Category Archives: strategy

Step 3: The Exit


Every rational investor realizes that it is foolish to expect every buying decision to be correct. If we acknowledge that not every decision will be correct, it becomes important to define, in advance, what being incorrect looks like. That definition is your exit. There are a lot of ways to do this, but designing an exit strategy should take a few things into consideration: Continue reading

Step 2: The Entry

The decision regarding what and when to buy receives the vast majority of investor attention, but may be the least important part of the entire process. It’s not that security selection is unimportant, just less vital than things like the exit and position sizing strategies.

I believe it is a mistake to consider the entry as a standalone, or singular process. Rather, it is merely the front half of an investment process. With this in mind, my entry strategy relies on a few basic concepts: Continue reading

Step 1: The Investor as Sculptor

“In every block of marble I see a statue as plain as though it stood before me, shaped and perfect in attitude and action. I have only to hew away the rough walls that imprison the lovely apparition to reveal it to the other eyes as mine see it.”


Sculpting was pretty straightforward for Michelangelo, he just took a chisel to a big block of marble and chipped away everything that wasn’t a statue. A similar approach can be used by investors. Continue reading

Morningstar Sees The Light

Really interesting paper from Morningstar ETFInvestor. If you are not a subscriber, Meb Faber has made it available here. The author of the paper, Samuel Lee, applies a simple moving average crossover approach to six separate strategies. The conclusions were powerful:

In virtually every equity, currency, and commodity index we tested, moving-average-based timing schemes reduced drawdowns without sacrificing return (in many cases improving it). The improved risk-adjusted returns can’t be explained by the increased average exposure to cash or to a few anomalous periods.

A moving average crossover signal is not a predictor of anything, it is a risk management device. One of the most effective ways to improve performance, as demonstrated by this paper (and many others), is to avoid ghastly drawdowns. This isn’t about trying to time tops and bottoms, it’s about avoiding most of a downtrend and capturing most of an uptrend. Definitely worth a read.

It’s Kind Of Like Trying To Push A Rope

A lot of people have an aversion to holding cash in an investment portfolio. For the last four or five months, we have been holding a much larger than normal amount of cash and this has inspired an uptick in questions from newer and prospective clients. Polite questions, but with an undertone of frustration. I wouldn’t think much of it, but some of the meetings I’ve had lately with people that are considering firing their current adviser and coming over here have been eye-opening.

When people are in the process of firing their current guy, they usually strip away undertones and are more explicit in describing their frustration. When cash balances are large, the frustrated client sometimes attributes this to incompetence, fear or laziness on the part of the adviser. Often they’re right. Sometimes the frustration stems from not understanding the decision making process. But other times the problem stems from unrealistic assumptions. An assumption that if you just look hard enough, the vast universe of tradable securities has to reveal at least some opportunities that are better than cash.

Objectively, it’s true – there are always opportunities somewhere. From a practical standpoint though, the odds of successfully exploiting those opportunities can change dramatically depending on the broader market environment. I’m not willing to put money at risk in places where the odds are stacked against us. In an environment where the probability of success is low, holding cash is the logically better choice. The urge to try to make something happen can be strong, but it’s dangerous. The market doesn’t care what you need or want and doesn’t reward you for trying really, really hard. There are no participation medals.

Poker players, military historians, football coaches and tacticians of all stripes understand that folding, retreating and punting can be valuable tactics in the face of long odds. We accumulate cash to preserve our ability to act when the winds of probability eventually turn in our favor.