+ All Categories
Transcript
Page 1: Top Down Investing

[email protected]

Top Down Investing

An Individual Point of View

Page 2: Top Down Investing

[email protected]

Passive vs Active Investing• Passive:

– Efficient market theory, supported by Nobel Prize in economics research, says you cannot beat or time the market, and the best you can do is remain fully invested with a portfolio engineered to give you market returns at the least possible cost. See www.indexfunds.com

– Ironically, efficient market theory requires that a large percentage of market participants engage in trying to beat the market for it to work

• Active:– The investor/trader believes that by taking some form of action, he can

beat the market. That action relies on an edge which may be fundamental or technical in nature, and generally represents the action driven by a specific theory of how the market works, a specific point of view, a specific timeframe, and/or a combination of these

– Ironically, there are more theories than there are traders

Page 3: Top Down Investing

[email protected]

Fundamental vs Technical

• Fundamentals: – belief in the power of numbers and analysis to establish an objective

value for stock price– buy the stocks with the greatest difference between intrinsic value and

current price. – the market is a weighing machine.

• Technicals: – all information is factored into the current price already; – prices follow patterns which have tendencies that repeat and which can

guide us into favorable conditions– Human emotions affect price as much as intrinsic value and rational

calculations– The market is a voting machine

• Combination: – Blend the strategies to achieve the best of both worlds

Page 4: Top Down Investing

[email protected]

Fundamental Approach

• Beliefs: By analyzing business models, financial statements, market conditions, I will be able to identify companies with a competitive advantage, project their earnings forward, and then determine if they are trading at a discount to their net present value.

Page 5: Top Down Investing

[email protected]

Fundamental Approach

• Motto: I will open 1000 oysters to find a pearl

• Advantages: – To the extent you are numbers and math based, you reduce

subjectivity– Stock screeners are available free, and cut down the work load– The number crunching is not complicated just extensive, so it is

easily done by computers– Consider outsourcing the research and filtering to professional

value pickers or professional growth pickers– In the long run the market is a weighing machine and value will

rise to the top

Page 6: Top Down Investing

[email protected]

Fundamental Approach

• Problems: – A lot of number crunching– Trust in the integrity of numbers– You are going up against Harvard MBAs and quant shops– Large cap records are complicated and also subject to

interpretation– Small caps have the most volatility and are subject to the most

market risk going forward which may not be reflected in historical financial records

– Markets and assumptions change faster than financial reports– Harder to aggregate sectors and regions than individual stocks

Page 7: Top Down Investing

[email protected]

Technical Approach

• Beliefs: By analyzing historical patterns of price action and applying statistics we can find conditions that are favorable for buying and selling. Emotions play a large part in market decisions and these emotional decisions are reflected at key moments in many price patterns which can be used to our advantage.

Page 8: Top Down Investing

[email protected]

Technical Approach

• Motto: History repeats itself

• Advantages: – To the extent you are numbers and math based, you reduce

subjectivity– Stock screeners are available free, and cut down the work load– The number crunching is not complicated just extensive, so it is

easily done by computers– Consider outsourcing the research and filtering to technicians– In the short run, the market is a voting machine, and psychology

becomes more important the shorter the time frame– Easier to analyze and trade sectors and regions which have

specific characteristics and patterns for their respective tickers

Page 9: Top Down Investing

[email protected]

Technical Approach

• Problems: – A lot of number crunching– Analysis paralysis– You are going up against Harvard MBAs and quant

shops– Reliability of patterns– Degrees of freedom & curve fitting– Discipline required to follow a system through

drawdowns– Chasing the perfect indicator– Can lack an anchor to a realistic model of market

action

Page 10: Top Down Investing

[email protected]

Bottom Up Approach

• Look at individual cases and search for value and opportunity one company at a time

• Look for the unique, the undervalued the over looked, the misunderstood, the anomaly

• Find your opportunity and wait for the market to come to you

• You don’t have to understand the whole market, you just have to understand 1 unique story to have an edge

• Supported by a lot of analysis and anecdotal evidence

Page 11: Top Down Investing

[email protected]

Top Down Approach

• Given the weight and influence of institutional money, most of the variation in stock price (75%) is a function of the overall market conditions and then the sectors that companies are in

• Only a fraction (25%?) of the variation in a company’s price is a function of the company itself

• Therefore it makes sense to look at broad market and sector conditions first and make wise asset allocation decisions, and not get lost in the weeds where you are inefficient

• Supported by a lot of analysis and anecdotal evidence

Page 12: Top Down Investing

[email protected]

A market assessment

• Should include at least the following:– Enough frequency to identify trends within your action

timeframe– Early enough identification of trends to make action

meaningful– Disciplined and comprehensive– Identifies strong and weak areas in the market– Based on a philosophical model of how the market

works– Assumptions and beliefs identified– Robust enough to work in all market conditions– Establish a framework for action

Page 13: Top Down Investing

[email protected]

So what? Now what?

