Successful investing is anticipating the anticipations of others.
—John Maynard Keynes
One year ago, if you had asked me what a brokerage was or how to write a covered call, I would have probably stared at you with blank expression. I always had a latent interest in macroeconomics and geopolitics, but it wasn't until I downloaded the Seeking Alpha app in the summer of 2015 and began pouring over the thousands of articles on topics such as the commodity slump or China's debt crisis that I began to realize that my passion for identifying societal trends and successful companies could be put to good use, for my own benefit and for the benefit of the general productivity of our whole global community.
You see, investing is so much more than mere supply-and-demand equations or technical trends or capital pricing models; it is the framework through which our modern society so efficiently allocates and applies resources. Even though, as the world faces a deep depression - a combination of secular stagnation and political illiberalization - it may not seem like it today, but it is thanks to the principle of investment that our rate of progress has been so rapid. Our ability to freely discuss and debate the merits and demerits of various companies, products, and strategies here is what makes our community unique, as in the geologic time span of history, humans have rarely had such freedom as to democratize the allocation of society's resources.
It is a testament to the true value of this platform that virtually all of my knowledge about investing comes from this website, with the exception of the weekly Barron's article, Cramer's Mad Money, Bloomberg, or various books. And I would like to thank all of the independent authors here, the Seeking Alpha staff, and my loyal readers who feel listening to a 22-year old novice investor is worth subscribing to.
Before analysing my results, I want to return to the quote attributed to Keynes presented at the beginning of this article, because I feel as though my transformation and development into investing has been following a similar path to Keynes. You see, contrary to popular myth, Keynes was not an enemy of the free market; in fact, just the opposite was true - Keynes was a fervent capitalist and highly active investor.
Around 1913, he started one of the first investment partnerships/pseudo-hedge-funds by speculating in currency markets. However, after losing almost all of his capital twice over in the currency and commodities markets, Keynes began to realize that true investing should rely less on short-term speculation and more on company fundamentals and long-term value. I started my foray into investing in similar fashion, trading USD/JPY contracts during Japanese auction hours; however, eventually, I began to realize the same conclusion that Keynes came to - that in speculation as in gambling, the house always wins and the players rarely do. So, I focused more and more on intrinsic value, cash flow trends, capital flows, etcs. and my results vastly improved as a result.
In any case, let's get to the crux of this article: if one were to build a portfolio of my various recommendations made over the past year, what would the performance of said portfolio be?
Below is a detailed compilation of all of my calls by asset class, call type, holdings weight, and price return.
Note: Weighting is determined by the confidence of the call expressed at the time and how many shares would theoretically be bought (e.g. heavy = 200 shares; mid = 100 shares; light = 50 shares), and gains/losses are calculated as if the position (long or short) were to be liquidated today.
As you can see, a portfolio containing my recommendations has actually performed quite well, to my own surprise! While I do invest on some of my calls, I rarely do because the reality of being a young person in the modern day means I lack the capital to do so efficiently, so it is as much a surprise to me that my portfolio has performed so well. Here are some brief looks at some of my best calls:
I knew I had found something special with Albemarle and I am proud to say it remains my best bet thus far, up 60.85% since publication. Their portfolio of refined chemicals and lithium hydroxide products alone, by supply-and-demand, would elicit a recommendation but management is so efficient that the company is performing all the better for it. With management divesting the underperforming Chemetall unit from the Rockwood acquisition and the end of Indochina's insatiable polymer demand nowhere in sight, I would continue to hold an outsized position in Albemarle well into the future.
As it seemed Japan was destined to pursue further monetary measures to shore up their deflating economy, I knew Japanese financial institutions would continue to suffer. Little did I know that the Bank of Japan would fully commit to NIRP and decline to expand the asset purchase program, making my short calls on MTU, SMFG, and MFG second-most profitable. To top it all off, the BoJ failed to warm up the banks and money managers for NIRP, so computer systems suffered from a month of disuse and errors as engineers scrambled to figure out how to make NIRP work. It's still a mess with no end in sight, and unless a massive change in political leadership occurs (highly unlikely), these shorts are a no-brainer!
