Strategy Update Provided by Wayne Ferbert and the Alpha DNA Team
December Equity Long Short Update
By: Wayne Ferbert | December 18, 2018
Someone recently reminded me of one of my favorite quotes from investment legend Benjamin Graham:
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
Never have truer words been spoken! It is easy to remind people to have a long-term outlook on the markets and consider the proverbial ‘weight’ of their portfolio – but harder to actually maintain that longer term outlook in the face of market weakness.
For our strategies at Alpha DNA, the ‘weight’ of our portfolio is the digital strength of the companies we invest in. We only buy companies that have had actual success selling their products AND that success can be verified by the digital trajectory the company is producing.
But we also realize that in the short run, the market will have a vote and that vote can lose site of the fundamentals of the stocks and markets. For that very reason, we measure the ‘vote tallies’ across our stock universe and use that feedback to adjust the net posture of our portfolios.
Back on October 8th, we increased the defense in our long short portfolios when we went from net 75% long to net 50% long. That is the first step in moving to a more cautious portfolio when we see signs of weakness in the markets.
The reduced exposure has helped here in December as our Equity Long Short strategy is down less than -3.5% while the S&P 500 and Russell 3000 are both down closer to -8% (performance gross thru close on December 17th).
We continue to monitor the markets and the ‘votes’ to determine if we need to take the last step in our long short portfolios and move to a market neutral posture where we have the same amount of long and short exposure.
Primarily, the reason we have not taken the last step to move to a neutral position is the nature of the selloff relative to the strongest digital performers and the weakest digital performers. Both are being sold off in very similar proportions.
Generally, the highest levels of fear in the market are displayed in the performance of the weakest digital companies. But in this sell off, since early October, the best and worst digital companies have both sold off by nearly identical amounts. In other words, the market has lost sight of its obligation to ‘weigh’ the performance of companies. Usually, this happens when a sell off is transient or temporary in nature.
Of course, markets have a way of reminding you that they have a mind of their own. We continue to monitor the price performance relative to the digital performance and will adjust the posture if the signals warrant an adjustment.
If you’d like to discuss our posture scores and the deep dive on our view of the market, by all means call or email us. We’d be happy to discuss it further.