The Problem With My Quant Is Diversification

My Quant is up 15% this year, which is a solid year by any measures. But compared to the SPY it sucks. The reason is simple — bifurcation of stocks occurred several months ago, first punishing high fliers and then certain sectors broke out while others did nothing.

Let’s examine what occurred in November.

I happened to be 20% weighted in GLD — bogged out for 4.3%. That hurt tremendously. Then, as the rules go, I had to buy 2 stocks per sector — which is a normal thing to do. But that only works when markets are actually doing well over a broad spectrum. Markets have diverged wildly and are only showing gains in certain sectors.

I have two Quants to choose from– Growth and Value. For November, I was 100% growth and the raw data was great — up 5.4% vs 3.4% for the SPY. Then I choose two stocks per sector, rated by Sharpe ratio, and build a portfolio. That’s where the problems occurred.

Here are the returns for my growth Quant per sector (raw pool vs my holdings)

Basic Materials: +0.79% / +1.53%
Consumer Goods: +6.94% / +7.6%
Financials: +2.77% /+2.1%
Healthcare: +5.8% / +2.5%
Industrial Goods: +18% (only two stocks in pool) / -0.66%
Services: +1.76% / +4.27%
Tech: +7.1% / +7.77%
Utilities: +8% / +1.8%

As of now, my Quant was only +1.2% for November. Without my gold position, which was implemented as a sort of hedge against markets, I’d be up 3%. If I only bought the highest rated stocks without forcing diversification, my gains would be fucking outrageous. Starting this month, at least for a time, I am going to experiment with buying only the highest rated stocks.

As for the GLD and TLT hedges that fall into place when markets underperform, I am going to eliminate the portion and only put it on when GLD outperforms SPY. As it is now, the trade lingers month to month until the SPY beats GLD for months in a row. I think this strategy is flawed. For now, when GLD and/or TLT beat SPY — there will be an automatic 10% position in the asset and that asset will be maintained the following month only if GLD and/or TLT beat the SPY again.

In short, the way the Quant will be managed now can in fact lead it to being 100% long tech stocks, which might be an err, but the risk will be mitigated by the holding period — which is only 1 month.

I had a big contest inside of Exodus in November, me pitted against some Pole from Chicago. He traded well, but not often. Quite honestly, his fortune was helped by a freak trade in CRC. If not for that, I am certain he’d be shining my shoes now. But men do not make excuses and they own up to defeats. It appears I lost the contest. It came down to the wire, me 4x long CLVS needing a $15 print with minutes left on the clock. It got there, miraculously, but then faded a few cents.

The accountants are working furiously to get the final tally.

One thing is for sure, Le Fly will have his revenge — and when he does — it will be served cold.

The CLVS trade was supposed to be quick. It was running and I got in at $15.75. It ran to $16.5 and I didn’t sell, and then it collapsed. I ended up applying a Martingale Stratagem, buying as it knifed lower. I got my basis down to $14.88 and held into the close. It traded as low as $13.5, at which point I wanted to die.

On the issue of BLUE. I was 50% weighted in the stock as of late Wednesday. The rationale: I wanted to beat Diddy inside of the Pelican Room. So when the stock ran $4 at the open and I was up on Diddy — the logical thing to do was to sell — right? WRONG. See, if I won by just 0.2%, he wouldn’t have to shine my shoes. In order to get him to shine, I needed at least 100bps. I ended up selling more than a dollar lower, giving up my lead. So that’s when I bought CLVS, and a bunch of other shit, in an effort to make a last minute come from behind rapish win.

Sadly, time ran out and it appears I am the loser.

THE RESULTS: 4.98% to 4.83%

All month long I’ve been in a trading contest with my arch nemesis Diddy inside of Exodus. It all started way back when as he talked shit, so I challenged him and here were are. As of Wednesday, Lord Diddy was up a bit on me, so like any normal person would do — I then decided to take a 50% weighted position in BLUE. For those watching it, I could only imagine the sheer level of entertainment. But for me, honestly, it wasn’t much fun.

