Alternate Investing/Trading Styles

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JCD
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Alternate Investing/Trading Styles

Post by JCD »

I think most people know of valuation based investing, technical or chart based investing and macro based investing, index based investing and themes based investing. I'm sure there are some other names or sub categories for these types of investing like dividend investing is a specific theme. These are all in the "not" list of investing styles. What I'm looking for are investment styles that are less interested in the macro, fundamentals or market behavior. What other variables are not well covered by those themes? Well I have at least one example I found.

In my effort to find other methods of evaluating companies/stocks I discovered these folks, "Dumb Money." They use what they call "social arb" to discover trends by analyzing twitter comments to discover what they believe will be future market reactions.  For instance, using twitter and google trends they believe(d?) that beach rentals would have their best summer season in years with great pricing power.  I don't know how accurate that prediction is, but that was a view they posted in the recent past.  They also describe going into stores, looking at customers, interviewing employees, etc.  Part of what intrigued me about them is that they specifically said they would rather not know what the price of an asset is before buying it, in part because they are looking for information not already known by the market which will have a material impact on the price. I assume they basically accept EMH-style assumptions which is why pricing to them does not matter.  They described a method that is about as far away from evaluation as one can imagine, looking more like "special situations" but an evaluation purely on customer behavior rather than business structure.
 
Given this is not like most investing styles where price is a factor, a view I have not seriously considered previously, I'm curious what other unique investing styles you have run into, and what if any success or failure you've found in applying them? Also if you have any hands-on view in this method I'd be very interested to hear about it.

ertyu
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Re: Alternate Investing/Trading Styles

Post by ertyu »

I can't apply it for obvious reasons, but I'm reminded of those guys that hired a satellite to get images of wallmart parking lots to estimate sales prior to earning reports and to take pictures of australian mines/roads etc to estimate stocks of materials and delays in their transportation in the hopes of predicting future price moves. Forgot who they were but they should be googleable.

Dream of Freedom
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Re: Alternate Investing/Trading Styles

Post by Dream of Freedom »

You can look at what other investors are doing. So looking at insider trading or hedge fund ownership for instance. Unfortunately you don't know if or how they are hedged.

Special situation investing is kind of a subsection of fundamental analysis, but it might be off the beaten path enough for you. It's things like companies emerging from bankruptcy, spin offs, mergers, and a few other things. You Can Be a Stock Market Genius by Joel Greenblatt is a good place to start, because despite the title it's actually a solid book on it.

Lucky C
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Re: Alternate Investing/Trading Styles

Post by Lucky C »

Dream of Freedom wrote:
Wed May 26, 2021 9:29 am
You can look at what other investors are doing.
I recently found the site Cheaper Than Guru which basically turns 13F forms into an easy web interface. You can track different legendary investors, e.g. Michael Burry: https://cheaperthanguru.com/portfolio/michael-burry

There is a delay in 13F forms but Meb Faber has a book Invest With The House that aims to demonstrate this 13F copying technique can work well even with a delay. Maybe not so much in a year like 2020, but unless you expect future 1-month bear markets followed by record fast recoveries, it should be fine in the future.

Of course the investors you copy would probably use regular valuation and technical methods, but you can construct a portfolio of different investors whose techniques would vary wildly. You could split a portfolio that copies Warren Buffett with someone who invests in smaller companies with more of a technical basis, for example.

Lucky C
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Re: Alternate Investing/Trading Styles

Post by Lucky C »

You could base long term investments on demographic changes, though you might call this macro investing. I would say it's different enough. A macro investor would look at things like the yield curve and jobs numbers to make changes based on odds of a recession, for example. If you look at demographics, you might instead tilt toward parts of the world where population is growing strongest (e.g. India) OR where more of the population is getting into investing (maybe China?)... You could tilt away from countries like USA where the majority of accounts with lots of equities are in the hands of an aging workforce, where US equities as a % of account balances are high and retirement (account withdrawals) will be accelerating in the coming years.

What countries should have increasing demand vs. supply of equity shares in the future due to demographics alone? Demographics are relatively easy to project over long time periods vs. macro trends, and could have an unstoppable long-term impact on P/E multiples regardless of what macroeconomic changes may affect the fundamentals.