• How do you navigate?

• How do you choose?

• What works?

• What does a reasonably accurate assessment of the market look like?

• If you had one, what would you do with it?

Page 14: Top Down Investing

[email protected]

Choices everywhere

• Given a reasonably comprehensive, accurate, objective assessment of the market:

• What should I do?– Buy strength? (on breakouts or pullbacks?)

– Buy weakness? (on breakdowns or bounces?)

– Sell strength? (sell breakouts?)

– Sell weakness? (can I borrow the stock?)

Page 15: Top Down Investing

[email protected]

A set of beliefs and a conclusion• Tortoise beliefs:

– Institutional money moves the markets– Money follows performance, like mice follow cheese– Movement occurs in patterns, like the seasons– There are more trend followers than counter-trend players by number and

capitalization– Institutions favor inactivity and safe trend following, and at a minimum:

diversification, due to fiduciary responsibility– Weekly analysis will identify patterns of institutional money movement in time to

seize opportunity and prevent disaster– Top down approach is an efficient way to analyze world markets for an edge– Technical and fundamental approaches both have merit, but the shorter your

time frame the more important technical analysis becomes– Buying strength is the most reliable method, most aligned with institutional

preferences– The longer the time period of holding, the less important holding out for a more

favorable entry becomes– Price is objective, everything else is a forecast and an opinion

• Tortoise conclusion– Individual investors have an edge in flexibility, agility, and freedom that allows

them to meet their personal investment objectives

Page 16: Top Down Investing

[email protected]

Picking a set of markets

• Cover the world market, so that no macroeconomic opportunity goes unnoticed

• Use Exchange Traded Funds as research tools and trading instruments because:– Tax efficient– Very cheap (“cheaper than Vanguard” cheap)– Variety

• Broad baskets (world indices and regions)• narrower sectors & styles• individual countries

Page 17: Top Down Investing

[email protected]

Analyzing markets

• Many ways to do it– Relative strength– Point and figure charts to indicate sector statistics– Price relative to 200 day moving average– Volume patterns– Elliot waves– Phases of the moon

• Tortoise Index: price performance over multiple time periods, with an emphasis on near term

Page 18: Top Down Investing

[email protected]

7 regions of the Tortoise world market model

Ticker Name

SPY US S&P 500 Index

EWJ Japan

EPP Asia (less Japan)

EFA European/Australasian index

ILF Latin America 40 (large caps)

EZU Europe

EEM Emerging markets

•Simple enough to grasp at a glance•Broad enough to cover the world and identify edges•You can drill down for individual countries & US styles

Page 19: Top Down Investing

[email protected]

Weekly Regional performanceTicker FundName %1wk %2wk %3wk %4wk %5wk %10wk %20wk %40wk Tndx

EEM Emerging Markets -0.89% 0.86% 1.32% 2.38% 3.59% 14.39% 11.64% 32.37% 62

EFA EAFE index -0.62% -1.61% -0.08% 0.99% 2.57% 8.05% 5.37% 11.92% 47

EPP Pacific less Japan 0.55% -2.69% -2.24% -2.88% -1.89% 3.16% -2.20% 9.16% 30

EWJ Japan -0.95% 1.81% 4.56% 6.12% 7.99% 16.05% 23.47% 26.24% 80

EZU MSCI EMU Index -0.61% -1.98% 0.61% 1.24% 2.58% 6.59% 0.98% 7.40% 45

ILF Latin America 40 -0.66% -1.28% -2.50% -4.35% -1.63% 12.87% 19.09% 52.08% 46

SPY S&P 500 -1.78% -1.46% -1.44% -1.84% -2.06% 5.40% 1.18% 6.29% 32

Tortoise Index concept:•Compare each region against all ETFs for each time period•How did the region do compared to the best and worst?•Ranks on a 1-100 scale proportional to best and worst•Combine into a single easily understood measure on a 1-100 scale•Identifies strong regions, can drill down into strong countries and sectors

Note how performance of EEM amd EWJ (vs the S&P) are rewarded by the Tndx

Page 20: Top Down Investing

[email protected]

US Indices: each of these Exchange Traded Funds is liquid and are traded like stocks on the AMEX, with the important distinction that they can be shorted on a downtick

DIA SPY QQQ

IJJ MDY IJK

IJS IJR IJT

Value Blend Growth

Large

Mid

Small

World Market Model

Page 21: Top Down Investing

[email protected]

DIA SPY QQQ

IJJ MDY IJK

IJS IJR IJT

EWJ

EPP

ILF

EFA

EZU

EKH

TLT RWR LQD

Regional indices from around the world: each of these ETFs is liquid and are traded like stocks on the AMEX, with the important distinction that they can be shorted on a downtick. These ETFs add important overseas regions as well as a set of miscellaneous sectors that are not correllated to US equities

