Investment Strategy Statement - Amit Ghate

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Includes: GORO, ONCS, TSLA
by: Amit Ghate
Summary

This article presents my Investment Strategy as it exists today.

I focus on contrarian ideas: shorting manias and going long bearish overreactions.

I'm an opportunistic trader whose skills and outlook are continuously evolving.

I'm a mechanical engineer who has been an active trader going on twenty years now.

Investment Strategy

I tend to focus on short-selling, supplemented with a basket of smaller cap and/or dividend-paying value longs. For short selling, I look for situations where I believe that the crowd is over-optimistic or preferably there's a full-on mania raging. I'm not a perma bear and was heavily weighted to the long side after the 2008 swoon, but today, overall market valuations have me much more short than long, a transition which I made much too early in this cycle and has definitely cost me in terms of performance and returns. However, charts like this one from advisor perspectives have me leery about being net long at this time (note, despite the December pullback, we're still above 1929 valuations!):

Standard Deviation Average

(source)

Investment Process

In a certain way, my investment processes for shorts and longs are mirror images of one another.

For shorts, as mentioned, ideally I look for manias, and to find them it's very helpful to follow social media (Twitter and chat rooms, e.g.). That said, it's difficult to miss major sector manias if you're a full-time trader. For example, I think today we're in a bit of a marijuana bubble, while a few years ago, we saw manias in the rare-earth metal stocks and before that in the 3D printing space.

Once I've identified a mania, then it's a matter of getting familiar with the most played names and shorting a few of them. For example, I wrote in detail on why I thought Tilray (TLRY) (while trading above $150) was an excellent short, not only being part of a bubble but then having additional structural reasons for its sky-high stock price. In the same vein, I'm currently also short a bit of Canopy Growth (OTC:CGC) and Cronos Group (OTC:CRON), but these are merely short term trades, I don't consider them height-of-bubble stocks at the moment.

Conversely, for longs I like out-of-favor and possibly under-followed value plays or plays where I think the risk-reward has become favorable due to investor sentiment having become too pessimistic.

As an example of the latter, I've written why I like OncoSec Medical (ONCS) (articles 1 and 2) as a speculative long. The stock has been beaten down because good trial results failed to meet high (and, in my opinion, unreasonable) investor expectations. The company has four cancer trials ongoing - a registrational trial in melanoma, and trials in triple negative breast cancer, cervical cancer, and head & neck cancer - yet the company trades at a market cap of only $41M. Should any of the trials be positive, (and in my opinion initial results from the melanoma study are already promising) I think the potential rewards create a very favorable risk-reward scenario.

As an example of out-of-favor stocks, I'm currently long some gold stocks and ETFs because I believe the sector is completely unloved with investors having increasingly abandoned the sector since its peak in 2011. If portfolio managers eventually decide to increase gold allocations from underweight to even-weight, I think the sector could move precipitously as there's really not much supply to meet even a moderate increase in demand. With that backdrop, I like Gold Resource Corp. (GORO) as a specific name in the sector which I believe is under-valued at current metal prices and is (conservatively) well-managed.

Writing for Seeking Alpha

In trades that I particularly like, I often try to share my rationale and conclusions with the Seeking Alpha audience. The writing process begins with re-reading the relevant SEC and company documents and then reading other perspectives on the name from SA authors. This latter exercise is always a useful learning experience, as not only do I typically come away with a better understanding of the opposing view or views, but it also lets me hone in on what might be unique about my own view, which I can focus on in my article.

The hard work is gathering all the background information and generating a theme for the article, once that's done, the writing process generally takes a day or two, but it's a process I highly value and recommend as it's a real test to the investment. In fact, once or twice I've gotten out of a position when the objective process of writing it up showed weaknesses in the thesis that I had to be avoiding or ignoring!

Having the facts laid out in an objective fashion also turns out to be helpful in reviewing and managing a trade over time. Not only are my most important data points and sources condensed in one place (or several as in the case of my ongoing investment in GORO), it also serves as an easy way to review whether my thesis is playing out or not and to adjust the trade accordingly.

The final - and perhaps most valuable - aspect of writing for Seeking Alpha is the feedback (both negative and positive) that one receives in the comments. I often gain new information and perspectives from the interaction in the comment threads.

Executing Trades

While I've traded for a long time, I still have a lot to learn in terms of best execution. In particular, I tend to be too early and to put on too large of a position at the early stage. I think it comes down to a psychological point of thinking "if I know this, the market will instantaneously know it too". So I've made a point in the past year or so of waiting longer to execute shorts and to scale in more gradually.

