Tag Archives: ideas

Alpha On Steroids, AKA ‘Microwave Alpha’

In the Paradox of Skill , author Brad Steiman accurately proclaims that ” confirming skill takes an investment lifetime, and you can never be fully confident that the alpha is not random. ” Alpha is the intercept in a regression of fund performance versus a benchmark. It measures success across time, and that is why it takes so long — you need a lot of observations (time periods) to gain significance. As shown in the following picture, it takes more than 140 years to identify the skill of a low-skill manager, and even an extraordinary manager will take 20 years to manifest statistical significance, and by that time the management might not be the same. Click to enlarge Nonetheless performance evaluators continue to use alpha as their skill barometer without ever questioning its meaningfulness. No one wants to wait decades, so we ignore the underlying theory. “Alpha” sounds like science, being a Greek letter and all, but there’s little science in its actual usage. But don’t despair. There is a new and better approach that can deliver statistical significance in a much shorter period of time. Call it alpha on steroids, or microwave alpha — shortening decades to years. The breakthrough determines statistically significant success in the cross-section rather than across time. I’ve written about this approach in Real Long-Only Due Diligence and Real Hedge Fund Due Diligence . A portfolio simulator creates all the portfolios the manager might have held, selecting stocks from a custom benchmark — thousands of portfolios. A ranking in the top 10% of this scientific peer group is significant at the 90% level, even if it’s for a short period of time, like a quarter. To state an extreme example, a return of, say, 1000% is significant, and you don’t have to wait 50 years to declare it significant. This process creates what I call “Success Scores. ” A statistician would call them “p values.” A ranking in this scientific peer group is the statistical significance of performance above the benchmark. Of course it’s still important to get the benchmark right, which means custom is highly advised. So you have a choice. You can continue to use alpha, but you really should wait the requisite time before you invest, or you can use Success Scores. An additional benefit of Success Scores is that they replace peer groups with their myriad biases, including “Loser Bias” caused by the fact that most members of peer groups underperform their benchmarks, creating a race against losers. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Adapting The Bowser Game Plan