I hadn’t overweighted a position like that in ages, perhaps never. I didn’t think about it yesterday, but felt the knife twisting inside my stomach this morning. In the pre-market it was up nearly a dollar, but futures were lower — so I was tentative. Then it busted loose out from the gates, up more than $4, and the Gods smiled upon me. I ended up selling a little bit lower — but booked a 3.5% profit nonetheless.

I believe we’re neck to neck now, with Evil Diddy with a slight lead. I’ve traded twice as much as him, reminiscent of the Wile E Coyote vs The Road Runner. Both of us are up pretty nicely for the month — in the range of 4.7-5.5%. The day is still young so I have some trading to do.

I added to a BYND position I took on Wednesday and ended up selling the whole thing for +3%. I am massively in cash, after selling BLUE, and relieved to have that pressure off my chest.

DEVELOPING…

When I was a young man I didn’t know how to cook and used to rely upon others to feed me and feed me well. When I was hungry I was at the mercy of these people to make me a meal. I had a very 1950s relationship with food and I was a greater man because of it.

And then a few years ago I was thinking to myself “Fly, you are a master ace stock trader — you can do anything and anything at all.” So then I began a long journey of becoming a master chef by way of Youtube. Gone are the days of having to visit cooking school and pay for classes. Nowadays you can learn a lot more simply by watching YouTube, which is what I did and now I am a master chef. Along that process, I’ve also become a master bartender, or mixologist — and am able to concoct just about any dish or drink in existence.

What does this have to do with Thanksgiving? Well, I will tell you. This being the Super Bowl of cooking, Master Chef Fly will be presiding over the kitchen today, making masterful dishes using masterful techniques. Since I do not drink booze anymore, I have no need for my mixologist skillset, and will leave those skills idle and instead re-activate my barista talents — which were acquired about a decade ago.

On the menu today is turkey, but not a whole turkey but two turkey breasts — because only savages eat dark meat. Also, I am making my world renowned sage sausage stuffing, green beans, candied sweet potatoes, cranned berried sauce, mashed potatoes, corn, and copious amounts of gravy. Last night I made a pumpkin pie and will be eating it throughout the day.

As for the holiday shopping season is concerned, dare I suggest buying 10 copies of Fly’s two short books? They’re instant classics, written by me with care, detailing my life as a young punk stockbroker during the dot com mania.

Off to cook some meat.

I’d tell you what I bought — but it would only increase my apprehension and increase my cortisol, so I will keep you where you belong — in the cold darkness of ignorance. I had a successful day and made a lot of money — even though I did this, apparently, my trades do not count in the scheme of big data and the law of averages.

Nevertheless, here are my closed trades for the past two days.

INMD +18.5%
INMD +7.2%
INMD +5.9%
CLDR +5.17%
BMRN +1.1%
(CAH -1.1%)
INCY +4.4%
AMED +3.44%
(KPTI -4.28%)
GBT +9.34%
INMD +4.5%
EHTH +1.36%
INMD +2.7%
AXSM +5.6%
RARE +1.92%
AGIO +1.13%
(SAND -5.4%)
(CDE -6.7%)
ICPT +6.3%
ICPT +5.55%
ICPT +3.52%
NXTC +3.28%

18 for my last 22, or 81%. No big deal, I am certain you’re doing better with your XOM and ANIK positions. In spite of all this, I am presently positioned in a 50% weighted holding, the likes I haven’t done in probably a decade or more. I cannot recall the last time being so overweight. It is not my intention to hold this longer than a day, maybe two. It is my intention to have a bit of fun with it and entertain the masses with my incredulous acts of boldness and depraved sense of greed.

More on this tomorrow.

Happy Thanksgiving.

Today’s bounty.

