Investment Strategy

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Our time tested investment strategy* is what separates us most from other advisors. It enables us to make money for you during rising markets and minimize losses during falling markets. Unlike “always fully invested” advisors, we vary our portfolio’s risk exposure based on numerous market indicators we track – increasing risk exposure when these indicators suggest a favorable investment environment and decreasing risk exposure during an unfavorable investment environment. Our strategy emphasizes capital preservation, not just capital gains and has been back tested for the past six decades.

Our investment strategy is best illustrated on a backdrop of one complete Stock Market Cycle labeled with Investor Sentiment. Scroll your mouse along the curve. At every point on the curve, you see one chart comparing our portfolio performance to a benchmark index and another pie chart indicating how our portfolio allocation is changing. Notice the dramatic change in the portfolio composition – going from 90% risk assets/10% cash during a favorable investment environment to 10% risk assets/90% cash during an unfavorable investment environment. Over the complete stock market cycle, we handily outperform the benchmark index (S&P 500 for example) with only 60% of funds at risk on average and low portfolio volatility – excellent Risk Adjusted Returns by any measure. For simplicity sake, we assume a stock market cycle that lasts four years (16 quarters).

Risk Adjusted Returns

It is not enough to say that your portfolio performed well. When one measures a portfolio's performance, one needs to also determine AT WHAT COST said performance was achieved. Or, how much risk was taken to achieve said performance. For example, a hedge fund may claim to have beaten your benchmark (say the S&P 500 index) by 5 or 10% last year. However, they may have accomplished that by levering up your portfolio two or three times it's value. Had their bet gone wrong, you could very quickly have lost more than half your wealth. This is betting, not investing. You might as well try your luck at the casino.
Meanwhile, you traditional investment advisor may have matched your benchmark; however, to do so, they had to risk 100% of your funds.
At World Wise Investments, we aim to match, and consistently beat, other advisors with less than 60% of your funds at risk! Therein lies the concept of “Risk Adjusted Returns”. It is a measure of how much of your money was put at risk in order to achieve desired returns. The higher the amount of funds at risk, the greater the risk of catastrophic and unrecoverable losses.
When we invest, we worry FIRST about how much we risk LOOSING and then count the prospective returns we COULD make. A gambler, MAY deliver similar returns but with 200-300% of your funds at risk. We will try to provide the same return, but with less than 60% of your funds at risk!

Investor Sentiment

We use investor sentiment as a contrarian indicator. Historically, bull markets top out amidst a wave of investor euphoria, while bear markets turn around amidst investor despondency. There is logic behind this. There comes a time in every bull market, when every investor who wants to invest is already invested up to the hilt. There is no more “new” money to be put to work. Seller step in and take the market down. Conversely, bear markets bottom when every investor who wants to sell has already sold. There are no more sellers. Buyers step in and take the market higher. To be sure, market tops or bottoms are typically not events, but rather, a process. A market topping or bottoming process can stretch out over months. Thus, sentiment extremes are best used as caution flags.

» PLEASE HOVER MOUSE ON INVESTOR EMOTION POINTS TO VIEW PORTFOLIO PERFORMANCE AND ALLOCATION*
» TOUCH INVESTOR EMOTIONS UNDER THE CHART TO VIEW PORTFOLIO PERFORMANCE AND ALLOCATION*

Investor Sentiment: OPTIMISM

Half way through the bull phase of the stock market cycle, Investors are optimisitc. We are fully invested and sitting tight having enjoyed substantial gains already.

optimism_chart_11 optimism_chart_21

Investor Sentiment: Excitment

As the market gains, excitement builds and Investors scramble to buy more risky assets. We are getting cautious, and start reducing our risk allocation.

excitement_chart_1 excitement_chart_2

Investor Sentiment: Thrill

The thrill, the greed, the complacency that nothing can go wrong - all Investors are geniuses. We are replacing more risk assets with Options, Cash and Bonds.

thrill_chart_1 thrill_chart_2

Investor Sentiment: Euphoria

Investors are "all in" and the market is in a topping process. We have confined risky assets to 12% of portfolio and hold tons of cash. We are underperforming our benchmark index.

euphoria_chart_1 euphoria_chart_2

Investor Sentiment: Anxiety

As the correction begins, Investors get anxious but presume the good times will roll soon. We are sitting tight with minimal losses in our Options position.