UNDERSTANDING THE UNDERLYING PHILOSOPHY TO HELP YOUR PORTFOLIO Aside from the in-depth, top-of-the-line analysis that The Bowser Report provides, there is another reason why subscribers have high returns: the Bowser Game Plan. This investment strategy has helped subscribers remain disciplined and realize profits for over forty years. For that reason, we always send new subscribers an explanation of the plan in some form. Still, we get a lot of questions and concerns. Sticking to a plan is essential for every investor. To succeed, you must either bring your own plan to the table or apply The Bowser Report’s. And, whatever the plan, it must align with your investment objectives, which vary from investor to investor. For example, some investors begin with a very limited amount of capital, restricting the size of their positions and their number of holdings. Therefore, these investors must develop or adapt plans to suit their needs and avoid losing money. While the Game Plan helps maximize profits and minimize risks for many subscribers, it is vital to understand the philosophy behind the strategy to better apply it directly or adapt its core strategies to fit your unique investment goals. BREAKING DOWN THE BOWSER GAME PLAN 1. DO NOT PAY more than $3/share for a stock. This is a fairly simple rule that we have always stuck to at The Bowser Report. Certain stocks are great buying opportunities at under $3 per share. Prior to publishing the first newsletter, founder Max Bowser noticed a trend that once a stock broke above the $3 threshold, it typically continued appreciating if the company’s fundamentals remained strong. The likely reason for this is that many institutions start taking positions when a stock surpasses $5 per share. Buying companies before institutional interest occurs increases the likelihood that fundamentally-sound, low-priced stocks will provide you with higher returns. 2. CREATE A PORTFOLIO of 12 to 18 stocks. Diversification is important. Diversification is essential when it comes to managing any portfolio. Most investors believe that investing in different stocks is how to diversify and minimize risk. However, this overlooks the fact that some of these stocks are within the same sectors, industries and even have similar sources of revenue. That’s why it’s always good to review our extensive analysis to ensure that our most recent stock pick doesn’t overlap with any of your current holdings. Another factor to consider when diversifying is how commissions can reduce your capital. A great free online brokerage is Robinhood, but if you use another broker, try not to over-diversify your portfolio. A simple rule of thumb is that if the commissions of buying and selling twelve stocks ($240 for the average broker) is more than 5% of your account value, then you should consider a smaller number of holdings. Regardless, we have found that holding twelve to eighteen stocks hedges against any potential big losses. The more stocks you own, the greater your chances of holding a winner, which will more than make up for the losers. 3. DO NOT SELL when a stock goes above $3/share and is moved to Page 5. Because I am also a day trader, the foundation of this rule is the backbone to my personal trading strategy. Never add to your losers, just your winners. That being said, a “winner” for The Bowser Report is a stock surpassing a share price of $3. By selling every time a stock breaks out of that price range, you are cutting your winner loose before it even has a chance to make you money. As you will later see, we emphasize taking your profits when your holdings double. If you take your profits as soon as it breaks $3, most of the time you’ll never give it the chance to double! 4. DO NOT SELL when a stock moves to a lower category. Just because a company isn’t performing well in the short term does not mean that it doesn’t have potential upside. If you are sufficiently diversified, you will have no problem with underperformers. The Bowser Report tries to focus on picking stocks that are going to be around for the long haul. That is why we focus on sales and earnings forming long-term trends, as opposed to just looking at the most recent quarterly results. By doing this, we are finding companies that will survive through short-term fluctuations in sales and earnings. All in all, try to avoid selling if you don’t have sound logic behind the decision. If you are not sure whether or not to sell, you can always refer to the next part of the Game Plan: the selling plan. 5. SELLING PLAN: Sell half of your holdings when the stock doubles from your purchase price. Sell the remainder after the stock drops 25% from its most recent high. If the stock drops 50% without doubling, sell all shares. This is easily the most important rule of the Bowser Game Plan. It highlights when to take profits and when to cut losses. Better yet, it has proven to work for Bowser subscribers for decades. Still, we’ve had subscribers deviate from the selling plan. Those who are successful outside of our selling plan find their success in thoroughly developed plans based on their own investment objectives. Investors deviating from the plan generally have vast investing experience, while individuals with little to no investing experience should stick to the Bowser Game Plan. An example of someone deviating would be an experienced investor who chooses to sell all his or her shares at one time as opposed to sizing out (i.e. selling half at one time and the other half later). There are countless other modifications to our selling plan, but those with no experience in developing a strict selling plan and sticking to it should use ours as a tried and true method. 6. RECORD proceeds from sales. It is important to always record your profits and losses in order to track performance. If you are only ever tracking your current holdings, you lose sight of where your portfolio began, and the profits it’s generated. Better yet, tracking buys and sells allows you to analyze your entries and exits. It also gives you the ability to see how well your plan is doing, and how well you are sticking with it. 7. PORTFOLIO EVALUATION = current value of portfolio + proceeds from sales. The same concept for #6 also applies to this rule. Value your portfolio and track your performance in order to better visualize your portfolio’s growth and your growth as an investor. ADAPTING THE GAME PLAN The big takeaway from breaking down the Bowser Game Plan is that disciplined investing generates profits. The Game Plan has been developed and fine-tuned over decades as a successful investment strategy. Those who are unfamiliar with strategy development or who tend to stray from self-developed strategies should absolutely stick to the rules of the Bowser Game Plan. However, no one situation is alike. Investment objectives vary depending on account size, risk tolerance, brokerage and other factors. That said, the Game Plan can and should be tweaked to suit your situation. Just make sure to do so in a regimented way! We touched briefly on brokerages in this article. We have our list of those we’ve had positive dealings within the past. Selecting which one is right for you is a whole other article in itself, but as long as the brokerage has stop orders, minimal commissions and good customer service, you should be fine. Overall, we would like to emphasize there is a need to have a structured game plan and to remain disciplined. If the Bowser Game Plan doesn’t fit your objectives, feel free to modify it in a structured and calculated manner if you have experience and are 100% comfortable doing so.

Thematic ETFs: Smarter Than Regular Smart Beta ETFs?