GBT +9.34%
INMD +4.5%
EHTH +1.36%
INMD +2.7%
AXSM +5.6%
RARE +1.92%
AGIO +1.13%
(SAND -5.4%)
(CDE -6.7%)
ICPT +6.3%
ICPT +5.55%
ICPT +3.52%
NXTC +3.28%

Gobble gobble day is tomorrow and I intend on working fastidiously into the close, by way of executing a monstrous trade. This will only be broadcasted inside Exodus — so fuck off.

DEVELOPING…

You’d be wise to not bet against me. Here are my trades for today and today only. You should print these out as a thorough reminder that betting against Le Fly is not only stupid, but it’s madness.

GBT +9.34%
INMD +4.5%
INMD +2.7%
AXSM +5.6%
RARE +1.92%
AGIO +1.13%
(SAND -5.4%)
(CDE -6.7%)
ICPT +6.3%
ICPT +5.55%
ICPT +3.52%

Both losers were in the gold sector, a dead area of the market not so much different from the black sea — salting portfolios across the globe with indecorous qualities.

Here was yesterday’s bounty.

INMD +18.5%
INMD +7.2%
INMD +5.9%
CLDR +5.17%
BMRN +1.1%
(CAH -1.1%)
INCY +4.4%
AMED +3.44%
(KPTI -4.28%)

Notice how wise I am with my trades and how I profit from them often. This is what happens after decades of trial and error — perfecting a trade to the point of excellence.

BEHOLD as I am now 70% cash, positioning for one last major gambit of supreme magnanimity.

I booked a series of trades today that led me to 30% cash and one oversized position in a hot biotech stock. I am doing so in order to attempt a big splash into National Festival Day. I can go either way, frankly. I can up the ante and truly place my balls on the table and short stocks betting on a Black Friday catastrophe. Or, I can simply bet on continuation.

Truth is, this is a good trading environ. If you’re not having fun trading now, you’re a miserable sea-hag and should probably kill yourself. Happy Thanksgiving.

That being said, I have been cold this month, plagued by horror and phantoms. But I sense a shift coming and the Gods are known to favor me, in spite of their humor.

Here were today’s trades.

INMD +18.5%
INMD +7.2%
INMD +5.9%
CLDR +5.17%
BMRN +1.1%
(CAH -1.1%)
INCY +4.4%
AMED +3.44%
(KPTI -3.7%)

Ciao.

Let’s review for the sake of posterity. It’s important that we learn from mistakes and educate ourselves about how the market really works.

Facts:

SAAS or software stocks are the best stocks in the market — thanks to growth.
SAAS stocks are favored in both private and public markets because of predictability in their business models.
We are in the early stages of enterprise moving IT budgets away and into the hands of specialists in the SAAS industry.
The SAAS sector is the most overvalued in the market, due to the above reasons, and are subject to sharp downturns.

None of those points can be debated. If you hate SAAS and love oil, simply put, you are an idiot.

When SAAS stocks go rocked in October, I TOLD YOOOOO the sector was most oversold since 2014. The oscillator inside Exodus demonstrated this plainly.

Here are two of maybe a dozen articles with me ranting about this.

SAAS STOCKS NOW OVERSOLD MOST SEVERELY SINCE 2014

How Oversold Are SAAS Stocks Now?

Returns over past month.

So how did Lord Fly capitalize on this occurrence? Not much. I have restrictions in place that keep me either in a Quantitative model or very short term trading fool. Both models are great for long term growth, but I’m missing the best ideas approach to investing, a style that I often practiced when I managed money professionally. So, starting 2020, Le Fly will open up a “Best Ideas” portfolio again and populate it with my best ideas. I will still trade and do the quant, but there is a space missing in my investment experience here, as I miss out on ideas and strategies that I know work — but cannot execute upon them because of self imposed rules.

Well, fuck that and fuck you Dr. Fly for keeping the shackles on me. The roaring 20s are just around the corner and I intend to get my share.