Technical Analysis Calls: Sketchers USA (NYSE:SKX), Arbor Realty Trust (NYSE:ABR), Apollo Commercial Real Estate Finance (NYSE:ARI), CYS Investments (NYSE:CYS), MFA Financial (NYSE:MFA), Alpa Alerian MLP ETF (NYSEARCA:AMLP), and Eagle MLP Strategy Fund (MUTF:EGLIX)
It seems like a rather motley group to stick together - mREITs, midstream MLPs, and footwear stocks - but all of these picks have one thing in common: I found the best stocks in a particular category by the strict use of technical analysis. In the modern world of investing where algorithms can analyse company data at light-speed and allocate capital seemingly perfectly, it may seem like traditional statistical arbitrage is something of an impossibility but clearly there is still opportunity to find undervalued stocks by simple technical analysis. Strictly speaking, however, it is important to note a distinction here: that my mREIT and MLP picks in particular may have benefited in significant proportion from systematic market conditions from interest rates or commodity prices, etc., whereas the success of my call on Skechers, for example, could be attributed more to arbitrage conditions, i.e. based on intrinsic company value and market valuation.
Overall, based on weighted unrealized gains/losses (excluding reinvested dividends), a portfolio containing my recommendations would have gained a decent 13.74% thus far.* Compared to the Morningstar U.S. Market Index which would have gained 4.90% within the same period, my portfolio of recommendations has performed above and beyond. Considering my calls consist of Japanese equities and some shorts, it is quite stunning to see just how closely my portfolio's returns track along the same path as the index albeit higher; although, with such high asset correlation these days, you would be hard-pressed to find an index that doesn't appear to track the same path.
*Based on the weightings given above, total cost of the hypothetical portfolio would be $78,183.50 and total market value today would be $88,912.50, including short calls.
To investigate, let's analyse just how close my portfolio is to the benchmark using alpha and beta. Has my portfolio's performance come from actual investing skill or has my portfolio gained simply from beta exposure? Using the following formula to calculate alpha:
α = portfolio return - (risk-free rate + (benchmark return - risk-free rate) β)
If we assume the risk-free rate to be the average rate of return of the 3-month U.S. Treasury bill for the same period of my portfolio and calculate the beta using regression analysis of the covariance of the two return arrays divided by the variance of the benchmark return index, we get the following completed equation:
α = 13.74 - (0.19 + (4.90 - 0.19) 1.13)
= 13.74 - 5.51
An alpha of 8.23 means that the portfolio delivered 8.23% in excess returns above the expected return for the risk involved. Thus, significant alpha was indeed achieved. Of course, one could always change the risk-free rate to a longer-duration T-bill or alter the benchmark index* to one more appropriate like a long/short global equity fund index, however, the result would generally be the same - a high amount of alpha generation. Still though, looking back, clearly if one were to follow my recommendations, the portfolio would have a significant long equity bias, which is something I don't like. Moving forward, I would like to incorporate more short calls and explore more non-traditional assets such as derivatives in order to consistently achieve true alpha returns.
*The benchmark was chosen by Morningstar to be the most appropriate index.
I am truly proud to be a part of the Seeking Alpha contributor community and it really is amazing how much I've learned in one year from this amalgamation of experts and amateurs debating day after day, often in their free time away from their actual finance careers. More recently, I have noticed how our community is often derided as being too technical or too negative (Tesla (NASDAQ:TSLA) coverage comes to mind), yet one needs to merely compare the performance results of the independent authors here versus the typical Wall St. cheerleading squad to see the real difference. One day, if I ever achieve my dream of running my own investment partnership or even if I'm just passively investing in my free time, I will always treasure what started it all - Seeking Alpha and the relentless pursuit of alpha.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.