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  • The next two legs of our stool are an evaluation of different types of investments. At some times Fixed Income is the place to be, sometimes, it is international equities, other times US stocks, and there are times that commodities or foreign currencies are the place to be. A solid investment strategy will evaluate all of these asset classes to determine what is the strongest and should be represented, and just as importantly, what deserves no representation in your portfolio. And with the advent of the Exchange Traded Fund (ETF) market, all of these asset classes are available to investors just like buying IBM.
  • You’ll notice in these previous charts that they were all financial related issues. When we look at the causes of price movement in any individual stock, the market and the sector together on average cause 80% of the price movement in a stock. That means the company fundamentals usually account for less than 20% of a stock’s price movement. This is the reason a company’s stock price sometimes seems to move independently of the fundamentals!
  • Most people, however, spend 80% of their time on stock evaluation and only 20% on sector and market evaluation. In other words, they ignore where the greatest amount of risk lies – the market and sector forces. Because most of the risk in any stock is in the market and the sector, I structure my game plan from a top down approach. My success ratio in stock selection is going to be limited until I define risk in the broad market first. Source: “The Latent Statistical Structure of Securities Price Changes” by Benjamin F. King
  • Basically, there are two types of securities analysis – fundamental analysis and technical analysis. Fundamental analysis is what most of us are familiar with. When you see an analyst on television or read comments from an analyst in a magazine or news story, most often these comments come from fundamental analysts. A fundamental analyst tries to answer the question “What” to buy. She will study the company’s balance sheet, evaluate the management team, try to understand the quality of the company’s earnings. A technical analyst tries to answer the question “When” to buy and just as importantly, “When” to sell. A technical analyst wants to find the trend of a chart – is it trending up or trending down. Is the stock outperforming the broad market? How high, or in some cases, how low can the stock go?Unfortunately, there are very few on Wall Street who effectively combine the fundamentals with the technicals. In a sense, they’re playing the piano with only one had. While that may be a way to play a simple melody, you can play much better music if you play the piano with both hands. In fact, our game plan is grounded in this philosophy of combining the fundamentals with the technicals, or playing the piano with both hands.
  • We all understand the basic law of supply and demand; we have all experienced these forces at the supermarket. We know why in the winter tomatoes don’t taste very good, don’t have a very long shelf live, and are expensive. We inherently understand why there are lemonade stands in the summer and hot chocolate stands in the winter. Stocks, sectors and asset classes move in and out of favor just like produce in the supermarket.
  • This is a modern day Point & Figure chart of Deere. The numbers have moved to the vertical axis and the prices have been replaced with X’s and O’s. X’s represent demand O’s represent supply. You’ll notice that from September 2008 to December 2008, the stock was making lower X’s and lower O’s meaning that demand was getting weaker and supply was getting stronger. That started to change in December. Now we see that Deere is showing demand getting stronger by the X’s going higher and supply getting weaker by the O’s not pulling back as far each time. You’ll also notice two lines – red and blue. The Blue line is called the Bearish Resistance Line or I like to refer to it as I-95 South. As long as the stock is below the blue line, it’s “trend” is negative. Conversely, the red line is the Bullish Support Line or I-95 North. As long as the stock is above the red line, it’s “trend” is positive and I consider it a solid citizen.
  • The NYSE Bullish Percent Indicator, whose history goes back to 1955, is merely a measure of the percent of stocks being controlled by demand. At the end of everyday we go through all stocks on the NYSE and put them in two piles – the Double Top or Buy Pile and the Double Bottom or Sell Pile. Once that is completed, then we get a percentage reading of the percent of stocks on a Double Top or controlled by demand and plot that percentage on a grid which goes from 0% to 100%. When this indicator is in X’s it is rising and telling us that stocks are coming from the supply pile into the demand pile. Conversely, if the stock is falling and in O’s then it tells us that more stocks are moving from the buy pile into the sell pile and supply is gaining the upper hand. We look at this chart as one of our main coaches telling us whether the offensive team is on the field or the defensive team is on the field. When the chart is in X’s the offensive team is on the field and we look to wealth accumulation strategies. When the chart is in a column of O’s, the defensive team is on the field and we look to wealth preservation strategies for the portfolio. There are two lines of demarcation letting us know our field position and the types of plays we should run. When this indicator gets down to the 30% level or lower it is in oversold territory and this is when the news media will be particularly negative. But remember, the markets look ahead 6 to 18 months. News headlines tell us what has happened. Conversely, the 70% level or higher is high risk. The availability of demand to push the market higher is severely limited. Typically this indicator gets to these extremes only once every 3 to 4 years. While 2008 was very active on this chart, it was just a reflection of the overall market volatility and on average this chart only changes 2.5 times a year from offensive to defense and vice versa.There is one warning I must give you about this indicator and that is it will not necessarily move like the S&P 500 or the Dow Jones. Both of these indices give more votes to certain stocks either based upon how big the company is, capitalization in the case of the SPX, or price, as is the case with the DJIA. In the NYSE Bullish Percent, all stocks are created equal much like your portfolio is put together. That is why I find it a much better indicator to watch than the often quoted indices. You’ll never see this indicator quoted on CNBC.