anxiety_chart_1 anxiety_chart_2

Investor Sentiment: Denial

More market losses, but Investors are in denial - refusing to believe this correction can last much longer. We keep our portfolio unchanged.

denial_chart_1 denial_chart_2

Investor Sentiment: Fear

A lack of any sustainable bounce induces fear into Investors. We sit still - losses in our Options portfolio are offset by gains in our bond holdings.

fear_chart_1 fear_chart_2

Investor Sentiment: Desperation

Still no bounce in the market and Investors get desperate. Our portfolio is unchanged. Having avoid any significant loss, we are now outperforming our benchmark.

desperation_chart_1 desperation_chart_2

Investor Sentiment: Panic

As losses mount, panic sets in. Investors contemplate selling - unable to bear more losses. We dip our toes into the market using a small part of our huge pile of cash.

panic_chart_1 panic_chart_2

Investor Sentiment: Capitulation

Investors Capitulate - selling risk assets at whatever price they can get for them. We see the whites of their eyes, waiting to load up on the fire sale in risk assets.

capitulation_chart_1 capitulation_chart_2

Investor Sentiment: Despondency

Sellers are washed out and despondent. Everyone who wants to sell has already sold. We are waiting for risky assets to show some signs of life before adding more.

despondency__chart_1 despondency_chart_2

Investor Sentiment: Depression

As risk assets turn higher, Investors are not buying as the recent drubbing has left them too depressed. We are buying more risk assets using our cash pile.

depression_chart_1 depression_chart_2

Investor Sentiment: Hope

A continuing rise in asset prices, inculcates some hope into burned Investors. We have a nearly full allocation to risky assets and are handily outpeforming our benchmark index.

hope_chart_1 hope_chart_2

Investor Sentiment: Relief

A sustained uptrend leaves Investors relieved and they begin to tip toe back into risk assets. We have been all in for a while and enjoying the run up in risk assets.

relief_chart_1relief_chart_2

Investor Sentiment: Optimism

Half way through the bull phase of the stock market cycle, Investors are optimisitc. We are fully invested and sitting tight having enjoyed substantial gains already.

optimism2_chart_1optimism2_chart_2

Options for Risk Management

The use of Options is key to our investment strategy. During unfavorable market environments, we reduce risk exposure by replacing risky assets with Options purchases. Click here for more information on how we use Options to reduce risk exposure. Click here for general information about Options at the CBOE website.

Use of Options

For those unfamiliar with Options, here is an oversimplified explanation of what an Option is. If you are familiar with Options, feel free to skip this paragraph. An Option is a leveraged instrument/security that “tracks” the price performance of a stock or ETF. If the stock or ETF price rises, so does the price of the corresponding Option. Why choose an Option rather than the stock or ETF itself? Because an Option offers LEVERAGE. This leverage allows you to invest less money up front for exposure to stocks or ETFs. For example, using an Option, one could obtain $100 of exposure to a stock or ETF for as little as $1. The advantage? If the stock /ETF were to fall to $50 (50% loss), an option holder's loss would be limited to $1 (1% loss). Thus holding an Option instead of a stock or ETF allows you to dramatically reduce your financial exposure (and consequently financial loss), were the stock or ETF to go down. And, if the stock or ETF goes up, you participate in the gains.
So, when market conditions turn unfavorable, we reduce our financial exposure by selling stock/ETF and booking profit. However, we still want to participate in further gains, should the market continue rising. To achieve this, we REPLACE the sold stock/ETF, with Options. The net effect of this is to reduce funds exposed to riskier investments. And, with the Options positions in the portfolio, we will continue to make money if the stock market enters a bubble phase.
So if Options let you have the best of both worlds – reward with less risk, why not use them exclusively and forget about stocks or ETFs? Because Options have an expiry date – anywhere from 1 week to a few years. If you buy and hold an Option and the stock or ETF corresponding to that Option does not gain in price before the Option expires, you loose the purchase price. Think of the purchase price as an insurance premium you are paying to limit your loss if the stock or ETF goes down in price. The cost of Options also varies dramatically. Option are cheap when equity markets have gone up significantly. The price is cheap because equity markets are up and investors are euphoric. Complacency is in the air and investors feel as though nothing can go wrong and see no NEED for insurance. Fortunately for us, this is exactly the time we would be looking into purchasing insurance – when insurance is cheap. Conversely, insurance costs are ridiculously high when market conditions are favorable and the risk of loss is lower. Typically, these are times when the market has corrected significantly and panic abounds. Investors are afraid of FURTHER downside and are rushing to buy insurance. At such times, buying Options at premium cost makes little sense and purchasing stocks or ETFs is WORTH the risk.
To give you an idea of Options premiums - an Option that costs $1 during unfavorable market conditions is likely to cost $3 or more during favorable market conditions!

