Are You Smarter Than Advanced Systems a Group Monkey? Course Syllabus 1
Questions from Last Week? How Are Our Stocks Doing? 2
Question of the Day What s the Difference Between Mid-Cap and Equal-Weight? Might Be Better To Use EW? Market Cap Weight 38% Equal Weight 3
Investing Strategies If you want beta, go with passive ETFs or income generating strategies. If you want alpha, primarily use active & other sector rotating strategies (aka. smart beta). You can build your own smart beta portfolio simply by combining passive ETFs, sectors, styles and factors. Equal weighting different sectors (or factors) gives you more of a value tilt! Getting a Directional View Before Investing 4
The Investment Hierarchy Asset Class Geography Sector The New Active Investing It s no longer about picking stocks You can be asset class-, sector-, industry-, geography-, income- or style-oriented 5
Caveat Emptor Before investing in a fund, determine the fund s relative and absolute risk. Beta measures sensitivity to the return of the overall market (magnitude of the relationship). Standard deviation measures variation in return for an stock or fund no matter what the cause. It is important to note that a low beta for a fund does not necessarily imply that the fund has a low level of volatility. A low beta signifies only that the fund's market-related risk is low. Standard deviation is a measure of a fund's absolute volatility. Risk & Uncertainty (or investing in your retirement years) Risk is not volatility. It is drawdown (loss of capital). However, in the short term, volatility is a reasonable proxy for risk. But over the longer term, drawdown is a much better measure of risk. Volatility does contribute to risk but it also contributes to market gains. 6
Measuring Risk Source: http://investspy.com Risk & Reward 7
Why Sector Analysis Advanced is Systems Group Helpful 1) Monitor sector to determine if it is following a seasonal pattern 2) Out of 200+ industry groups, determine which ones are at optimal entry points 3) Now look at the leading stocks in those sectors and industry groups Look at Short Interest, ROE and Current Ratio. 4. Or, invest in the sector itself! It s a Three Step Process (or Top Down Analysis) 1. Macro-Economic Analysis: You must start with the big picture here. This means considering and determining where the global economy is in terms of the business and credit cycle. 2. Sector Analysis: After you determine where we are in the big picture cycle, you will then have to narrow down what sectors are best poised to thrive in the current, and more importantly the upcoming, economic environment. 3. Peer Group Analysis: After you narrow down the list of sectors you want to focus on, it s time to start comparing companies within the same industries in an effort to determine which one offers the best potential return for your investment. 8
Versus Bottom Up Analysis 1. Company Specifics: At its core, bottom-up analysis is not concerned with where we are in the macro cycle or what sectors are poised to thrive. Instead, bottom-up analysis is concerned solely with a company s specific fundamentals. For income investors, this includes focusing on how long a stock has been paying dividends for, years of consecutive increases, and the average annual rate of those distribution increases. Different Equity Asset Classifications Styles & Size Sectors & Industry Groups Loosely referred as an asset class, there are an infinite number of ways to slice and dice the universe of stocks and bonds to create a subset or trading basket. For instance, you could have high-yield bonds issued from companies in the energy space, emerging market healthcare stocks, or dollar-hedged European stocks. 9
Why Sectors Matter Stable, But Sometimes Weird Amazon (AMZN) is in the discretionary sector (XLY). But AMZN is the top holdings in QQQ? Walmart (WMT) is in the consumer stable sector (XLP). And Target (TGT) is in the consumer discretionary sector? Exxon Mobil (XOM) is in Basic Materials on Yahoo Finance. 10
Low Correlations Opportunistic Investing 11
What are the Sectors? Now There s 11 Sectors 12
Remember Sectors Are Advanced Very Systems Group Wide Sectors & Industry Groups 13
And Sub-Industry Groups You Might Also Consider Telecom XTL, VOX Regional Banking KRE, KBE, IAT Biotech XBI, IBB Real Estate XLRE, VNQ, VNQI, SCHH Aerospace and Defense ITA, PPA Retail RTH Pharmaceutical -- PJP Gold GDX, GLD, NUGT Internet FDN, PNQI Oil XOP Semiconductors SMH, SOXL Construction ITB, XHB Insurance KIE Natural Resources IGE, PHO, NANR Mining -- PICK 14
Why Care About Sectors? Small Group Outperforms Large Group Underperforms S&P 500 +12% 10 15% stocks will perform market returns and only 10% will outperform. Stocks Will Rotate From Outperforming to Underperforming Stocks Can Rotate Between Being in Favor and Being Out of Favor S&P 500 +12% Margin of safety should always be on the top of your investment list. 15
But How Do You Find the Top 25% of Stocks? Single Stock Alternative 16
S&P 500 Sector Performance It s Why We (Should) Rebalance Asset allocation doesn t work without diversification; Which doesn t work without rebalancing; Which doesn t work without mean reversion. Make sense? This forces you to take profits and reinvest them at lower prices. Another example of buy low, sell high. 17
Sectors and The Economy Cyclical Correlations Lower Than Style Boxes 18
Check the Weighting! If You're Going to Stay in the Market You are not going to catch a wave if you are not in the ocean The percentage of days (in a year) that contribute to the trend is 12 to 13%. The remaining price movements are either sideways or counter-trend. Ergo, be in the market with strong *safe* sectors 19
What I ve Discovered Economic forecasting is fruitless The economy doesn t always dictate how the stock market will perform Stock picking is hard (and risky). Sectors are generally *safe*. If you make a mistake, they often will mean revert They all pay dividends! Be clear on your weighting strategy. Use equal weight for small and mid cap exposure, or for less exposure to top names in the index (e.g. XLE or XLY). Market cap weight for momentum and dividends. Major Factors 20
Evolution of Factor Analysis Factor Tilting 21
Sector Surfing Find the directional bias for any given sector. For example, find the strongest sector using trend analysis and relative strength. Trend analysis uses moving averages, trend lines and/or channels. Relative strength compares the performance of a sector (or stock) to the market (or to another stock). Pick the strongest sector or the strongest stock in that sector (or weakest depending on your directional bias). Having a Directional Bias 22
Need to Gather Intel Demonstration 23