analysis; the latter focusing on the S&P 500 and NASDAQ.  Individual stock selection for the long side of the portfolio is based on secular or cyclical growth opportunities, combined with relative strength characteristics within the technical analysis realm.  For the short side of the portfolio, vulnerable characteristics in either the fundamental story or technicals will be the focus.  Further, broad index positions in investment vehicles - via ETFs or options - that focus on either the long or short side of the market will be part of the portfolio, either as supplements to core positions held, or as hedges against core positions held.

In general, most positions will be incrementally built up or reduced, leading to higher than average turnover rates.   The average holding period of positions is completely market dependent.  Some positions may be held over a multi year time frame, others multi months, while some may be multi week.

Disclaimer: The opinions listed on this blog are for educational purpose only. You should do your own research before making any decisions.
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