Launching Absolute Return Ideas: High-Conviction, Short-Term Trading Bets

by: High Watermark Investments
Summary

Absolute Return Ideas is a service providing short-term, direction agnostic trading ideas.

Our algorithmic approach is supplemented by a backtested record of each call’s performance.

This idea was discussed in more depth with members of our private investing community Absolute Return Ideas.

Absolute Return Ideas (ARI) is a Marketplace service aimed at providing short-term trading ideas to subscribers.

ARI is meant for the disciplined

ARI is meant for investors / traders looking to make money in a sustainable manner by consistently following our calls. The typical ARI subscriber will need to be emotionally detached from a position that they take.

ARI service is not a play on the long term and consequently does not include debates on the merits or demerits of a stock. Especially for the folks who are emotionally attached to a stock or the ones who hate a company, ARI is not the right service. There are many "buy and forget the stock" services on Seeking Alpha, and ARI is not one of them.

What do ARI subscribers get?

  • Directional (long/short) trading calls with clearly defined expectations of trading period, which will be typically less than trading 15 days.
  • Historical performance of the last few calls given on the stock to help decide on whether one should go ahead with a call or not.
  • Access to a Google sheet with a track record of all the prior calls.
  • 20-25 calls per quarter

We also plan to introduce a poll where subscribers will be able to ask for our call on particular companies. This feature is not available yet, but we plan to launch it soon.

The stocks selected are based on a combination of trading history, market cap and stability in operational metrics. We arrive at our trading price estimate for a company’s stock using algorithmic models that weigh the companies’ recent operational performance trends and sentiment analysis, and the stock’s performance relative to the market.

As an example of our performance, three out of our last four calls on Apple (NASDAQ:AAPL) have generated positive returns:

Source: Company filings, Seeking Alpha, Yahoo Finance, Author estimates

However, we would also like to highlight that our last call on AAPL generated a loss:

Source: Company filings, Seeking Alpha, Yahoo Finance, Author estimates

The reasons for returns to be lower than our expectation vary from management dynamics, extreme movement in demand-supply characteristics, insider developments and a whole host of microstructure issues.

We have no biases toward any of the companies, and our calls are completely based on our algorithm.

A point here is to keep your trading and investing books separate. For example, we have been bullish on Oracle (NYSE:ORCL), but an ARI call on Oracle could be short for a 5% kind of a move. We would want to highlight that HWI’s long-term thesis remains intact and the ARI call is just a seven-trading-day directional bet. We wouldn’t want readers with long-term positions in the stock to exit, thus creating a mess of their portfolio. Should a long-term investor in Oracle be willing to short the stock, it should be done as a separate position.

Also, at ARI, we are providing our assessment of the direction of the stock price movement over the next few days. Whether a reader wants to lever up through derivatives or trade the stock is entirely up to the reader.

About the ARI algorithm

ARI uses algorithmic intelligence to enhance human judgment. The ARI marketplace aims to generate directional calls based on:

  • Trends in company results
  • Stock's price movement
  • Inconsistencies or continuity on management vision
  • Avoiding extreme sentiment-led price action

In addition to blending in fundamental and technical factors, we also look at the trading history of the stock. To help decide whether a call is worth the risk, we also provide the results of at least the last four calls. Our calls assume that we carry the position through the duration of the call. We further compare the results of our calls vs. what had happened if the stock was shorted or was held, for the duration of the last four periods.

The algorithm keeps learning from all of this information to ascertain where the stock could be over the next few trading days.

However, the market's extreme reactions can lay to waste the best of intent, which is what happened in case of the negative returns seen in AAPL this quarter.

With the caveat that historical returns cannot ensure similar results, we hope readers understand the strengths and limitations of our system. (You can see the results of our algorithm and open calls on the ARI tracker, available to subscribers only.)

About us

HWI is a combination of algorithmic and human intelligence, bringing together nearly three decades of experience in financial engineering, equity research, portfolio strategy and fund management.

In order to avoid any potential conflict of interest, we will not be taking any positions on any of the companies that we publish about on the marketplace or the free site.

The conflict of interest that sell-side poses is possibly the biggest contributing factor to the rise of crowdsourced investing. The proliferation of Seeking Alpha as an investing platform also has led to a deluge of opinions (including HWI’s) about companies and sectors. With ARI, our opinions are evaluated by the returns that will be generated within a span of a few days vs. our thematic pieces that have longer time frames.

Next steps

If our thought process resonates with you, consider joining us at ARI. You also can try a free trial. We wish you the best in your investing.

Also, we're offering a Legacy Launch Offer of $60/month and $500/year - 20% off the regular price for the first two weeks.

Disclaimer

  • Our estimated returns are on a pre-tax, pre-transaction and pre-impact cost basis.
  • Past performance cannot guarantee future returns.
  • HWI is not a registered investment advisor.
  • All data is sourced from company filings, Seeking Alpha and Yahoo! Finance. Estimates are based on HWI calculations.

To learn more and sign up - go here.

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.