Below, we explain rate of return, the importance of active investing and absolute return benchmarking as used here at Signals Matter.
Yes. Every day. And this Blog explains how we do it at Signals Matter.
Just as a refresh, rates of return are driven by the nature, scope and level of risk control we apply to a particular investment strategy. Generally speaking, investment strategies fall into two camps: active and passive.
Here’s how they differ. Active investors generally seek returns against an absolute return benchmark, let’s call it 5%. Passive investors generally seek returns against a relative return benchmark, such as the SP500 Index.
Passive investors that buy and hold stocks for the long term expect returns that mimic the SP500 Index, their relative return benchmark. Risk and return of the SP500 is beyond their control. If the SP500 is up 20%, great; the investor should be up 20%. As well.
But if the SP500 is down 50%, as it was in 2008, not so great – the investor is down 50%, requiring a 100% move up just to break even. There is no risk manager employed across town at the SP500 offices.
By the way, if you think buy-and-hold, passive investing is a good idea (and there is plenty of support for the idea that it used to be a good idea), we’d ask you this: Would you want to buy and hold at a market peaking? At a top (perhaps not the top, but definitely a top) of a bubble?
We recognize the past statistics that favor passive investment results, but in today’s conditions, and depending on your age or ability to wait out a pending recession, it may be the very worst portfolio decision you ever make.
If you want to buy-and-hold, fine, But please, at least wait for a market bottom rather than this market top to make your entry. Everyone knows the adage: buy at bottoms, sell at tops. But our experience confirms that almost no one does this…
Herds of investors are now chasing return, passively going long ETF’s with their eyes on return and ignoring risk. We’ve seen this movie before; we all know how it ends…
It’s been a nice run, a great run, but quantitative tightening, lies just ahead, which, along with a myriad of other market triggers and landmines that demand active (rather than passive) attention, portends a higher-risk outcome for investors.
We like to narrow the risk in investing and not hang out for whatever the market brings – especially now.
First, we only invest actively.
Secondly, we signal our investments based upon our expected return, which we figure out ahead of a trade, not our post-trade rate of return. Our calculation of expected return precedes every investment signal we post in the Subscriber-Only segment of Signals Matter (launching publically in mid-November). Our rate of return is what we achieve when the trade is over.
Yep. We’re kind of greedy here at Signals Matter.
We’ll take no investment signal that does not have a chance of making at least 5% over a relatively brief time frame of a few weeks to a few months. That’s our bogey, our ‘absolute return’ benchmark. 5%. That’s it. That’s what we expect to make per signal.
Because behind the scenes, we actively engineer each signal to meet our selfishly-chosen expected return. How can we do this?
Because we’ve been doing it for decades, as former hedge fund traders, family office investors, and time spent as a Commodity Trading Advisor, as well as a Commodity Pool Operator registered with the Commodity Futures Trading Commission (CFTC) and as Portfolio Managers at Morgan Stanley.
Experience begets knowledge.
Our active management methodology is built upon a foundation of patience. We wait as long as it takes for our signals to develop, for the stars to be aligned, just as we waited last summer for the near total eclipse of the sun. ‘Totality’’ it was called. The earth and the sun had to be perfectly aligned.
My colleague uses the metaphor of a duck hunter. A smart hunter will sit for hours with a thermos, a hunting dog and a 12-guage until a duck passes. He doesn’t just arrive, point to the sky and start shooting.
In short, we wait for the ducks—i.e. the trade signals. Sometimes for a long time. But we are locked, loaded and scanning the landscape for opportunity.
And we trust our signal criteria as much as hunter trusts his 12-Guage or trusty hound. 1) Expected return, 2) sufficient momentum to achieve our 5% bogey benchmark and 3) acceptable downside risk are the hallmarks of every signal.
These must be aligned, so Signals can take some time to setup.
Here’s our outcome. Basically, our investment signals win (are profitable) 50% of the time and lose 50% of the time. But here’s the plus and foundation for our advance, expected return calculation:
When we win, we win about 10% on average per signal. When we lose, we lose about 2% on an average per signal. Doing the math, our expected return is 4% on average across all trades – a result that is just shy of our 5% absolute return bogey. Pretty good.
Trade duration at Signals Matter averages about 28 days (4 weeks, say a month) per trade. If we do 1 trade a year, we earn 4%, our actual return. If we do 10 trades a year, we earn 40% in the aggregate.
If we do 100 trades a year, we earn 400% in the aggregate – and this is what we are doing. We post about 100 Signals a year, hugely dependent upon market environments, for sure. That’s 8 new signals a month.
Pretty simple, no? We post our signals to buy, sell, sell short or buyback every week in our Signals Watch page. All you need to do is pull the trigger.
No worries. Signals Watch hasn’t gone public yet, so how could you know? Basically, it is a weekly publication of Signals Matter that showcases individual stocks and exchange traded funds that meet our rigorous technical and fundamental criteria for investment.
Why is Signals Matter important to you?
Smart investing is about living, not trading; about knowledge, not fear. That’s why we do the heavy lifting here at Signals Matter, why we signal the trade and why we manage the risk. All you do is pull the trigger, if you or your advisor are so inclined.
We built Signals Matter because we know that almost no one outside of a professional investment platform has the time, interest or resources to select, combine and derive sophisticated trade Signals as we do from our wide, essential spectrum of technical and fundamental filters.
Yet we know as well that anyone, including you, can deploy these tools if properly and simply condensed to an unpretentious and user-friendly dashboard of Signals.
To subscribe to Signals Watch (or to our Trend Watch and Recession Watch deliverables which keep an eye out for macro icebergs and opportunities ahead), visit our public Website which will go live in mid-November.
Thereafter, you can join our private community of investors eager to let their profits run, cut their losses short and generally navigate the choppy waters that lay ahead.
Be sure to visit our interim Blog site at www.SignalsMatter.com for candid talk about where we are, how we got here, where we are likely going … and why.
SIGNALS MATTER, LLC IS NOT A PROFESSIONAL OR LISCENSED FINANCIAL OR TRADING ADVISOR. NO INFORMATION OR OPINION HEREIN CONSTITUTES A SOLICITATION OF THE PURCHASE OR SALE OF ANY SECURITY. AS ALWAYS, PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.