January 2014 Review

Portfolio Update 
- Technical Book:  As discussed in the recent portfolio update, the technical book.  All 3 of the indices (S&P 500, Dow and Nasdaq) have had long-held buy signals (since late-2011) and though they’re all close to final legs for this bull-run, it was decided that positions would be taken.   Since Mr. Market appreciates irony, initial sell-signals came later in the month for both the S&P 500 and the Dow.  While this would normally have resulted in Our Man cutting back the positions to their cost basis, it was unnecessary in this instance as the positions were at their cost basis.

- NCAV: The position in Radioshack was exited, as it had been in the portfolio for a year since it last met the criteria for the NCAV book.

Performance Review 
January was a positive month for the portfolio, which posted a marginal (+22bps) gain despite markets falling and a large move away from risk.

Given the sharp fall in the markets, it wasn’t surprising that the largest positive contributor was the Puts/Hedges book (+91bps) which benefited from the exceptionally week equity performance in Japan and especially Brazil.  The Absolute Return Funds (+30bps) book also benefited from the flight to safety, with both Treasuries and Gold helping the performance.

The Equity-biased books were largely negative contributors during the month, with the International/Country book (-38bps) suffering from its exposure to both Greece and Spain.  With all 3 major US indices (S&P, Dow and Nasdaq) losing money for the month, the Technical (-74bps) book began life as a negative contributor.  Things on the stock-specific side were somewhat better; the Equities book contributed (+30bps) despite a falling market, after DRWI showed incremental signs of the much hoped for growth in its wireless deployment and THRX saw some management present and some marginally positive news.   The NCAV (-5bps) and Energy Efficiency (+1bps) books are pretty small, and thus had marginal impact.

Despite the fall in the markets, the US Dollar failed to make much headway.  The Currencies book (-17bps) was hurt as the detraction from the Yen’s strength outweighed the contribution from the Dollar’s strength against the Euro.  The China Thesis book (+3bps) was marginally positive as though the weak news from China saw the A-Shares struggle, it also saw the Australian dollar weaken.


Portfolio (as at 1/31 - all delta and leverage adjusted, as appropriate) 
18.4% - Technical (DDM, SSO and QLD)
17.3% - International/Country (GREK, EWP and EWI)
13.6% - Bond/Absolute Return Funds (DLTNX and HSTRX)
7.9% - Equities (THRX, and DRWI)
0.6% - NCAV Equities
0.2% - Energy Efficiency (AXPW, and XIDE)   

-8.5% - Hedges/Put Options (premium of 141bps in EWZ Jan-15 puts, and 30bps in EWJ Jan-15 puts)  
-13.8% - China-Related Thesis (CROC – Short Australian Dollar, partially offset by CAF – Long Chinese A-Shares) 

-49.6% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

13.1% - Cash 

Disclaimer:  For added clarity, Our Man is invested in all of the securities mentioned.  He also holds some cash and a few other securities (of negligible value).  You should not buy any of these securities because Our Man has mentioned them, but should do your own work and decide what’s best for you.

2014 Portfolio Update: Some small changes

With 2013 representing the second consecutive flat year for Our Man, it made sense to spend the holiday period thinking about whether any changes should be made to the portfolio and the best way to go about these.  The result was two-fold; the first is purely cosmetic with the renaming of some books such that they better reflect the types of investments within them.  The second is a little more structural; as I’m sure you’ve noticed Our Man tends to be somewhat underinvested and the reality is, this is merely a reflection of personality.  Simply put, OM is a cynical and curmudgeonly fellow, and a result of this is that he’s skeptical of the world and thus typically underinvested.

How to combat this perpetual underinvestment is something Our Man has been pondering for a while.  Ironically, the answer partially stems from an existing book; the NCAV book takes a fairly simple (and mainly) quantitative approach to valuation (see here for some initial description). As a result, the book should have a large exposure when markets look “cheap” (i.e. lots of stocks pass through the NCAV book’s screens) and very small exposure when markets look “expensive” (like now!).  This gave Our Man the idea to incorporate a l-only Technical book, which will be driven by when the technicals and market psychology, typically having positions when these factors suggest that we are in long-term (expected multi-month to multi-year) bull market run and otherwise having no exposure.

The Technical Book
Our Man has been a follower of Objective Elliott Wave (OEW) theory for the last 6-7yrs, and has been learning to become a practitioner of OEW over the last year or so.  The problem with most technical analysis is that it’s often used to justify the analyst’s subjective views, but hopefully Our Man’s experience will be different as OEW takes an objective approach to the Elliott Wave principle which “posits that collective investor psychology, or crowd psychology, moves between optimism and pessimism in natural sequences.”

Our Man’s idea is to use this OEW on the Long-side, to help capture the longer-term trends in the market, and primarily those within bull markets.  As such, this ‘book’ would have been L for most of the last 5 years.  Hopefully, Our Man will also benefit from his observation that bottoms in markets tend to be points, whereas tops tend to be longer processes.  The broad rules for entering and exiting positions will be as follows:
- OM will track the Dow, S&P 500 and Nasdaq using OEW, and will use the double-levered ETFs to invest in those (to get some capital efficiency and compounding benefits, which will be very beneficial…assuming the technical book works!)
- Entry: OM will allocate approx 3.33% to each ETF when the technical model says it’s a long-term buy (i.e. 10% at cost, max)
- Exit: OM will cut the position back to the original 3.33% size (if it is already below this size, then there will be no change but OM will note in his monthly update) when an initial technical sell signal is hit for the relevant ETF, and will exit it completely if the signal is confirmed (typically, this occurs after the market has already declined to some degree).  In instances where the signal is not confirmed (i.e. the market reverses and continues higher) then the book will run with the existing position (c3.33%) until a new initial exit signal (where OM will again reduce the existing position and exit the balance on confirmation).

The Existing Books: Update

With regards to the other “books”, it makes sense to take this moment to clean the existing ones up a little.  If we step back, the idea behind the various "books" is to help compartmentalize the various types of investments that Our Man makes.  Having been writing this investing diary/blog for a couple of years, it's become clear that in some cases the book names don’t really encapsulate the trades within them.

For most of the existing books there’s absolutely no change as the names effectively express the types of investment that are made in those books.  Thus expect the Currencies, Absolute Return/Bond Funds, NCAV, Puts/Hedges, or any of the theme specific books (Energy Efficiency, China Thesis, etc) to carry on.

Elsewhere, three of the existing books are having their names changed slightly to better reflect the types of investments within them.
- The Value Equities book is becoming the Equities book; while the book will continue to house long-term (i.e. multi-year) positions in individual stocks (including both US-based and international companies with a US-listing or ADR), the more generic name reflects that not all of these will be driven by old-school value. 
- The Other Equities book is becoming the International/Country book, which reflects that it is where all of the macro/CAPE/etc bets on Countries (and perhaps Regions), expressed through ETFs, are and will be housed.
- The Precious Metals book is becoming the Commodities book, just so it’s all encompassing should Our Man ever own any other commodities.