Key Advantages

  • 1) Excellent Risk Adjusted Returns.
  • 2) Returns are smoother over the stock market cycle – there is no roller coaster ride.
  • 3) Defined and contained losses during market corrections to help you sleep easy.
  • Risk Adjusted Returns

    It is not enough to say that your portfolio performed well. When one measures a portfolio's performance, one needs to also determine AT WHAT COST said performance was achieved. Or, how much risk was taken to achieve said performance. For example, a hedge fund may claim to have beaten your benchmark (say the S&P 500 index) by 5 or 10% last year. However, they may have accomplished that by levering up your portfolio two or three times it's value. Had their bet gone wrong, you could very quickly have lost more than half your wealth. This is betting, not investing. You might as well try your luck at the casino.
    Meanwhile, you traditional investment advisor may have matched your benchmark; however, to do so, they had to risk 100% of your funds.
    At World Wise Investments, we aim to match, and consistently beat, other advisors with less than 60% of your funds at risk! Therein lies the concept of “Risk Adjusted Returns”. It is a measure of how much of your money was put at risk in order to achieve desired returns. The higher the amount of funds at risk, the greater the risk of catastrophic and unrecoverable losses.
    When we invest, we worry FIRST about how much we risk LOOSING and then count the prospective returns we COULD make. A gambler, MAY deliver similar returns but with 200-300% of your funds at risk. We will try to provide the same return, but with less than 60% of your funds at risk!

Favorable and Unfavorable Market Environments

To determine favorable and unfavorable market periods we monitor numerous market indicators. Here are five key indicators we follow closely. Click on any of them to learn more.

Stock Market Valuation

The P/E ratio (price to earnings ratio) is most commonly used to determine market valuation. The P/E ratio is simply the price of the stock (or index) divided by it's earnings per share. For example IBM stock trading at $200 and having earnings per share of $14 would have a P/E of $200/$14 = 14.28. Naturally, the lower the P/E ratio, the less expensive the stock. While the price of the stock is well established, the “earnings” are more subjective. One could use IBM's actual (present) earnings to calculate the current P/E ratio or future (next year's) earnings to calculate the “forward” P/E ratio. Hence, one could estimate that IBM will earn $17 next year and hence the “forward” P/E ration for IBM is currently $200/$17 = 11.7, thus making IBM's stock seem inexpensive. Unfortunately, “future” earnings are notoriously unpredictable.
If the economy were to enter a recession, IBM's earnings would be hit and go down to perhaps $10/share. In this case, at $200/share, IBM's P/E ratio would be an expensive $200/ $10 = 20. To circumvent such valuation issues with P/E ratios, we choose to look at other market valuation models like Shiller Cyclical P/E ratio, Cresmont Research P/E ratio, Q Ratio, GDP/Earnings ratio, Sales/Earnings, etc. Not all stock market valuation indicators are created equal. When choosing valuation indicators, it is important to look at those that have a reliable historical track record of predicting the future market returns.
    • 2) Stock Market Cycle
    • 3) International Capital Flows and Liquidity Provisions