I don't know if this is a realistic way that anyone would want to look at investing since you'd have to bank on multi-generational trends having an impact on prices and ignore wild sentiment swings, recessions, and currency risk along the way. But thinking in this way might help your portfolio from being too biased toward one country where the demographics will be a headwind for future returns.

Lucky C
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Re: Alternate Investing/Trading Styles

Post by Lucky C »

Also you could base on insider trading activity. Maybe only buy companies without insider selling over X months or above a certain insider buying to selling ratio. Maybe even increase equities exposure after high insider buy/sell ratios and decrease after low buy/sell ratios. You'd be dealing with a lot of noisy data so you'd have to filter it somehow, and set up some rules that should work well in the future and hopefully avoid setting up something that looks great in a backtest but flops going forward.

chenda
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Re: Alternate Investing/Trading Styles

Post by chenda »

Illegal.

Lucky C
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Re: Alternate Investing/Trading Styles

Post by Lucky C »

Here's a good site for insider trading data: http://openinsider.com/
Haven't based any investment decisions on it but it's interesting to explore.

chenda
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Re: Alternate Investing/Trading Styles

Post by chenda »

Illegal. On pain of gaol.

jacob
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Re: Alternate Investing/Trading Styles

Post by jacob »

@chenda - The trading of insiders is public knowledge since they have to file their trading activities with the SEC and thus it is legal. What is illegal is trading based on some tip from an insider that is not public knowledge. The "trading strategy" based on public information is usually some handwaving about how insiders may sell for all sorts of reasons (college ed for the kids, buying a new McMansion, ...) but they only have one reason to buy. Of course with this strategy being somewhat well-known another reason for an insider to buy would be to pump the price or demonstrate confidence in the company lest the their stock options lose value. Most analyst reports will contain some info about recent insider activity.

chenda
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Re: Alternate Investing/Trading Styles

Post by chenda »

@jacob thanks for explaining.

JCD
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Re: Alternate Investing/Trading Styles

Post by JCD »

I'll add one I heard in Market Wizards--the idea probably doesn't still exist in the same form, but basically it was to talk to all the big banks and ask them about their world views--"What are you thinking?" By surveying these folks, you'd get a sense if the deutschmark was going to go up or down against the dollar or whatever. Since the currency market was largely controlled by these banks and these few people, it mattered more what they thought than what the reality on the ground actually was, as they had the largest impact on the exchange market. While it is a bit market-behaviourish, it really isn't about reading the charts or coming up with statistical models, its about qualitative analysis of the major market player's view of the world. It would be a bit like watching 100 real vision videos and then averaging your investment on all the calls made, giving each analyst a 1% allocation.

Lucky C
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Re: Alternate Investing/Trading Styles

Post by Lucky C »

Generally thinking about these sorts of alternative strategies, the success stories largely consist of people going "all in" on their custom/novel strategy and sticking to it for a long period of time (the Dumb Money guy starts his presentation by saying he's been working on it for 20 years), and the success stories are often spread due to the extremely rare 20%+ CAGR achievements over several years or decades. The conclusions I draw from this are:

A wildly successful alternative trading strategy would be your own design, so any "public" strategy or idea briefly discussed on a forum would be insufficient and probably require hundreds or thousands of hours of work on your part to make it start to work. It would need to be a full time job for you that you would have to stick with for decades. I imagine if you half-assed an "alternative data" based strategy you would not be likely to beat the market unless you time it right (starting near the time the S&P 500 enters a bear market perhaps).

I imagine a probability distribution of various investors' ROIs with the "left" tail of lower than "the market" returns being a lot fatter than the right tail. If you are just doing something "different" than following a typical market portfolio, you're probably going to land somewhere in the fat sub-par end of returns. If you're not being biased (thinking you're way smarter than the herd) it's hard to have reason to believe that your strategy will work with superior returns over the long term. It could take years to gain confidence that a success is due to more than just luck, or if a failure is just bad luck. It would be very hard to stick with an alternative investing strategy, unless it starts out very successfully, in which case it may be luck and you may not realize you would be better off abandoning it after the initial lucky successes. A hard psychological game.