It’s been a true transformation for the ETF industry over the last few years. With a size of $3.137 trillion , the global ETF industry hit a record at the end of April 2016. The U.S. market alone boasts a size of over $2.2 trillion, derived from over 1,890 exchange traded products. While this joy-ride is something to delight in, crinkles of worries must be there on the foreheads of issuers. After all, with such gigantic and successful progress, ideas of new issuances are likely to fall short. There is always pressure for beating the benchmark, navigating tough trading times and last but not the least, peer pressure. Simply put, the days of plain vanilla ETFs or market-cap weighted ETFs are gone and products with several wining attributes, like low volatility or high dividend, are coming on-stream. Commonly, these next generation ETFs are called smart-beta ETFs. But it seems that the lure for smart beta investing is also diminishing these days. Beating the benchmark on a sustainable basis is tough in the present global backdrop that is fraught with issues. Plus, first-time craze also ebbs when a new investing theme turns older. Probably, this is why issuers are fine tuning the smart beta concepts to make them smarter. For example, Goldman Sachs introduced the ActiveBeta Index concept, Global X has a suite of scientific beta ETFs and so on. In fact, to make things more competitive and take them a few notches higher, Global X got itself busy in promoting the Thematic investing and launching more products based on it. Inside Thematic Investing As per Global X, its family of thematic ETFs looks to track companies that reap returns from ” structural changes in people and demographics , technology and innovation, and natural resources, along with companies that exhibit a particular set of desirable values.” As we can see that the above-mentioned criteria is long-term in nature and less susceptible to sudden changes in economic policies of various countries or a sudden jerk in the market emanating from some geo-political crisis. Instead, these factors look to cash in on some emerging trend in the global economy. As an investor, if you have faith in a particular segment over the long term, only then you should go ahead with that product. As of now, Global X has four categories in its thematic investment, namely technology, resources, values and people. Not that these ideas are fool-proof as products in technology and resources segments piled up losses previously; but new entrees in people and values segments seem striking at the current level. We’ll tell you why. People Products Global X Millennials Thematic ETF (NASDAQ: MILN ) This recently launched ETF looks to track companies targeted at the U.S. millennials generation (birth years ranging from 1980-2000). Since millennials seem to be the growth driver of the U.S. economy, outpacing baby boomers in 2015 as the largest generation and has the prospect of comprising 75% of the workforce by 2025, this surely emerges as a long-term bet. Per Global X , millennials now earn about $2 trillion, with income projected to grow to $8 trillion by 2025. Since millennials have a tendency of splurging on tech-savvy products and eating out, several tech or consumer discretionary ETFs can give MILN little competition. Global X Health & Wellness Thematic ETF ( OTC:BFIT ) There is a visible shift in consumers’ taste and preference for health and wellness products which give people a better quality of life. It is already a $3.4 trillion industry . As global life expectancy is projected to surge by 18% by 2100, contribution of health and wellness companies ought to be higher. This explains why investors can have a look at BFIT which revolves around stocks like Whitewave Foods Co, Adidas AG, Herbal Life Ltd, etc. Global X Longevity Thematic ETF (LNGR) This new fund tracks companies which depend on people across the globe living longer lives. Now, since older people invest more in health care related products and services, health care will rule this fund. Boston Scientific, AbbVie and Medtronic are the top three firms of this ETF. As a matter of fact, this fund may face tough competition from other health care and biotech ETFs like iShares Global Healthcare ETF (NYSEARCA: IXJ ) , iShares U.S. Healthcare ETF and Guggenheim S&P 500 Equal Weight Health Care ETF (NYSEARCA: RYH ) . Values Product There is only one fund as yet, namely Global X S&P 500 Catholic Values ETF (NASDAQ: CATH ) . The fund gives exposure to the companies within the S&P 500 whose business practices follow Catholic values and leave out those that do not. Companies involved in weapons, military products and child labor do not get an entry card into this ETF. The theme falls in the category of socially responsible ETFs, though CATH is quite unique in nature. Bottom Line Maybe defined in a different way, thematic ETFs seem quite similar to smart beta ETFs. It’s just that the ideas are innovative and thus the issuer can expect success ahead. Original post Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.