PROTECT YA NECK
Frankly, I'm bored. This market neutral position I have adopted doesn't make for a very entertaining portfolio. I prefer acrobatics to the ballet. Adaptability is important, however. Sometimes you must be a ballerina. Other times you have to put on your Cirque Du Soleil tights.
I've been in a ballerina costume for nearly two months now. In November it has paid off. With a few days left in the month I am sitting on a gain of about 1% for November. This is important for a number of reasons:
1. It stops the bleeding that last month brought.
2. It puts me ahead of the performance of my benchmark, the S&P 500.
3. It validates my tactical asset allocation approach once more.
For those of you who haven't been paying attention or are new to this venue, there are two sides to my process. The first is to look for small-cap stocks with some type of restructuring, distressed or activist angle. I look outside of this venue from time to time, but know that in order to make my bread, I have to use the right butter. I outline all of my investment ideas via research reports, as most of you are aware.
The second part of my approach, shrouded in a bit more mystery being that it isn't highlighted as often, involves a tactical asset allocation approach that is mechanical in nature. This means that whatever personal opinion I have about the market or a group of investments doesn't matter. When the bell rings, my response becomes Pavlovian in nature, with complete and utter disregard for whatever else is occurring in the financial ecosystem.
I have mentioned many times the emotional dilemma I face from being at odds with the mechanical side of my trading. Give me a recent example, you ask? On November 18th, in a posting titled Everything Is Everything I spoke about my TZA hedge being up some 18% since I initiated the position during the first half of October. I also foretold of a turbulent path ahead for my TZA hedge that would likely create only a single digit percentage profit at the time of my exit. I pacified myself gently and came to terms with my fate, ultimately stating that, "I am perfectly fine with that."
The reason I am perfectly fine with giving up a good portion of a profit in this hedge is simple: The moment I become involved in overriding whatever system I have developed for creating consistency in returns is the moment I fail as a portfolio manager. It is the investment equivalent of hurling yourself into a black hole without any idea of where you stand. It is akin to a quarterback losing his playbook and relying on imaginary drawings of plays made on the palm of his hand before every snap. Sure, he might complete a pass or two. Over the long run, however, his offense is going to be shredded to pieces due to the lack of efficiency and proper management.
I have an undying need to know where I am in the market at all times. My system of allocation allows me to do that without any worry about a macro or micro shock taking me out of the game. I know what play I'll be running under every possible scenario, without confusion or questioning.
That's my safety net and I wouldn't be able to be an acrobat without it.