      International Capital Flows and Liquidity Provisions

      Sometimes, a certain market (stock, bond, currency, etc.) keeps trudging higher despite a litany of reasons why it should not. It confounds investors and throws fundamental analysis out the window. Often, explanations for such moves can be found in the analysis of how and why capital flows around the world.
      As an example, witness the confounding stock and bond market moves since March 2009. Despite the most anemic economic recovery in history, dismal wage and employment growth and a hollowing out of America's middle class, US stocks kept chugging higher. The retail investor saw a tepid economy and chronic unemployment and wage stagnation amongst peers, and could not reconcile this with a booming stock market. Indeed, as of early 2015, “retail participation” in this stock market rally has been the lowest ever.
      At World Wise Investments, we took a different perspective. After the stock market cratered 55% in 2008-2009 and the Federal Reserve papered over insolvent financial institutions with nearly a trillion dollars in liquidity, we saw low risk opportunities and bought into the market. A few years down the road, we noticed that despite Quantitative Easing (QE) and a zero interest rate policy (ZIRP) embarked upon by major central banks around the world, economies were chronically stagnant. Our analysis foresaw an extended period of stagnation as a result of structural problems in the economy and debt deflation. This meant a continuation of QE and ZIRP. Why? Because there are no other time tested tools in the Federal Reserve's tool kit to jump start the economy. ZIRP meant near zero returns in safe investments like treasuries, bank deposits, money markets, etc. And that, we deduced, would FORCE such capital to flow to riskier assets. As a result of this capital flow, we have seen stocks, corporate and junk bonds and long dated government bonds rise in value. We have been fully invested during the duration of this bull market.
      Another example of capital flows can be seen in our current “Long US Dollar” investment theme that we initiated in early 2014. Why do we feel the USD will rise? Because despite it's share of economic problems, the US still is the best looking house in an ugly neighborhood. The US Dollar index is most heavily weighted against the Euro and Japanese Yen. While US growth may be a tepid 2.5%, these countries are laden with debt and are mired in a low to no growth deflationary environment. And while the Federal Reserve has stopped QE, these countries are still printing money like crazy to try and get out of this mess. With QE terminated, a 2.5% GDP and the Federal Reserve threatening to raise interest rates, capital is bound to flow from these problem areas into the US. That demand for US Dollars is bound to drive the currency higher. This capital flow will make it's way into the US stock and bond markets taking them higher as well.
      Analyzing capital flows and liquidity to seek out investment opportunities is not a widely followed concept in the investment world. If the investment professional you hire has a myopic domestic view and relies on traditional valuation analysis, you are likely to miss out on many money making opportunities.
    • 4) Investor Sentiment

Investor Sentiment

We use investor sentiment as a contrarian indicator. Historically, bull markets top out amidst a wave of investor euphoria, while bear markets turn around amidst investor despondency. There is logic behind this. There comes a time in every bull market, when every investor who wants to invest is already invested up to the hilt. There is no more “new” money to be put to work. Seller step in and take the market down. Conversely, bear markets bottom when every investor who wants to sell has already sold. There are no more sellers. Buyers step in and take the market higher. To be sure, market tops or bottoms are typically not events, but rather, a process. A market topping or bottoming process can stretch out over months. Thus, sentiment extremes are best used as caution flags.

Inflation

Historical evidence suggests that stock markets perform best when inflation is contained within it's long term trend of around 2-3%. Outside of this range, stock markets have a tendency to falter. It is important to consider curtailing portfolio risk when inflation is not contained within it's long term trend.

During a favorable investment environment, risk of capital loss as a result of a market correction is much lower. At such times, we “scale in” to assets associated with potentially higher returns – small capitalization stocks, technology stocks, emerging market stocks, etc. Portfolios achieve the bulk of their gains during such times.

As equity prices rise significantly, market conditions generally turn less favorable. Indeed, depending on how high the market rises, conditions can go from favorable to unfavorable to outright hostile. We witnessed such hostile conditions during 2000 and 2008. As markets move into hostile territory, we “scale out” of higher risk assets and replace them with Options, government bonds and cash.

Swing Trades and Alternative Investments

In addition to long term trades based on our core investment strategy, we augment portfolio performance using:
(1) Swing trades based on technical analysis. Along with a few proprietary indicators, we use Relative Strength Index (RSI), Fibonacci Retracement Levels, Trend Lines, TRIX, Moving Averages, etc. to set up swing trades. Swing trades especially help portfolio performance during range bound or trend less markets.
(2) Alternative investments in currencies, Master Limited Partnerships (MLP’s), royalty trusts, commodities and precious metals.

* Portfolio returns and allocations are hypothetical and for illustrative purposes only. As such, every stock market cycle varies in amplitude and time span and portfolio returns vary accordingly. Past performance is not a guarantee of future results. Investment returns and principal value will fluctuate, so that investors’ accounts, when liquidated may be worth more or less than the amount they started with.

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