Indeed, I wrote an article about how my Radius Health (RDUS) short, while being closed out at a gain, was really a poor trade because I was in way too early, and the actual facts that would be needed to prove my thesis were so far off in time.

I've since improved this aspect of my trading and have waited longer to take full positions in such stocks as Aerie Pharmaceuticals (AERI) and Tesla (TSLA) for instance. I included discussion of the AERI short in my RDUS article and presented my TSLA thoughts here.

Valuation

I believe that valuation matters, and is the ultimate determinant of long term stock prices. Indeed it's why I started out this article by reproducing a market valuation chart. However, what I've learned (at my own expense) is that valuation really only applies to the very long run. Using valuation measures to attempt to time the market is fraught with risks.

Psychologically I still have problems accepting this, so it's an ongoing personal process to eschew trades on valuation alone.

Nonetheless for me to have conviction in any short or long, the valuation case has to be crystal clear. It's just that I can't stop there, there must also be clear and compelling timing catalysts and/or structural reasons to enter the trade. For example in my TSLA trade, I've long noted that TSLA's market valuation is an order of magnitude higher than that of its true automotive peers. But previously the timing for an outright short sale wasn't right because there was so much for longs to hope for in the future. I think the timing is now right because all of the good news is out, and we're finally beginning to see the problems bears had long forecast actually begin to play out. (For example demand for the Model 3 is beginning to wane, there are many problems with service, competition is heating up, etc.)

Portfolio Risk

I try to divide my portfolio into two buckets; opportunistic trading and long term value & dividend plays, with the latter targeted to become a larger portion of the overall portfolio every year. Nonetheless, I learned in 2008 that the best-laid plans can go awry, so I can't profess to having this all figured out. Indeed portfolio management is something that I'm focused on improving. If I feel that my skills increase by a significant level, I may ultimately begin a model portfolio to share with Seeking Alpha readers, but that's likely a few years off.

Portfolio Return Objectives

Since trading manias and small-cap stocks are inherently volatile, I've found that having portfolio return objectives isn't really helpful in trading, so it's not something I dwell on. Ultimately my goal is to have consistently positive annual returns independent of market action.

Industry Expertise

My training as an engineer doesn't confer any specific investment edge, but I do like to think that it has prepared me to be more objective and less emotional (which is one of the biggest risks to one's own capital). It has also provided me the skills and experience to dive into new areas and pick up the fundamentals in a relatively expedited fashion.

Stage of Investment Career

I'm in my early 50's and have traded for a number of years. However, I'm still learning and the market is ever-changing, so I hesitate to characterize my "investment stage". Rather I still find the markets endlessly fascinating and enjoy the new aspect of sharing my thoughts with readers (thank you Seeking Alpha!).

At times I have lived off of my investment income exclusively, while more recently I've returned to part-time consulting engineering and can live off of that income as needed. I've found that there's a very welcome balance achieved by having one foot in the trading world, with its focus on mass psychology and emotions, and the other in the engineering world with its precision and objectivity.

Aggressive or Conservative Investor

As I mentioned above, my portfolio is split between opportunistic trades and long term value holdings, but since the trading side is the active side of my investments, I think I'd have to classify myself as aggressive rather than conservative. Over time I think that will change, however, and as it does I hope eventually to share more conservative ideas with the Seeking Alpha audience.

Biggest and Hardest Lessons

Trading the market can be a very humbling experience. For some reason, streaks are common (at least in my personal experience) and, hence, there are times when one feels like nothing can go wrong and other times when it feels like nothing can go right. Both prey on one's emotions; winning streaks make one insouciant to risks (and over-allocation is the typical result), losing streaks accentuate fear and can cause panicked decisions and "revenge" trading (i.e. trading to make the losses back all at once).

As a result of this, the biggest lesson and also the hardest lesson I've learned is that I should always trade in smaller sized positions than my emotions tell me to. And while it seems simple to have very mechanical rules about this, there's always a temptation to internally fight about "how this time is different". Moreover, when one follows the allocation rules and the trade goes well, there's a huge temptation to rue the undersized position and to second guess the rules even when winning!

Indeed as much as I know it and have been the victim of over-sized positions, I still make the mistake on occasion, which is why I classify it as the hardest lesson to learn. Hopefully, putting it out on paper like this will help!