It seems that doing something wildly different doesn't make sense for FIRE success. It doesn't make sense to pursue a rare chance of 20%+ returns with a large chance of failure if your lifestyle only needs a more certain 3-4%+ to be successful. Trying to be a Market Wizard is for someone who wants to work at it all the time and would be happy starting over and adapting after failing. A lot of the Market Wizards types have blown up before, or even after, being wildly successful. Even the legendary Jesse Livermore that every old school trader seems to revere was wiped out several times and killed himself after his final bust.

Anyway I guess what I'm getting at is it seems unlikely to me that you could take a more moderate approach to a weird/unique investing strategy, for example keeping 75% of your portfolio in a traditional portfolio and 25% doing something much different, and hoping to spend only a few hours per month maintaining it. You either have your own strategy that you're passionate about and work like a full time job, which you would want to put most of your money in, or you don't have a robust enough strategy and it is likely to underperform doing something "normal".

However in this rare time where a lot of expected returns of major asset classes are somewhere around 0% real for the coming years, it may make sense to do something different even if the alternative strategy normally does not pay off. For example, a small % allocated to tail risk hedging to balance risk of a big crash hurting your normal equity positions. The other benefit of doing something different as a small part of your portfolio is of course the "free lunch" of diversification by rebalancing uncorrelated strategies every year or so. Maybe strategy diversification makes sense even if the returns of the alternative strategy are likely to lag the market over the long term.

Lucky C
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Re: Alternate Investing/Trading Styles

Post by Lucky C »

JCD wrote:
Wed May 26, 2021 3:50 am
They use what they call "social arb" to discover trends by analyzing twitter comments to discover what they believe will be future market reactions.
Just watched the presentation. He says he spends 4 hours/day data mining (hunting for trends) and makes 0-5 trades per year. I imagine he does this work on weekends, holidays, etc. and this 4 hours/day is after he has spent years developing his systems which probably required many more hours/day in the early years. So that's 1400-1500 hours per year doing just the data mining work, which is equivalent to a 30 hour/week job with a few weeks off per year. Since he is talking about 4 hours/day of real constant work and the typical office job has a lot of time waste, it is probably similar to a full time job in terms of hours/year actually working, just with less of a time commitment each day.

If he makes 2.5 trades per year on average, that's close to 600 hours of research per trade. Nobody wants to do this, or can do this if they're a pro Wall Street money manager even if they wanted to try. To say that his style is not for everyone would be an understatement. And I think the same work ethic and psychological restraint would need to be applied to most any other novel investment strategy you develop for it to be worth doing. If you only put in half the work (still many hours per week!) you might not be able to get any alpha and you'll just have a chunk of portfolio that's uncorrelated but mediocre - maybe useful in extreme situations (crashes) but not really useful over the long term with a sufficiently low withdrawal rate.

This is not directed at you JCD or anyone else on this forum (for all I know some on here could be spending all their free time on quality investment research), that's just how I see it. If someone on here wants to develop their own investment strategy as a nearly full time job after quitting the workforce, they would have a chance at succeeding. But the vast majority don't want to put in the work, or don't see the point if they already have enough to live off of even if returns are mediocre.

TL;DR: it's hard work

JCD
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Re: Alternate Investing/Trading Styles

Post by JCD »

@Lucky C

I don't take your comment personally, but from my personal view, I totally agree.  I do find many of the ideas they generated as semi-useful, like looking at trend data and tackling women's products because they are less well understood by "wall street men". I think there is something to that, particularly if you already use some other methods like fundamentals or technical analysis.  That is to say it might be a useful supplemental tool, particularly if you use it as a "verification" of your idea rather than the main thrust.  That is why I posted it, because I'm trying to educate myself on the varying ideas behind trading and investing and if I get 1+ more tools in the tool belt, it is a value add for me and I'm hopeful a few others will find it that way too.  Hopefully the idea is useful, then great, I've spread knowledge.  Maybe it is useful in a meta sense too, in the search for educational ideas.  

I know ERE is about more skill development than just investing, but this is one of the areas I'm currently spending lots of my time in.  If it isn't others because that is not where they want their life energy to go, I've got no problem with that.  Apple stock vs apple stock as 7Wannabe5 once quipped.  For those who want apple stock with simple investing, I'd definitely go with something more akin to indexing.  If you are doing single stock selection, it should be considered hard mode.

