Strategy

The chart above shows the results of the long only momentum strategy executed from July of 2020 through July of 2021. It evolved from including stocks of any market capitalization to only including large cap stocks due to price spreads and volatility. Momentum in markets has existed for hundreds of years and will continue to manifest itself for years to come as it is based on the basic human psychology of fear and greed. Successfully executing a momentum strategy is extremely difficult on any time frame. This includes trading on the long or short side. In any case short term momentum trading is absolutely lethal to the well being of an investment account and long term momentum trading is even worse. Having said that, there have been legendary traders that have been great “trend followers“ who have been the exceptions that have proven the rule. Some examples include David Ricardo, Jesse Livermore, Richard Donchian, Nicholas Darvas, Jack Dreyfus, Jim Simons, George Soros, Stanley Druckinmiller, Ray Dalio, Ken Griffen, Steve Cohen, Richard Dennis and Paul Tudor Jones.

The chart above shows the results of the contrarian strategy that I employed essentially buying stocks that had fallen severely out of favour with the market and waiting for a possible reversion to the mean. I ran this approach from August of 2021 through August of 2022. This was a truly horrible strategy especially during the Fed fueled - Tech, SPAC, Crypto, ARK bubble bursts of 2021 through 2022, however the learnings would dramatically alter my investment approach. The first lesson that I experienced from this strategy was the oft quoted Keynesian observation that “the market can stay irrational longer than an investor can stay solvent”. The second lesson was one that I must have heard a thousand times which is “don’t catch a falling knife”. The third lesson and the most important for me personally came from Warren Buffet - “price is what you pay, value is what you get”. And the stocks that I bought over late 2021 and most of 2022 were terrible values even at the price reductions they were bought at.

Much was learned from testing both approaches but the most important in my opinion was understanding that momentum trading was simply not congruent with my personal temperament. It was too volatile, too short term oriented and incurred unnecessary trading costs from wide price spreads incurred far too often. The contrarian approach taught me that I definitely preferred a patient buy and hold approach similar to running the family business or investing in real estate development projects. But it also sent me back to my screen factors to study deeply what could potentially lead to above average long term performance and by focusing on selecting only these stocks and holding on to them for many years as opposed to stocks that had simply been clobbered in price and waiting for them to turn around. As a result from September of 2022 through December of 2023 this high quality Long Term Performance strategy was employed and the chart above shows the results of this strategy.

So in summary my Long Term Performance (LTP) strategy was arrived at through an experimental (at times frustrating and most definitely unprofitable) three and a half year period chasing “gogo” stocks of all shapes and size followed by a “catch the falling knives” strategy which confused contrarianism with recklessness and finally to a “buy and hold” strategy focused on stocks that have performed well for many years and that will hopefully maintain these above average results for many years to come. As you can see from the chart above if the objective was to build a retirement account the opportunity cost was severe. However if the objective was to build an ongoing business concern with a repeatable approach that could deliver low risk, above market returns, the investment (might) come to be seen in time as a bargain. But either way it’s going to take a while to catch up to my benchmark now that this degree from the "University of Hard Knocks" has put me so far behind. Oh well upward and onward!