Remember, You Can Do Both
Be tactical... A lesson from Steve Cohen... The right thing for the right time... Why there's room for fundamental and quantitative analysis... Remember, you can do both...
Editor's note: Today, we're bringing you a guest essay from Austin Root, the chief investment officer at Stansberry Asset Management ("SAM").
As many of you likely know, Austin worked for Stansberry Research for five years. Most recently, he served as our director of research from 2019 to 2021. Austin also managed our Portfolio Solutions products, among other responsibilities.
In 2021, he joined the staff at SAM, a money-management firm – separate from our publishing business – that uses our research and ideas, and other sources to help manage individual client portfolios.
Today, in advance of a brand-new strategy the folks at SAM are launching, Austin is writing to you with his most important ideas about investing in today's markets... including a solution to what he says may be the most "divisive" question that exists among investors.
Let's start with two words...
I (Austin Root) want to get right to it... Thoughtful Digest readers, I'd like to share with you a critical idea for how to make 2023 a winning year for your investments. It's short and sweet...
Be tactical.
To me, this means being nimble and flexible with your investment approach, changing when the market changes, and putting yourself in a position to invest in the right things at the right time.
This might sound like common sense. But the fact is, many investors do the opposite...
They have "their way" of investing, and that's it – no matter what kind of market we're in.
Some say they are strictly fundamental investors. Others don't care about fundamentals at all and focus only on the charts, or price action. Or perhaps they prefer to invest solely in gold stocks. Or tech companies. Or stocks with low price-to-earnings ratios. And so on.
In my experience, having such a dogmatic approach doesn't serve investors well...
I've been fortunate to learn this from some of the greatest investors of this generation... investors with very different styles and the ability to adapt and be tactical.
Many of you will likely remember me from my years as director of research at Stansberry Research, where I served as portfolio manager for Stansberry Portfolio Solutions and the founder and editor of American Moonshots. I relished those days in no small part because I could trade thoughts with many editors who appreciated the value of being tactical. Those investors include Steve Sjuggerud, Doc Eifrig, Brett Eversole, and Greg Diamond, to name a few.
These days, I'm the chief investment officer at Stansberry Asset Management ("SAM").
For those who don't know, SAM is a registered investment adviser – separate from Stansberry Research – that provides tailored, well-informed, and active investment management for our clients.
I love that we're serving individual investors and helping them be tactical, with lessons learned from our experience in the markets.
Prior to my current role and my time at Stansberry Research, I was deeply involved in the hedge-fund world.
That includes time spent as a portfolio manager at S.A.C. Capital Advisors. That's the old fund of Steve Cohen. Steve is one of the richest people in America, owner of the New York Mets, and supposedly the inspiration for Bobby Axelrod on the Showtime series Billions (I can't say I see the resemblance).
What Steve Cohen knows...
Steve knows that being flexible in your approach is crucial to investment success. When his fund launched in the early 1990s, S.A.C. was known for frequently trading in and out of the market. Sometimes the fund would trade hundreds of positions in a single day.
These days, though, Steve is trading less. And the largest strategy at his new fund, Point72 Asset Management, is driven by deep fundamental research.
This is not an accident. Reflecting on his success over the decades on a recent podcast, Steve said...
I think the key is you can't stay static. You have to be adaptable. You have to look forward.
I've seen so many people over the years that had pretty good runs along the way but didn't change. What worked in the '80s or '90s didn't work in 2000, didn't work in 2010, and they went out of business. And I kept evolving and kept upping my game. Changing my game. And that's what it took to stay in business.
Being tactical in 2022 served our clients well at SAM.
And I believe it will be even more important in 2023.
Just look how winners and losers in the market have completely flipped this year, with last year's flailing tech stocks in the Nasdaq leading the way, and 2022's winners – such as energy and consumer staples – struggling in 2023...
