The beauty of a strategy book

Its not perfect, but its o.k., so I trade it.

Just want to present my new strategy book.

I live from my trading. So, I need a strategy book that squeezes out money of the market regularly.

Regularly does not mean it will always work.

So, I use the strategy book, but I still have to risk manage via the tape and via 42macro.com.

The aim of the strategy is to make money in the following regimes

Goldilocks

Reflation

Inflation

All shallow regimes
(where ROC of GDP and Inflation is not deep in one quadrant)

So, what I have to do is to avoid deep deflation regimes reading the tape.

Here is the backtest of the book of stragegies:

Once again this is highly capacity constrained. If this would work with a 1 Billion AUM (asset under management) I would get rich by raising funds and live of 2 and 20.

But this book can be traded with a sub 1 Million (I guess even with a sub 2 Million, but then you have to trade every day to scale in and out of positions) account.

All strategies of the book have the following factors:

Low Liquidity

AvgDailyTot(20) < 1000000 —> That means all strategies in the book only trade stocks that had no higher liquidity then 1 Million $ traded a day on average the last 20 Days. Ask yourself why this strategy works, and this is the answer: The liquidity is so low that your competition with tons of AUM simply can not participate. That means I do not compete with the big gals and guys. This is the edge of having a portfolio sub 1 Million!

EPS Growth

Small Caps had a bad last 10 Years, but if you add this factor, they did have a good last 10 years. I think it’s a wonderful factor since it can be explained even better. Would you like to have a house where you can raise the rent (therefore your bottom line) every year 30% or would you like to have a house where you could only raise the rent 3% every year. Stocks are no different!

Stock Price Momentum, Industry Price Momentum

Extremely hard to understand why momentum works. There are a trillion papers (and I read at least 100 of it) trying to explain why. I tell you I have no clue why it works. But momentum is the strongest single factor that works almost everywhere.

Quality (Gross Margin, Return of Investment)

This is explainable as well because it drives EPS growth in the long term. But be sure that you do not use absolute numbers. ROC is key here too!

ROC up on Institutional Ownership

Simply explained, if institutions buy the stock and institutions have more stocks they had 3 Months ago, that means the stock has been found which is a good thing.

Value

I am not a value bug. Not at all. I know there are strategies without value that work perfectly well. But on small caps value is important (but only if combined for example with momentum). There are a thousand ways to calculate value. Find the right one (hint next years Earnings estimates play a big role!).

Here is the ranking system of the above factors.

Now lets go to the strategies.

This (see above) is the first strategy of the book (out of sample since May 2020!). First, I did not want to include it, because it has big drawdowns in deflationary phases. But my thinking is: if I can manage the risk (e.g., raise cash) during deep deflationary phases this is a perfect strategy. Because it works very nicely during Goldilocks, Reflation, Inflation and in all shallow Regimes. So basically 80% of the time.

It uses all the above factors + insider buying, and it only buys stocks with a very high rank.

The second strategy (see below) is a real beauty, it’s also out of sample since June 2020.

It only buys stocks with extreme strong free cash flows to enterprise value [in Portfolio123 terms FRank("NetFCFQ/AstTotQ",#all,#DESC, #ExclNA) > 90].

The beauty of this strategy is, that there are phases where it does not find enough stocks to allocate all the capital in moments when market conditions get bad.

It also works very good during Goldilocks, Reflation, Inflation and in all shallow Regimes. So basically 80% of the time too.

The third strategy (see below) is based on earning estimates revisions.

The problem with this strategy is it needs a deep goldilocks or reflation or inflation Regime. It does very poor in shallow regimes but very good on deep deflation regime. Why: because in deep deflation regimes it does not find small caps with positive earnings estimates and goes to cash. But in a deep reflation regime it is a monster!

So the following book puts all three strategies together:

The only thing (which is hard!) I need to find out is when a deep deflation tape (= regime) is in play and I have to raise cash.

I want to keep it simple. The only thing I have to avoid now is a deep deflationary regime. Still hard enough, but Darius Dale from 42Macro.com has a great track record and I am getting better reading the tape, so I am positive!

Best Regards and happy trading.