Five Actionable Ideas for 2009

I thought I would summarize a few ideas I've mentioned on World Beta over the past few months as potential trading ideas based on some simple quant research:

1. Follow a simple tactical asset allocation model. With returns near flat, the model performed admirably in 2008 - look for an update to the white paper with out-of-sample numbers sometime in late January. The model is currently 100% in cash/bonds.

2. Look for a particularly pronounced January Effect in beaten down microcaps. I found that following the worst 10 years in stocks since 1927, the average return for microcaps in January was around 18% with no down years. An investor could either go long microcaps outright or create a hedged position by shorting large caps. Sample small and microcap funds are PZI, FDM, and IWC. Large cap ETFs include SPY and VTI. I mentioned a screen for beaten down microcaps here.

3. Look for a bounce across the board in January. In one study I examined asset class performance after a really bad month and the take-aways from this study were:

- It does not pay to buy an asset class after a really bad month for the following 1 month.
- 12 months later the return is not much different than average.
- 3 and 6 month returns, however, are stronger. You pick up on average about 3-4% abnormal returns buying after a terrible month.

4. Follow the smart money. A simple method of following the most popular stock holdings of the Tiger Cubs would have beaten the market by 12% a year since 2000. Current holdings include:

Qualcomm (QCOM)
Visa (V)
Mastercard (MA)
America Movil (AMX)
Priceline (PCLN)
Transdigm (TDG)
Sandridge Energy (SD)
SBA Communications (SBAC)
American Tower (AMT)
XTO Energy (XTO)

AlphaClone lets you create a custom group of managers (and while I am biased it is a lot of fun to play around with the software). In a future post I will take a look at the Hedge Fund Consensus and Hedge Fund Best Ideas Portfolios that would have outperformed the market substantially over the past 8 years.

5. Get long Japan. Japan is back to where they were in 1982, and have experienced three down years in a row - a setup that generates large returns of around 20-30% historically.

Happy New Years!

Comments

[bowater:]

in re: Januarys effect.

If the selling continues in the first week in Jan of 2009 on a stock that should have bounced up, that company is in trouble.. be careful. it could take a long time to recover or could go belly up.

Jan 02 11:22 AM

[Market Folly:]

good stuff as always mebane. I suggest everyone definitely check out his alphaclone for following the smart money, very useful tool they've created. also, if you want to just check out some of the current portfolios of prominent hedge funds, we've been doing our hedge fund portfolio tracking over the past few weeks: www.marketfolly.com/20...

Jan 02 12:16 PM

[Daniel Eskin:]

To the author - in terms of your last point about Japan, would you recommend to go long in Japan stocks or ETFs? Any specific ones that you can recommend?

Jan 02 12:16 PM

[stox2buy:]

There aren't many companies that can grow revenue 10-20% this year and turn profitable for the 1st time in this economy.

No debt, plenty of cash.

Look at Thermogenesis (KOOL), the leader in cell/stem-cell processing and preservation with no competition.

Do your dd before investing as always.

Jan 02 08:23 PM

[Dan Seeks A...:]

stox2buy: looking at your comment stream I'd expect you work at KOOL and have underwater options! :)

Jan 03 02:20 PM

[User 332147:]

does anyone have a specific ETF strategy based on the Global Tactical Asset Allocation Strategy? I'm lookign to implement this year for my portfolio. It's seems very easy/basic for the equity holding side of my asset allocation, but what about the fixed income? Do people realy move in and out of something like LQD based on ETF price alone?

Jan 06 12:01 PM