Want To Benefit (Outperform Market Average) From Active Management?

by: Peter F. Way, CFA

Summary

Here’s How – by 16% so far in 2016; 25% CAGRs vs. 9% SPY buy&hold.

In over 3,000 daily opportunities, winning ~ 6 out of every 8.

Just know the likely next 3-month price change limits of stocks.

Take the money and run as soon as targets are reached, turn off the ones not making it in 3 months. Reinvest in the best current opportunities next day.

We know where to find those likely price change limits.

The market-pros know

Because, as Clouseau (AKA Peter Sellers in the Pink Panther) said "It is my business to know these things."

Every day they put firm capital at price-change risk to help billion-dollar portfolio managers adjust big chunks of their holdings. They buy risk insurance against their possible capital loss, and make their clients pay for it - a cost of market liquidity.

The derivative-securities market actions between buyers and sellers of the insurance define what those "in the business to know" can charge to cover the price change possibilities - of both up and down changes.

We have been logging their actions, and the real-market eventualities, daily for over a decade, at all levels of upside-to-downside prospects, issue by issue on some 2,500 stocks and ETFs. We know the odds, and some of the ways to play them.

You may have better ways.

Here is the accumulation of percent gains and losses from =$ positions in the 20 best-ranked daily candidates this year to date in 2016, as they were taken.(ex-ante)

Figure 1

source: blockdesk.com

Produced by following an unchanging, previous-to-2016 defined, well-described in many SA articles, (less so in bullet points above) active investment management discipline. Referred to as TERMD, these percentage gains and losses reflect the 3-month holding period time limit.

That is why the yellow net-gains line and the green gross gains line are identical in the first 3 months. Likewise, no losses were taken in that period of potential recovery (or not) from interim price drawdowns below position cost price, shown in the red line.

But since then all candidate "positions" indicated have been closed out after 3 months, including the earlier sell-target achievements. Daily "reinvestments" perpetuate the scorecard. The proportion of gains to losses are visually evident.

Conclusion

Frequent assertions are made that active investment is inevitably unproductive for the individual investor. Often when data is offered in support of those contentions it comes from the records of active management by mutual funds or other large institutions that are trapped by their size. Ones that lack the ability to enter and exit investment positions without disrupting the market to their disadvantage. No wonder for many their scores are net deficient.

Operational flexibility is a principal advantage available to the typically smaller individual investor, confronting equity markets transacting a trillion dollars of trades a day. They can easily enter and exit positions, these days at trivial transaction costs of as little as $1 a trade ticket.

We want to help DIY individual investors better meet the time-defined milestones in their financial plans. To that end we contribute in Seeking Alpha articles periodic free looks at what these market professionals are saying by their self-protective actions. And what that has meant in terms of subsequent price changes.

Fuller and continuous descriptions are available at as-needed time occasions set by the individual subscriber, renewable as desired.

Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors, and now individual investors discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.

We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for their guidance what the arguably best-informed professional investors, revealed through their own self-protective hedging actions, believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided. Our website, blockdesk.com has further information.

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.