Make the shift!

Why it is so hard to change?

Let us look at the last 10 Years.

I started to trade small caps via Portfolio123.com in 2011 on the backdrop on a stellar decade of small cap value momentum from 2000-2011. I looked at my back tests and said: I am going to be rich very soon. Well, that did not happen, what happened was a decade where growth and big caps was the place to be.

I did not shift to big cap and mid cap growth, but I build trading models in the small cap space, that outperformed via small cap value momentum in a decade full of headwinds.

I basically told myself, yes, I could buy FB, Google and Apple here (Apple had a PE of 8 in 2011!) and spare me a lot of time trading in and out illiquid small caps.

But the thing was, I thought whenever value is back, I am not only be as good as big cap growth investors, but I am going to make a ton of money.

I am not sure that was the right decision, the thing is, I simply did not have the time to shift and get into growth names, so I stayed the course with the knowing, that I will do at least not be outperformed by growth and I could harden my models in a decade full of headwinds.

But what is 100% clear to me is, that a ton of traders are now primed and hard wired for growth, high beta and crypto. By now its basically a religion (post something against a bull case of crypto on twitter and you know very soon what I mean!).

To tell you the truth, my performance the last 3 Months has a lot to do with pure luck: The fact that value and momentum has been back!

I hate to say it but stuff like the $MXC trade is partly luck!

Because If I would be really flexible, I would make money on both sides (long and short), e.g. being short ARKK names (and not short IWM which has been relative strong lately).

My take is that luck is not enough to be a very good trader.

Let us imagine the perfect factor trend trader:

·        Plays trends in the whole factor universe (e.g., value, momentum, industry momentum, growth, EPS Revisions (up and down!), quality, short term price reversal within a strong underlying trend (> 3 Months!).

·        Is aware when a factor is overcrowded (bad for performance) and undercrowded (good for performance!) https://www.msci.com/research-and-insights/insights-gallery/which-factors-may-be-crowded

·        Has no bias, can be long and short at the same time playing the factor momentum game (e.g., right now he / she could be long small cap value momentum and short ARKK names and would earn money on both sides).

·        Short term mean reversion oriented within a trend: Looks for longs in a factor that is in an uptrend > 3 Months + not overcrowded + had a short-term price reversal down (which is not reversing the longer term up trend!) + has a macro tailwind.

·        And looks for shorts in a factor that is in a downtrend > 3 Months + that is overcrowded + had a short-term price spike (which is not reversing the longer term down trend) + has a macro headwind.

·        If he or she has a sub 1 Million portfolio is looking to express the view in micro to mid-caps to get the most convexity (moves like $MXC or Short ARKK names last week!).

·        Is macro aware, but lets macro not overtrump the factor momentum (price) signal.

If you trade like the above, there will be always a bull market exist for you (being long and or short).

A ton of people (that I respect highly!) tell me, that is not possible. You are either good at growth investing or at value investing and if the tide is not rising for your strategy, you simply sit in cash.

And even I respect those people I do not believe them.

Because if you look at the above list, is it technically really that hard?

It is not possible because we get wired and are not flexible enough in our minds.

But is it still not possible if we are hyper flexible and just look at factor momentum (long and short) with a grain of macro salt?

I doubt that. And because of that I have a ton of work in front of me in order to get much more flexible.

And what are the questions I have to ask myself every day?

1.      What is the strongest factor combination right now? Small cap value momentum in the energy industry —> wait for short term pullbacks and load up longs!

2.      What is the weakest factor combination right now? High beta mid-caps with decelerating growth ROC (e.g., the second derivative of growth, they might still grow but the rate of change gets weaker!) in the tech and story space —> wait for short term price spikes or trade bear flags to get short.

3.      External risk event: Yes, War, Inflation —> buy VOL protection for a left tail event

4.      Macro: Stagflation on ROC basis (which backs the uptrend in small cap value momentum and the downtrend in high beta mid-caps).

Lot of work to do ;-)

Have a great week!