Winchester Bluff Presentation 3_1_13 Winchester Bluff Presentation 3_1_13 Presentation Transcript

  • Introduction
  •  The fund measures its success based on the absolute level of profitability and not “relative” performance vs. the market Invests both long and short to capture profits in both rising and falling markets Low volatility/beta (currently @ .14) Low correlation to the broad market
  • Global Macro Strategy Ability to trade multiple instruments in asset classes around the world at any time Employs proven indicators of Point & Figure Charting and Relative Strength Employs objective technical analysis in conjunction with fundamental research Our strategy works because we limit risk and adhere to a clear trading plan
  • Cash US Stocks Fixed IncomeInt’l Stocks Currencies Commodities
  • 1. Not lose money2. 15 + percent annual returns over the next decade3. Continuous improvement by analyzing mistakes4. Gain partners who share our philosophy ofuncompromising risk management & enjoy experience
  • Active trading around core investments Defines & limits downside risk by investing in uncorrelated pure alpha streams ("Alpha" in investing language is the return you achieve based on manager skill) Invests in a core positions ranging from foreign bonds to currencies to commodities to global stocks Invests in subsidiary holdings at the periphery of the core to enhance returns Executes this dual complex strategy by constantly analyzing fifteen or more asset classes and simultaneously placing 30 or more trades Invests in only the most liquid markets that it can get out of quickly if necessary Portfolio construction process identifies what each position could add in terms of overall risk to the portfolio
  • Technical Market Analysis Growth Value Stock Stock Screens Screens CORE POSITIONS Event-driven Specialtrades/Straddles Situations/Niche Products/ Chart Pattern Emerging Recognition companies Hedges (portfolio protection)
  • The “buy-and-hold” myth: Buy the “Market” in 1929… It took 25 years to get back to even Buy it in 1973… It took 7.6 years to get back to even Starting in 1987 IBM went down 74%... It took 10 years to recover Cisco Systems (CSCO) was as high as $82 in 2000… It has yet to recover
  • Market and sector forces together typically cause 80% of the price movement in a Market stock. That means the company fundamentals usually account for less than 20% of a stock’s price movement. This is the reason a company’s stock price sometimes seems to move SectorStock independently of the fundamentals. Source: “The Latent Statistical Structure of Securities Price Changes” Benjamin F. King
  • Most people, however, spend 80% of their time on stock evaluation and onlyStock 20% on sector and market evaluation. In other words, they ignore where the greatest amount of risk lies – the market and sector forces. Market Source: “The Latent Statistical Structure of Securities Price Changes” Benjamin F. King Sector
  • What is Fundamental Analysis? What is Technical Analysis? 1. What to Buy 1. When to Buy 2. Company Management 2. Positive Trends 3. Earnings Growth 3. Relative Strength 4. Price/Earnings Value 4. Broad Market Risk 5. New Products 5. When to Sell
  • GROWTH SCREENThe Investors Business Daily (IBD) 85-85 Index ScreenIBD provides independent data ratings for every U.S. stock, including an Earnings Per Share (EPS) Rating and a Relative Strength (RS) Rating.Their research shows that in every market over the last 50 years, the best stocks have had EPS and RS Ratings of 85 or better BEFORE they made their biggest gains.The consistently superior performance of the IBD 85-85 Index reinforces this fact and is why we incorporate this screen as one of our primary tools: From the total period 11/13/2000 to 2/28/2013, the IBD 85-85 returned 274%, while the S&P 500 Index returned 12%Note: IBDs ratings are relative, with an 85 rating meaning the stock is outperforming 85% of all stocks in its peer group. The Index is updated after the market close each Thursday. At that time, stocks no longer meeting the 85-85 criteria are removed, stocks now meeting the criteria are added, and those maintaining their ratings remain in the Index.
  • VALUE SCREENThe Buffett/Graham ScreenThis screen identifies companies with high quality business at undervalued prices 1. Stock price is less than the net current asset value of the company 2. During the past 12 months, the company generated positive operating cash flow 3. The company has no meaningful debt compared to its cash position From back testing study 1998-2012, this group had an annual gain of 20% while the S&P 500 index averaged 2% a year.
