It’s probably understandable after more than a decade of bubbles, crashes, fraud and dysfunctional government that the investment pendulum would swing toward traders and scalpers. This trading mentality dominates the press and broadcast media, with a parade of guests recommending positions based mostly on short terms moves. The Buy and Hold strategy of decades past is all but a memory.
Today, we are supposed to buy stocks, sell them within a day of their peak and then buy them back after a 5% correction. Yes, I’m exaggerating but not as much as you might think. How often have you heard your favorite TV personality come on air and tell you it’s time to bail on a stock, only days later saying it’s a screaming buy? By the way, I’m not absolving myself from this criticism.
While fundamentals are often discussed on TV, my perception is that most recommendations are based on technical analysis. Today we live in a world of Fibonacci Retracement, Head and Shoulders, Relative Strength, Breakouts, the Golden Cross, Gravestone Doji and the ever popular Hindenburg Omen. While I look at charts daily, I still prefer the calculator as my compass.
The financial crisis of 2008 helped increase portfolio turnover as money managers looked to step aside steep declines and then jump back in as soon as the coast was clear. While I’m sure there are many great traders with the ability to tip-toe through the wiggles, my best guess is that most fail miserably and that overtrading is a prescription to underperformance.
About 6 months ago, I started analysis of my own trading history. After analyzing several years of transactions I came to the painful conclusion that my security selection was excellent but my execution and position management needed improvement. It was very apparent I wasn’t ready for the Fast Money Crowd so I started off by implementing a couple of rules:
- • No trades before Noon
- • Use VWAP or Market on Close Orders – (Volume Weighted Average Price) bought over several hours or on the market close
Even with trades that are going to be bought over the course of the day, I found waiting till noon before initiating the transaction added to performance. The morning and in particular the open has emotional baggage. Downgrades, upgrades and earnings typically dominate the tape clouded by emotion and usually overreaction.
Within a month of making these changes, performance in funds I manage started to improve. The research and portfolio selection process hadn’t changed, just the execution. Most of my security purchases are made using a quantitative multi-factor model. It’s a big term that just means I use computers and screens to assist with security selection. If a stock falls in the top 10% of the model, it gets a hard look. If not, it is generally ignored or sold. Exceptions are made for special situations but at least 80% of the portfolio meets the quant criteria. It will be a long time before stocks like Facebook (FB) or Michael Kors (KORS) rank well in my model but their growth rates pushed them into the special situations category.
The simple choice of waiting till the close before placing trades reduced turnover dramatically. Stocks that had taken big hits at the open often found institutional support as the day wore on, giving me pause and perhaps more time to complete my analysis. In any event, even if the decision was to sell, it was often made at a higher price.
A similar outcome was observed on the buy side. Delaying decisions until later in the day, often produced better results. Did it work every time? Of course not. Is the strategy I’m laying out going to work for you? I have no idea. However, I’m certain that one of the best investments traders and investors can make, is to complete an in depth review of your trading history. Don’t be afraid to make changes. Try something different.
If you’re hitting the ball out of the park every time you step to the plate, then ignore this post but if you’re struggling, now may be a good time to review your swing.
You may just find out, it isn’t so bad being the Slow Money Man in a Fast Money World.
-David Nelson, CFA
At the time of this publication both Facebook (FB) and Michael Kors (KORS) were in portfolios managed by David Nelson
