I made $8,385 from April 21st through June 17th! During this same time, the NASDAQ was down ~19%, bonds were down ~7% and many individual stocks were down 50-80%.
HOW DID I DO THIS YOU MIGHT ASK?
Essentially it comes down to being contrarian and to invest with facts over emotion.
While most were running from risk, I made calculated investments with limited downside. When markets sell off violently, people tend to lose sight of fundamentals and simply sell as they can’t stomach the pain of losing money or they are forced out of positions because of leverage.
Typically, this results in certain companies being sold indiscriminately, causing them to trade at or below fair value. This shows up most clearly in the options markets where one can see where the pricing of risk is estimated to be in the future.
All told, I made this money over the last two months by using the options markets to pay me to own companies that I would like to own at certain prices way below their current value. While we can estimate fair value, it is hard to know where the price will ultimately settle since, at the end of the day, the price of most things is simply determined by what price two people are willing to buy and sell. Therefore, we buy options that put a floor under how much risk we take, which limits our potential downside.
Since I worked for a multi-billion-dollar hedge fund a couple of years ago that occasionally used futures, currency forwards and options, I needed to obtain the FINRA Series 3 Futures and Option license. At the time, I was dreading taking the time and energy to take this test as I didn’t envision making use of that knowledge. I ended up receiving a score of 98% on the exam. Perhaps I studied too much? Regardless, the knowledge that I gained has proven to be incredibly useful to both hedge and profit for me and my clients.
While the markets have certainly been unsettled of late, to me it feels like a normal, but rapid, flushing of excess and a normal response to the world’s central banks reducing liquidity in the midst of war, tight commodity supplies and elevated inflation. I typically find during times like these are when there are great opportunities.
Brian F. Moss, CFA
The market action has been striking, particularly in the high-tech investment universe. Many names in Cathie Wood’s ARK Invest, ARK Innovation fund are down 50 to 90%! It is painful to watch these stocks decline so much so fast. I was investing during the dot-com blowup of 2001 and was caught in some of the mania but mostly was an observer and astute learner of what happened.
As a person who studied economics, I try to assimilate as much information as possible and think of all the possible angles. I try to watch for signs of the boiling frog. That age old tale of a frog sitting in a slowly warming pot of water. The frog will not jump out of the water as it heats and ultimately it will succumb to its death. However, if you throw a frog into a pot of boiling water it will instantly jump out.
Many investors exhibit characteristics of this whereby when they rise or fall slowly, they become complacent to the risks and to the stretched valuations. They tend to overstay on the way up and stay out on the way down. Our job is to attempt to get ahead of these moves to protect and profit for our clients.
As a former colleague once told me: “There is always a bull market somewhere.” The trick is to think differently, using orthogonal thinking and to use all of the tools available to capture the investment ideas in the safest, most risk-controlled manner.
All four of these investments I mentioned earlier closed with a significant profit resulting in a total gain of 4.8% on capital at risk which equates to a 24% out-performance versus the NASDAQ Index.
If you are interested in the details of these investments and more generally how we plan and position our clients for success, please reach out to schedule some time on our calendar.
Sincerely,
Brian
Disclosures*
This research note/blog post is for illustration and discussion purposes only. It is not intended to be, nor should it be construed or used as, investment, tax, ERISA or legal advice, nor any recommendation of, or an offer to sell, or a solicitation of any offer to buy, an interest in any security. Advisory Services are only offered to clients or prospective clients where Soaring Capital Management, LLC and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by Soaring Capital Management, LLC unless a client service agreement is in place.
Pro-forma portfolio illustrations shown are represented gross of advisory fees and expenses and presumes the reinvestment of investment income. Any descriptions involving investment models, statistical analysis, investment process and investment strategies and styles are provided for illustration purposes only. Client investments will vary based on the unique goals, objectives and other factors. No representation or warranty is made that any Soaring Capital Management, LLC investment portfolio, process or investment objectives will or are likely to be achieved or successful or will make any profit or will not sustain losses. Past performance is not indicative of future results.
The information contained herein is as of the date indicated, is not complete, is subject to change, and does not contain all material information, including information relating to risk factors. Any assumptions, assessments, intended targets, statements or the like (collectively, “Statements”) regarding future events or which are forward-looking in nature constitute only subjective views, outlooks, estimations or intentions, are based upon Soaring Capital’s expectations, intentions or beliefs, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions and economic factors, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond Soaring Capital’s control. Future evidence and actual results could differ materially from those set forth in, contemplated by, or underlying these Statements. In light of these risks and uncertainties, there can be no assurance and no representation given that these Statements are now or will prove to be accurate or complete in any way. Soaring Capital undertakes no responsibility or obligation to revise or update such Statements.
Return targets or objectives, if any, are used for measurement or comparison purposes and only as a guideline for prospective investors to evaluate a particular investment program’s investment strategies and accompanying information. Targeted returns reflect subjective determinations by Soaring Capital based on a variety of factors, including, among others, investment strategy, prior performance of similar products (if any), volatility measures, risk tolerance and market conditions. Performance may fluctuate, especially over short periods. Targeted returns should be evaluated over the time period indicated and not over shorter periods. Targeted returns are not intended to be actual performance and should not be relied upon as an indication of actual or future performance.
This research note is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.