Japan

Asia, less Japan

Longterm Treasuries

Corporate bond index

Real estate index

a mix of Europe/ Asia

European largecaps

European index

Latin America 40 large caps

World Market Model

Page 22: Top Down Investing

[email protected]

World Market Model

DIA SPY QQQ

IJJ MDY IJK

IJS IJR IJT

EWJ

EPP

ILF

EFA

EZU

EKH

TLT RWR LQD

EWG

EWK

EWL

EWN

EWD

EWO

EWP

EWQ

EWUCountry indices from around the world: adds in the next layer of detail with individual countries and additional key stocks (NEM and PD) for commodities.

BEARXNEM PDIYMHOV

EWH

EWM

EWS

EWT

EWA

EWY

Australia

South Korea

Hong Kong

Malaysia

Taiwan

Singapore

Sweden

Germany

Belgium

Switzerland

Netherlands

Austria

Spain

France

UK

EWC EWW EWZ EEM

Canada Brazil

Emerging marketsMexico

Home builders Gold

Basic Mat Metals

Bear Fund

IFNIndia

Page 23: Top Down Investing

[email protected]

World Market Model

DIA SPY QQQ

IJJ MDY IJK

IJS IJR IJT

EWJ

EPP

ILF

EFA

EZU

EKH

TLT RWR LQD

EWH

EWM

EWS

EWT

EWA

EWY

EWG

EWK

EWL

EWN

EWD

EWO

EWP

EWQ

EWU

BEARXNEM PDIYMHOV

IFN

EWC EWW EWZ EEM BZF

Page 24: Top Down Investing

[email protected]

Tortoise Strategy

• Method:– Top down, technical analysis

• Basis of analysis: – Price performance comparison

• Benchmark:– each sector against all other sectors

• Time period: – Weekly

Page 25: Top Down Investing

[email protected]

Tortoise World Market Model

As Of: 1/1/2006

GLD 64 Gold

TLT 49 LT Treasuries

LQD 39 Corp Bond

RWR 30 Real Estate EAFE EWD 52Japan Europe EWG 56

EWA 34 Asia less Japan Europe EWK 33EWH 23 EWL 46EWM 16 EWJ 80 DIA 32 SPY 32 QQQQ 24 EFA 47 EWN 47EWS 38 IJJ 34 MDY 39 IJK 40 EZU 45 EWO 56EWT 70 EPP 30 IJS 28 IWM 29 IJT 28 EKU 46 EWP 37EWY 94 EWQ 43

EWU 27Australia

Hong Kong ILF 46 Latin America Sweden

Malaysia EEM 62 Emerging mkts Germany

Singapore Belgium

Taiwan Switzerland

S Korea Netherlands

EWC 55 Canada Austria

EWW 62 Mexico Spain

EWZ 46 Brazil FranceUK

Tortoise World Market Model

Page 26: Top Down Investing

[email protected]

DetailsTortoise World Market Model As of:

Green: Tndx > Tndx(SPY) + 1 StdDev 32Yellow: Tndx= Tndx(SPY) +/- 1 StdDev 12.1

Red: Tndx < Tndx(SPY) - 1 StdDev

Ticker FundName %1wk %3wk %5wk %10wk %20wk %40wk TndxEWY South Korea 0.77% 5.57% 9.47% 21.21% 19.91% 40.46% 94EWJ Japan -0.95% 4.56% 7.99% 16.05% 23.47% 26.24% 80EZA iShares MSCI South Africa Index -0.44% 3.45% 5.82% 20.14% 15.23% 35.86% 78ITF TOPIX 150 -1.42% 4.20% 7.23% 15.19% 23.12% 26.61% 77

EWT Taiwan 0.65% 4.44% 6.48% 15.56% 0.32% 8.24% 70GLD streetTRACKS Gold Shares 2.91% -1.56% 4.37% 10.88% 15.94% 21.68% 64EEM Emerging Markets -0.89% 1.32% 3.59% 14.39% 11.64% 32.37% 62EWW Mexico -0.36% -0.20% 2.50% 19.43% 18.36% 48.17% 62ADRA Asia 50 ADR Index Fund -0.83% 2.36% 3.31% 11.06% 13.34% 18.89% 61ADRE Emerging Markets 50 ADR Index Fund -0.89% 0.83% 2.73% 15.20% 14.38% 36.50% 61EWG Germany -0.39% 2.16% 4.69% 9.67% 3.25% 12.96% 56EWO Austria 0.55% 0.44% 3.45% 11.88% 4.23% 22.08% 56EWC Canada 0.18% -0.05% 2.10% 12.08% 8.26% 25.14% 55FEZ streetTRACKS Dow Jones Euro STOXX 50 -0.82% 2.17% 4.31% 8.28% 1.88% 5.95% 54IYT iShares Dow Jones Transportation Average -1.67% 1.97% 0.19% 15.78% 12.23% 12.32% 54

