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I am a financial services veteran, who moved out on my own and launched a successful hedge fund a number of years ago. Recently, I launched The Whaley Report, a weekly investing service using just 8 specific ETFs in proprietary Focus Markets that provide global diversification and maximize... More
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The Whaley Report
  • “All We Need Is Just A Little Patience” 0 comments
    Sep 2, 2014 5:15 PM

    Yes, I just started this week's commentary with lyrics from rock band Guns N Roses.

    Don't count out a report entitled "Welcome to the Jungle" in the near future.

    Both are very appropriate spring boards for a conversation about the financial markets.

    I have a very detailed investment philosophy that is the basis by which all parts of my investment process stem from. If I can single out one common theme throughout that philosophy, it would be the idea of being patient and waiting for the fat pitch across the middle of the plate before putting capital at risk.

    I can promise you that if you can consistently practice patience in the financial markets, that alone can be a huge edge over other investors. The hardest thing for most investors to do is nothing.

    In my previous role as an advisor, the hardest thing for me to convince clients was that making a decision to do nothing was just as proactive as making a decision to change something. The fact is that money cannot consistently be made trading every day or every week during a given calendar year.

    Profits can only be made when the opportunity is available and not just because they happen to be desired or needed. Read those last two sentences again. Memorize them and trade by them.

    Those statements are the cornerstone of a philosophy that will outperform most other market participants.

    To Be a Fundamentalist Technician

    One of the core tenets of my investment philosophy is to think like a fundamentalist but trade like a technician. Simply put, the fundamentals of a particular market are an indication of how the market SHOULD BE acting and the technical factors of a particular market are indications of how the market IS acting.

    To outperform year in and year out, you must understand the fundamental underpinnings of a given market and trade in the direction of those fundamentals once the technical factors align in your favor.

    In my own process, I develop a BIAS for the fundamentals of a given market and then I look at the technical factors to see if the price action and sentiment are aligned with the bias I have for the fundamentals.

    If the two are aligned I will develop a directional bias for that market. If the fundamental and technical factors oppose each other, I institute a NEUTRAL bias for the market until congruence occurs.

    Regular readers of The Whaley Report know that I'm a big proponent of Pareto's Principle, or the 80/20 rule.

    Pareto's principle states that, for many events, approximately 80% of the effects come from 20% of the causes. In the July 7 edition of The Whaley Report, I go into detail about how Pareto's principle exhibits itself in investment portfolio performance. Email us if you would like a copy of that report.

    As you'll see today, that same principle can be used to better understand the price movement of markets. Approximately 80% of the price movement of a particular market occurs only 20% of the time.

    The rest of the price movement is simply noise within the trading range. This means I can maintain a NEUTRAL bias for long periods of time until the price action begins to align with the underlying fundamentals. That means there can be long periods of inactivity.

    This is especially true with the The Whaley Report's Focus Markets. Given that we're only trading 8 markets, there can be very long periods of time where we aren't actively initiating trade ideas for a particular market. Since the report's inception, we've averaged just under 1 trade each week.

    In addition, there have only been 23 weeks (25% of all weeks) when all 8 Focus Markets have had a directional bias. That means that 75% of the time, at least one Focus Market has a NEUTRAL bias each week.

    Pareto In Action

    Pareto anyone? Let's now look at Pareto in action with the price movement of a couple of the Focus Markets so far this year:

    SPY - 9.7% as of 8/29/14

    December 31, 2013 - April 15, 2014: 17 basis points (13 weeks)

    April 15, 2014 - May 30, 2014: 4.9% (6 weeks)

    May 30, 2014 - August 7, 2014: -38 basis points (13 weeks)

    August 7, 2014 - August 29, 2014: 5.1% (3 weeks)

    The S&P 500, SPY, is up 9.7% for the year through last Friday's close. We are currently 35 weeks into trading this year and SPY has made all of its price movement in just 9 of those weeks. For those of you keeping score at home, that's 25% of the time, which means that 75% of the weeks this year, SPY has essentially not moved at all on a net basis. Pareto anyone?

    GLD - 6.6% as of 8/29/14

    December 31, 2013 - January 15, 2014: 3.0% (2 weeks)

    January 15, 2014 - June 3, 2014: 28 basis points (20 weeks)

    June 3, 2014 - June 19, 2014: 3.6% (3 weeks)

    June 19, 2014 - August 29, 2014: -37 basis points (10 weeks)

    Gold, GLD, is up 6.6% for the year through last Friday's close. We are currently 35 weeks into trading this year and GLD has made all of its price movement in just 5 of those weeks. That means that all of GLD's price movement for 2014 occurred in just 14% of the weeks. 86% the weeks this year, GLD essentially has not moved at all on a net basis. I think you get the picture.

    As you can see from the examples above, markets spend very little time in a directional posture. Some markets, spend even less time aligned with their underlying fundamentals while moving in a directional manner.

    As such, a true investing edge comes from the willingness to do nothing, sit in cash and wait for real opportunities to materialize. If you stick with your process, opportunities skewed in your favor will present themselves and the low risk, high reward returns will follow. As Axel Rose would say, "…take it slow, it'll work itself out fine. All we need is just a little patience."

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