Lucky C
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Re: Alternate Investing/Trading Styles

Post by Lucky C »

A lot of individual investors talk about using something like 5-10% for big bets of their own choosing with the rest of the portfolio in indices. Without discipline and with the typical investor's emotions, this small chunk of the portfolio is bound to do worse than indices but it may have the benefit of keeping them from getting into trouble with 90-95% of their portfolio if they follow their own roles.

But if someone is more disciplined and has high conviction that they have an edge in some specialization - perhaps involving their field of expertise or a hobby they spend all their free time on - they could benefit from that small chunk in a high conviction bet without investing becoming a full time job for them. The opportunities would just be few and far between since they're not constantly researching to develop new strategies or find new trends. Maybe a once in a generation change is taking place involving a company/trend they know inside and out, and they can ride that trend for several years - but that would be their only position in their "play money" portion of their portfolio over those years. They would have to be just as disciplined when the time is right to get out too, and not become over-confident if they are successful lest they start making too many other bets that aren't once-a-generation types of opportunities.

Lucky C
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Re: Alternate Investing/Trading Styles

Post by Lucky C »

How about this for a portfolio of strategies / an alternative to the permanent portfolio:

25% passive holding of equities (both domestic and international to avoid home country bias and too much faith in one's own currency). Limit risk of active strategies (which usually do not beat the market) and capitalize on the continued trend into passive investing by the masses, at least until there is evidence of that coming to an end...

25% passive holding of real assets (gold, silver, real estate, land). Good for high inflation periods in theory, or at the very least for diversification.

25% income, whether this is stable dividend paying stocks outside of an index fund, government bonds, corporate bonds, REITs, depending on what makes the most sense in the current economic environment (currently bonds may be a bad idea, and there might be only a small handful of stocks with dividends that could keep up with inflation). Good for low inflation periods.

25% momentum/trend equities trading. Sometimes works well, sometimes doesn't, but at least lets you avoid holding during an extended bear market. Could switch between stocks/sectors/countries that are performing best, or go to cash if you really want to limit your drawdown or it appears that global equities are in a bear market collectively.

25% trades seeking to capitalize on extremely rare counter-trend moves, e.g. buy oil futures in 2020 when the current prices are negative (would have been good to buy later dated contracts at that time)... any unprecedented or 99th percentile type of opportunities would fall in this category and would be uncorrelated to momentum/trend. Could be applied to commodities, equities, bonds, or whatever could be a once in a lifetime opportunity at the moment. This category could also be used for whatever you may have a specialist edge in to find rare opportunities regardless of current price trend, a la the Dumb Money guys.

Yes, this adds up to 125%. I believe that is a safe amount of leverage with this amount of diversification, especially since you can implement part of this using futures which allow way more leverage than that, but of course you can scale down to 20% apiece instead. I just liked the idea of taking the Permanent Portfolio into a more aggressive realm.

This is also a good mix of about half and half passive or long term investing vs. active management or trading. You should be able to do alright if passive continues to "win" or if you are not as good an active investor as you imagined, or on the flip side you will be able to do well with such a high allocation to active/tactical portfolio management even if passive funds don't do very well in the years following their current high valuations.

white belt
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Re: Alternate Investing/Trading Styles

Post by white belt »

@Lucky C

That sounds like it has a lot of parallels to Chris Cole's Dragon Portfolio. He backtested pretty much every asset class and portfolio allocation over the past 90 years to try to determine how to make an all-weather portfolio that would provide consistent returns over 100 years.

In his article, Allegory of the Hawk and Serpent, Cole separates assets into the following types:

Serpent – steady gains during periods of stability and growth
-E.g.: Equity, credit, real estate, risk premia, private equity
-Leverage applied to middle of return distribution based on availability of credit

Hawk – asset accumulates small losses/neutral performance during a period of stability, exponential gains during periods of change
-E.g.: Gold, volatility, commodity trend following, global macro trading
-Generally require active management
-Returns come from left wing of return distribution (deflation) and right wing (inflation)

So a portfolio that is attempting to have stable returns over a long time period, like many of those strive for in the FIRE community, should have a combination of Hawk and Serpent assets. He comes up with the following allocation:

24% Equity (US)
18% Bonds (US Treasury)
19% Gold (physical)
18% Commodity Trend Following
21% Active Long Volatility

I think it provides a useful baseline but of course tweak or disregard as you see fit. His target audience was institutional investors and pension funds, so there are strategies available to the individual retail investor that aren't feasible at the institutional scale, and vice versa. The challenge for the retail investor is that you can't implement CTF or Active Long Vol without knowing how to trade options. I have a feeling the Long Vol ETF is coming, but it doesn't exist yet to my knowledge.