I believe that at the core of your portfolio, you should always own great businesses that will be bigger and more profitable enterprises a decade from now than they are today. But for a big chunk of your capital, you need to be tactical and invest in the right things for the right set of market conditions.
Now, this leads to a logical question...
What's the right thing for today's market?...
I'm going to answer this question, but to do so properly, I need to start by addressing a different question. That is...
Why does the investment world always seem to split itself up into distinct "this" or "that" camps?
Most market participants bucket themselves as either-or... Are you a growth investor or a value investor? Do you focus on debt securities or equities? Do you invest domestically or internationally? In public markets or in private markets?
In my mind, this is a flawed way of thinking about the world. Why can't more investors be somewhere in between? Or better yet, they should be both.
For instance, I consider myself a "valuegrowth" investor. One word.
Value investing at its core is about identifying things that trade at a discount to your view of that asset's true, intrinsic value. At the same time, though, if asset A and asset B are the same in every way, except B is growing its profits and dividends more quickly, shouldn't B be more desirable?
Of course it should. And we should all be in search of value and growth as investors. It's the same way that we can all benefit from investing in both debt and equity, domestically and abroad, and so on...
But in my opinion, there's no more obvious example of the "this or that" nature of many investors than when it comes to how you answer this question...
Are you a fundamental investor or a quantitative investor?
This may be the most divisive investment question there is...
Fundamental investors tend to be hyper-focused on the qualitative measures of a company, including its long-term business prospects, industry dynamics, and the competitive landscape, as well as the impact of the broader economy.
Fundamental investors also look at numerical, financial measures – such as net profit margins, return on equity, and price-to-earnings ratios – and try to forecast how well a company will do over time and whether it's fairly valued by the market.
Then there are quantitative investors... Oftentimes, they can't be bothered by any of that fundamental stuff. They tend to assume that all the qualitative judgments that fundamental investors stew over are either irrelevant or already reflected in stock prices.
Quantitative investors pour over reams of data to figure out which "risk factors" are most important to a stock's price action – and then build models to predict future price movements based on these factors.
They concern themselves with trends – and countertrends – in price movement, momentum, and volume. They test, iterate, and test again to find the most predictive models possible.
Not enough people in the market say, 'Why not do both?'...
That is why I'm writing to you today.
If it's important to "be tactical" in 2023, my top idea for how to do it – this year and beyond – is to become both fundamental and quantitative at the same time.
Simply put, by doing this, you can skew the risk-reward of investment opportunities in your favor... Look for enduring companies that are attractive from a fundamental perspective, then also do the quantitative work to determine whether you should own them now, and, if so, how much. By doing both, you will be investing in the "right things at the right time," dramatically increasing your prospects for outsized returns.
And I have news to share about a solution that I think does both in a big way.
Stansberry Asset Management has a brand-new strategy that I'm incredibly excited about. And I think you will be, too. In fact, we're harnessing the power of a quantitative tool that I bet you're at least familiar with, if not already a supporter of...
Before I reveal which tool, allow me to state something that some of you likely already know. SAM has always used a fundamental approach to investing, one that draws on the excellent work of Stansberry Research and marries that with research we're doing on our own.
Through those efforts, we at SAM identify well-run businesses with enduring growth prospects, enviable margins, and high returns on investment. And then we invest in those companies on behalf of our clients when they trade at attractive valuations.
But what you may not know as well is that at SAM, we're also tactical and quantitative investors. We shift capital to parts of the market we see as having the most favorable reward-to-risk ratios. We use quantitative and analytical tools to focus our fundamental ideas on those parts of the market we view as most promising (and we look to avoid those areas we see as most troublesome).
Over time, we've found that when we do both fundamental and quantitative analyses well, that provides the best chances for investment success.
And during the past year, the team at SAM has been working to find a way to even better combine a quantitative approach with our deep fundamental research.
My team and I rolled up our sleeves...
