strategy


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Start with the big picture. Milken explained how successful investors first look for big global shifts that will affect many facets of life, and then drill down to find ways to invest in that coming shift. These tectonic moves can be even more lucrative since so few investors take the time or have the ability to see them coming. “The best investors take a look at the world on a macro basis and then try to figure out, looking at the macro basis, for the best ways to deploy,” he says. “We are quite often surprised how little research people do and how divorced they are … from the real world.”

* Know when to be afraid. Managing risk is one of the biggest jobs for investors and executives. But many decision makers allow themselves to mistakenly think risky investments are safe because others say there’s no risk. “Often the greatest risk is when you perceive no risk,” Milken says. Milken pointed to the poor long-term performance of government debt as a good example. Investors typically pay up for so-called “sovereign debt” as they think the securities are safe and government officials say they are. But that assumption has caused costly mistakes by banks in the past and could return.

* Risk is necessary for progress and needs to be taken intentionally and consciously. Investors and CEOs must take risks to succeed. To underscore his point, Milken quoted Facebook (FB) co-founder Mark Zuckerberg, “The only strategy that is guaranteed to fail is not taking risk.” But Milken said rather than taking risk, many investors and CEOs think they can sidestep danger by taking what they think are safe bets. But this is a folly as these executives are actually taking on greater risk as a result, Milken says. “One of the major challenges we have is so many investors perceive they haven’t taken risk, when they’ve taken great risk.”

* Find companies that will be big dividend payers. Facing the needs to generate steady returns on their money, large investors often seek companies that have large dividend yields right now. But Milken cautions it’s often companies that don’t pay big dividends now that might prove to be the biggest dividend payers in later years. “It’s a lot better to buy the dividend stocks of tomorrow rather than the dividend stocks of today,” Milken says. “You’ll get a lot higher rate of return on your money.”

* Know your limits. Milken spent much of his time subtly criticizing the recent trend in investing to buy passive investments such as index funds. Index funds don’t try to find the best opportunities, but instead offer investors a low-cost way to diversify and get exposure to the market return. Milken, though, says macro events can present big opportunities that require expertise to find — or those to avoid. “If you don’t have expertise in a sector or knowledge, invest with some else who does rather than diversify,” he says.

One of the troubles with trying to beat the market, or picking someone who says they can, is that it takes many years of outperformance before one can prove the investor is beating the market due to skill, rather than luck, says Mark Hebner, founder of Index Fund Advisors. For instance, on average it would take 180 years in order to prove that the average fund manager who beat the market did so from skill, rather than just luck.

Milken acknowledges the difficulty professionals have in finding these opportunities again and again. “In reality, very few people achieve those rates of returns … for a long period of time.”

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I’ve been managing the XLF position as the market has moved to the upside quite significantly over the last two trading days. Probably should have executed today’s trades on Friday, but, executed them today.

I’ll update later today.

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Opened a new trade in XLF. Better liquidity in this than there is in XHB. Liquidity is [in the short term] a real issue so I’m looking to see if the greater liquidity provides, or rather prevents, larger drawdowns.

The new position uses about $900 [small position].

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*Update

After the strong close, my final PnL for the day

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There has been further weakness in the market. Quite a substantial fall in XHB. Still suffering from the lack of liquidity, but larger moves like this one registers.

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Spent some time rolling a number of positions to bank profits. The idea being, [i] protect profits [ii] try to maximise profit potential. Of course commissions play a part and over trading will increase that cost.

However, on the whole, I am reasonably pleased with the outcome. I banked almost $500 in profits, so the cash balance has risen. The open positions are now mostly in the red as the reset creates [hopefully] greater profit potential.

One issue is that XHB is nowhere near as liquid as DIA [SPY, QQQ] and this is an issue. Over the longer time frame, it will not make any difference, but right now, it is an issue.

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Still trading in the established range.

The Fed seems unable to make a decision to raise rates. All they are talking about is 25 basis points. Essentially nothing, yet still they procrastinate. Therefore we are probably range bound until some catalyst breaks the deadlock.

*Update

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After the Fed, looking ok.

Part of the issue was that some of the position had gone to maximum loss and wasn’t repricing. I’m thinking that this was mostly due to liquidity issues. I watched the market trade for a while yesterday morning, and the liquidity of XHB as compared to SPY was just stark.

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