If I look at your example portfolio, you are at roughly 1/5 equities and 1/5 income, which jives pretty well with Cole's allocation for times of stability and growth. You have 1/5 physical assets that should provide protection against inflationary times. What remains for your example is how to capitalize on deflationary periods of change.

Cole writes that the purpose of Active Long Vol is to harvest gamma profits during prolonged down or up trends (the vega profits during flash crashes are just a bonus), so that seems like what you are trying to do with the momentum/trend equities trading.

The last 1/5 of trading rare counter-trend moves sounds like it could be considered global macro trading, which is another Hawk asset. What you describe would require the most active management of anything in your portfolio but certainly there are opportunities for large profits. I mean I can think about things that have offered 100%+ returns which I heard on podcasts over the last year like buying BTC back when it was $8-12k on RealVision, the oil futures trade arbitrage in 2020 talked about on MacroVoices, and the uranium trade talked about on MacroVoices. I get the impression that many who do this type of trading specialize in one specific area (e.g. currency, crypto, commodities, etc). There are also various newsletters for macro traders and specific niches, but those cost $$$ (might be worth it if you have a large enough portfolio though).

Lucky C
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Re: Alternate Investing/Trading Styles

Post by Lucky C »

Yes, I was also thinking of the Dragon Portfolio. To again relate to what I had in mind...

Seems to me like the Dragon Portfolio equities portion would benefit from diversifying outside of US only (and the diversification would be appealing to the average investor), and tactically switching between countries if you know what you're doing (not for the average investor).

For the bond allocation, again it makes sense to me to not limit yourself to one type of bond/passive income, e.g. when Lending Club was active it was a decent bond alternative.

Same with gold, it makes sense to have some other precious metals or other real assets such as farmland. Gold is great due to negative correlation when equities go south but sometimes silver, oil, etc. are way "cheaper" in terms of their ratio to gold prices.

In place of commodity trend following, why not include or replace with equities trend following? We know from recent events that equities are still prone to strong trends due to retail investors jumping on the bandwagon, whereas commodities may now be more efficient than a trendfollowing backtest may suggest. Or maybe not. Why not just momentum/trend in general?

Lastly, yes, the last segment could be your "special sauce," a strategy that you understand that almost nobody else employs. For Chris Cole, it's active long volatility. For others it may be social trends, or old school value investing, or trading antiques... Or continuing to work at a job you like even if it only brings 20% of your typical annual return! Whatever you can do that isn't correlated to the other strategies.

white belt
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Re: Alternate Investing/Trading Styles

Post by white belt »

@Lucky C

Good points. I think the value of the Dragon Portfolio is his classification of Hawk and Serpent. If you understand those conditions and where a particular asset falls on that spectrum, you can structure your portfolio however you want to balance different types of assets and you should do pretty well.

Cole mentioned that they had to deliberately keep things simple in order to be able to backtest the data back that far. His goal was to get consistent returns over any economic cycle, not to maximize returns in one particular cycle.

I'm in agreement about your points with bonds and gold, I think one just has to be careful to understand their risk when substituting asset classes. There is going to be much more risk using Lending Club than buying a Treasury Bond because generally higher return means higher risk.

What happens if you are doing equity trend following and equities trade sideways over an extended period? I'd have to look at the historical data for how equity trend following has performed. I have heard others argue that trend following in other forms could serve a similar anti-correlation role to equities so it might be viable. Even so, the highest negative correlation asset to equities during the period is active long vol. But there are other assets that have historically shown negative or non-correlation to stocks (art, uranium, some other weird stuff?).

What is the risk you are trying to hedge against that makes you want to diversify outside of the US? Certainly if/when the dollar is no longer the global reserve currency the equation changes a bit and I will likely substitute something for US Treasury bonds, but I think we are still a few years away from that considering most central banks around the world are following a similar path of fiat currency debasement.

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