We did a lot of homework and whiteboarding. We had loads of discussions... built financial models with literally hundreds of thousands of rows of data... and then developed and back tested this new strategy six ways to Sunday.
Now, I'm very skeptical when I hear people talk about back tests. And you likely feel the same way. After all, there are some less-than-reputable folks in the investment industry that will use back testing to solve for whatever results they want. They simply change the variables until they have stellar results.
At SAM, we did the opposite. Our first test produced better results than we'd imagined. So we tried to make them worse. We changed position sizes and our buy and sell criteria. We even ran what we thought were virtually impossible scenarios, like what would happen if every stock ceased paying a dividend.
The results changed with every iteration. But they were always impressive. That's when we knew we had something special.
Join us to learn more tomorrow night...
This new strategy is called Tactical Select, and it's powered by TradeSmith, a longtime corporate affiliate of Stansberry Research.
To inform how we manage Tactical Select, we are harnessing the power of TradeSmith's suite of portfolio-management tools, including its flagship products: TradeStops and the Volatility Quotient ("VQ").
As you may know, TradeSmith has also built out its quantitative solutions to be far more than just stops and VQs. And we're using the very best ones to help determine which of our favorite fundamental ideas go into Tactical Select – and when.
I'm so excited to share the results of our back testing along with the details about this strategy and why it's a great fit for 2023... and beyond. To hear more, you can join me – and TradeSmith CEO Keith Kaplan – for a special SAM webinar tomorrow, February 16.
I strongly encourage you to take a moment to register for this free live event right here. We'll get started at 7 p.m. Eastern time tomorrow.
For many of you, I believe this strategy could be an absolute game-changer. I can't wait to show you why.
New 52-week highs (as of 2/14/23): Analog Devices (ADI), indie Semiconductor (INDI), iShares U.S. Aerospace & Defense Fund (ITA), Parker-Hannifin (PH), Shell (SHEL), and TFI International (TFII).
In today's mailbag, feedback on yesterday's Digest about inflation, the jobs market, and the Federal Reserve... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"We're told the Fed is pulling all the levers to fight inflation, yet the reserve requirement is still at zero. Is asking banks to limit lending no longer a Fed lever?" – Paid-up subscriber Paul J.
"With respect to the phrase: 'That includes U.S. government leaders...', I ask that you change words. They are not leaders. Not at all. A more correct term would be 'elected and appointed officials.'
"I have known many leaders in my day. Our elected (and appointed) officials are most definitely NOT leaders." – Stansberry Alliance member Joe M.
"Corey, I enjoyed reading your comments on the labor market and why it is in its current tight state.
"As a 45-year builder/developer I have experienced the ups and downs of labor many times caused by economic conditions.
"This time is I see it much differently.
"In early part of 2022, companies were trying to hire to keep up with the high demand of products and services. They had a difficult time hiring full-time people while paying higher wages to get job openings filled. Because of the panic hiring, they over filled jobs. Then high inflation came. Now they are laying off full time people because consumers are backing away from purchases.
"The next cause of more job openings is efficiency. The workforce has changed. You now have to hire three people to do the work of one. This is real if you are an employer. So your bottom line is shrinking or you are trying to raise prices. Walmart is currently experiencing that from their suppliers who want to raise prices.
"Conclusion, the lowering of interest rates will not help at home inflation. Labor in a product or service will continue to outpace the material. For one, at jobsites I continue to see the excessive material waste... If you want the work done you let the workers waste time and material and pass it along to the buyer. I would bet other industries are having the same problems.
"It's going to take a long time to correct this way of doing business, if it is even possible. With only 60% of the population participating in working and building America the employment numbers are even worse than they appear.
"I'm 66 years old, supposed to be retired. But I still am getting calls for work to do but can't find anyone to do it. Figure that one out. Is it labor supply or demand?" – Paid-up subscriber Norm H.
Sincerely,
Austin Root
Towson, Maryland
February 15, 2023
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