EWD Sweden 0.58% 0.13% 3.99% 10.41% 1.02% 10.41% 52PPH Pharmaceuticals -2.04% 4.72% 3.26% 4.17% -3.92% -3.02% 52XLB S&P 500 Materials select -0.79% 0.23% 1.95% 14.18% 4.81% 0.10% 50PWJ Powershares Mid Cap Growth -1.13% 0.23% 0.57% 9.38% 9.58% 19.45% 49TLT 20+ Yr Treasury FITR 0.11% 2.64% 1.54% 0.51% -1.51% 4.11% 49EFA EAFE index -0.62% -0.08% 2.57% 8.05% 5.37% 11.92% 47EWN Netherlands -0.49% -0.10% 3.78% 9.90% 3.89% 8.20% 47ADRD Developed Markets 100 ADR Index Fund -0.66% 0.40% 1.72% 6.66% 2.19% 8.12% 46EKH European Largecaps 0.19% 1.32% 0.57% 4.51% 0.72% 6.51% 46EWL Switzerland 1.05% -1.48% 1.42% 8.73% 6.27% 14.80% 46EWZ Brazil -0.45% -2.99% -2.00% 11.83% 23.50% 49.11% 46ILF Latin America 40 -0.66% -2.50% -1.63% 12.87% 19.09% 52.08% 46

ADRU Europe 100 ADR Index Fund -0.31% 0.17% 2.10% 6.46% -0.17% 6.26% 45EZU MSCI EMU Index -0.61% 0.61% 2.58% 6.59% 0.98% 7.40% 45IXG S&P Global Financials -1.00% -0.18% 0.15% 9.70% 8.84% 14.62% 45IYH DJ Healthcare -1.68% 1.42% 0.96% 5.24% 0.35% 8.24% 45IYM DJ Basic Materials -1.04% -0.21% 1.38% 11.49% 2.53% 0.47% 45OIH Oil service -2.53% -3.45% 1.25% 17.94% 9.99% 37.89% 45XLV S&P 500 Healthcare select -1.77% 1.67% 1.47% 4.93% -0.09% 6.44% 45IXP S&P Global Telecom -0.41% -3.49% -3.43% -1.93% -7.82% -2.39% 19IAH Internet architecture -1.90% -4.87% -3.75% 1.09% 2.24% 0.80% 18XLK S&P 500 Technology -2.29% -4.22% -4.39% 3.62% 0.53% 7.90% 18DSV DJ Small Cap Value -1.50% -5.35% -5.11% 2.70% -1.82% 6.46% 17EWM Malaysia 0.59% -4.08% -4.62% -4.35% -8.46% -0.44% 16IYZ DJ US Telecom -1.17% -4.23% -4.91% 1.96% -4.83% 0.93% 15

VOX Telecomm VIPER -1.47% -5.22% -5.34% 3.09% -1.50% 6.93% 13

Tndx(SPY):Std Dev:

1/1/2006

Page 27: Top Down Investing

[email protected]

Top Down analysisMutual fundsETFsRegions

CalculationsTortoise IndexConsistencyAsset allocation

ReportsBenchmarkingFund familiesNLNTF "stars"ETF "stars"RegionsETF swing trading

GoalsConsistencyDisciplineRoutineSimplicity

Tortoise method summary

Page 28: Top Down Investing

[email protected]

So what?Weekly Bench Mark - as of Dec 31,  2005

SystemAnnualPassive

ETF 

TortoiseMutualFunds

DOW(DIA)

S&P 500(SPY) 

NASDAQ(QQQQ) 

This Week %  -1.22% 1.07% -1.67% -1.87% -2.51%

2005 YTD% 9.16% 27.73% -0.34% 3.50% 4.81%

 2005 $Value $109,161 $127,728 $99,655 $103,500 $104,810

2004 %  N/A 10.42% 2.50% 7.73% 7.82%

2003 %   N/A 22.71% 21.34% 22.19% 43.54%

2002 %   N/A -8.62% -16.89% -23.35% -38.41%

2001 %   N/A 9.88% -5.62% -12.12% -31.13%

2000 %   N/A 26.60% -6.03% -9.80% -36.10%

1999 %   N/A 98.10% 27.90% 20.40% 85.60%

Based on 100K portfolioSo far, consistent outperformance

Page 29: Top Down Investing

[email protected]

Roadmap

Passive

Active FundamentalTechnicalCombination

Top DownBottoms Up

ActionManagementAssessment

MarketsAssessment

Markets ManagementAssessment


Top Related