What's Working Today? And Why Not Cutting Bait.

Someone made a comment earlier today re: moving out of stocks that had broken trends in sectors I am favoring. For those following along at home, but not reading the comments my response was in a general sense, running a mutual fund is different than how I'd treat say a hedge fund or a personal account. One example I used was Blue Coat Systems (BCSI) - just a few short weeks ago this stock broke its 50 day moving average, made a run back at it (from below) and failed - this was around $40. In my better safe than sorry vein I sold 1/3 of this very large position (500 of 1500 shares) In the interim the stock has dropped to low $30s (but what hasn't). In a personal account or a hedge fund with active trading you'd probably dump the whole position and come back later once it has put in a bottom. Same could be said for some of the stocks weakening of late, especially today. But I am trying to take a more mid term perspective with this fund - I try to keep a core in positions I like in the long run and then trim them back when they are really doing well, and buy more when they fall to major support levels. Even simply by doing that, I show a much larger than normal 'turnover' ratio than the typical mutual fund so hence this is not the type of fund you'd prefer to have in a taxable account since gains are distributed and taxable at year end.

But if I went to a full bore trading strategy (which again is not suitable for this type of vehicle) I'd be cutting positions much more wholesale and making much more aggressive short term moves. For example, last week I was a day early and bought Nordstrom (JWN) since retailers were seemingly washed out. This is a non typical 'trade' since 90% of positions here are longer term in nature (even if I add/remove from the edges of each position). But as of Friday you could see financials were stable as were retailers. So in a hedge fund where you are actively trading you'd go (for a short time) into a heavy long position in these names due to their relative strength in a terrible tape. But obviously I am not doing that here, and even on this 7% pop in Nordstrom I took it out of the fund (my goal was mid $30s+), and pushed the money into positions I feel comfortable holding for months/quarters. So it is a different mind set and time frame. There are quite a few things I see each week that I cannot take advantage of. For example, on the short side I mentioned Coach (COH) and Polo Ralph Lauren (RL) back in August as shorts, I mentioned restaurants ex Chipotle (CMG), in the recent mania I mentioned Macau flavored casinos as looking rich, dry bulk shippers overextended (Dryships is down 40% from peak), and last week solar stocks as in full mania. So these are all very good offsets to long positions that would of led to a lot of outperformance but 99% of funds cannot short and Marketocracy.com funds can only be 'long only' or 'short only' - thankfully we have UltraShort ETFs but they are more blunt tools, rather than fine instruments.

So overall, timelines have to be longer with a mutual fund, and precision is lacking to some degree, especially on the short side. Many opportunities are just not available since you are essentially long only or at least long 'mostly'. With that said, as I wrote late last week and this weekend, retailers and financials are overdone - there will be a time to be negative again but for now some of the leaders? Try Coach and Polo Ralph Lauren :) There will even be a time to buy these sort of stocks for a fund like this where the time frame is longer than a week or two; just not yet. In all my missives about Coach I have tried to end it with "I really do like Coach in the long run" etc. But in general, other than my UltraShort hedging, I am trying to avoid any holding periods that are quite that short (a few weeks or less) with the vast majority of the fund.

Again my mission here is to see if I can beat what the vast majority of funds are doing, by playing by 'their rules'. So while I might see some great short term opportunities I usually will only blog about them in a general sense i.e. 'this mania is getting long in the tooth in ABC sector' or 'retail stocks sure look washed out'- since taking advantage of the very short term dislocations in the market is not playing along with the theme of what a typical mutual fund can or will do. Does that hurt performance? Yes. But that's a function of the system, so I am trying to stay within that framework.