  •  Fundamental research tells us what ought to happen with a stock, while technical analysis tells us what is happening with respect to supply and demand Technical analysis, and in particular “Point & Figure” technical analysis, gives us the discipline to make decisions based on price This logical approach helps reduce uncertainty in the market. It allows us to recognize market risk and therefore:  Move to cash/short assets when market indicators dictate that supply is in control  Invest long and more aggressively when demand is in control The ability to perceive and manage risk, and thereby preserve our investors’ capital, is our primary objective at Winchester Bluff
  •  We all understand the basic forces of supply & demand The same forces that affect prices in the supermarket also affect prices in the stock market Stocks, sectors, and asset classes move in and out of favor just like produce at the supermarket
  • Point & Figure BasicsPrices represented by X’s and O’sAlternate columns of X’s and O’s as the price changes X’s = Price is rising O’s = Price is fallingTrend-line shows strength or weakness Chart Source: www.dorseywright.com
  • 23 X <- Demand22 X X X X X wins21 X O X O X O X O X20 X X O X O X O X O X X O X O O X O X O19 X O X O X O X O X O18 X O Notice that supply and demand X battled it out for a full year17 X until demand won at $23 0 <- Year 0 0 1
  • 45 O O X X O X O X O X X O X O X O X O X O O X O O X O X O40 O X O X O O O O O B S X X X X O X O X X35 X O X X O X O X X O X O X O X O X X O X O X O O X O O X30 Stock A Stock B
  • Now that you understandPoint & Figure chartingbasics, we can move on toour most importantindicator, the NYSEBullish Percent.
  •  Our Primary Market Indicator Tells us whether to have the offense or defense on the field It is calculated by taking the number of stocks in the NYSE on a buy signal, and dividing by the total number of stocks in the NYSE, resulting in a percentage For example, if there were only 1,000 stocks on the NYSE and 500 were on buy signals, the resulting NYSE Bullish Percent would be 50%, which is then plotted on a Point & Figure chart.
  • • X’s = Offense – Wealth Accumulation• O’s = Defense – Wealth Preservation• Two Important Areas: 30% and 70%• Measures Risk in the Market• Does not have to move in tandem with the S&P 500 or the Dow Jones.
  •  One of the most important considerations when investing is determining whether to take an offensive or defensive posture When offense is suggested we employ the funds assets by making stock purchases When defense is suggested we work to protect existing positions and take advantage of shorting ideas
  •  Buy Exchange Traded Funds (ETFs) Buy stocks on breakouts Buy leaders Consider deep value plays Employ liberal stop loss points Buy Offensive sectors (BP & X’s) Focus on strong technical stocks Buy on pullbacks Use trend-line stops Focus on strong relative strength Buy Call Options
  •  Trim or take profits Short equities Reduce equity exposure Raise cash Sell weak RS stocks Buy Inverse funds Buy protective puts Tighten stops on long positions Increase non-correlated exposure
  • How our process helps us invest with discipline
  • Over the past 30 years: The average stock mutual fund has returned 10.7% The average investor has returned only 3.7% The difference can be attributed to investors making emotional decisions For Example…
  • DECISION INPUT WB Process  Decisions are clear-cut Emotion-based Investing  Input comes from many sources and leads to second-guessing AT DECISION TIME WB Process  Portfolio construction based on a set of rules Emotion-based Investing  There are no rules
  • COMFORT LEVEL WB Process  Investments are easily reevaluated as indicators change Emotion-based Investing  Decisions put off due to difficulty EMOTIONS WB Process  Emotions are not a part of decision-making Emotion-based Investing  Emotions cause errors that can have disastrous effect
  • REACTING TO NEWS/MEDIA WB Process  No effect - we stick to an organized plan. Emotion-based Investing  The news causes most investors to panic PEACE OF MIND WB Process  A lot Emotion-based Investing  None
  • Independent Statistics FundamentalWeb-Based ResearchTechnology Asset 85-85 Evaluation Screen Asset Value Inventory Screen Investment Market Decision Risk Technical Sector Research Risk Portfolio Risk Analysis Relative Strength Trend Chart Lines Patterns
  • Stock: Date:Sector: Positive (Y) Negative (N) CommentsMarket BPSector BPValue ScreenGrowth ScreenTrendPatternConsistent with current DALIFavored SectorTechnical AttributesStop Loss %Sell Analysis:1/3 when up 30%1/3 when up 50%When broke trend lineWhen Relative Strength changedWhen dropped back to first 1/3 sellWhen nothing happening 1+ monthHow did stock perform after sale
  • 10-year average annual return goal: 15% Investment Process & $100M AUM Risk managementFund launch
  • Private Limited Fund Subscription Placement PartnershipSummary Agreement Memorandum Agreement
  • What is most important is seeing that your money managerhas a coherent process. PROCESS is the key.Does the concept make sense? Is it robust? Is the organizationcommitted to its discipline? Is risk managed during theinevitable downturns?Over long stretches of time, having a strong process and gooddiscipline makes all the difference.Identifying good managers is a tough decision. Of course, wehope that your choice of a manager will be Winchester Bluff.The path to good returns is simple: find a manager whoseprocess you are comfortable with and hang on through thickand thin.