A few learnings as we papertrade our model in a repeatable, scalable fund concept.
1. We did not buy and sell at the open, or in pre-market. We waited 17 or 19 minutes into the trading day. Paper trading only. We made a few dollars because stocks fell early, but we also lost on stocks we were exiting. We hold the same 5 core stocks and the SPY hedges for a 2nd day (no transaction costs or trading), but we were supposed to buy 2 stocks and sell 2 stocks. By the time we pulled the trigger, the market moved. In today's market, that movement was material to our results for the day.
Objective: how to rebalance effectively, and how to avoid the 'market open' in rebalancing on a down day.
2. Our core 5-stock holdings are down significantly today. They are down from 4x to 12x the percentage drop of the SPY. When the market is rising, these stocks rise faster than the SPY. However, when the market falls they fall faster. With a time horizon of minutes (watching the tape), this seems catastrophic. With a time horizon of days or weeks, this evens out and is what we expect to see. The BEAR market leg lower is not kind to high-BETA stocks, even those that work well together.
3. We set our model to assume positive expected returns to risk assets. If we were to reduce our expectation for profits in the stock market, or increase our expectation of the risk free rate of return, it changes the stocks that we pick. It is hard to know how to calibrate the expectations of investors. This is an area to focus on. For example, if we assume that September is a bad month, and investors have lowered expectations of earnings for 'fresh' money in the markets, then the model would pick less risky stocks. This allows the 'edge' to work better and more slowly than for high velocity stocks. Think Berkshire Hathaway B-class shares vs. Bitcoin financier.
We will work through these issues and have a fund concept that is workable. It requires a consistent management process, labor available in the evenings and mornings every day the market is open, and commitment to learn and evolve the process. Thanks for taking the journey with us. If you are interested in learning more, please reach out via our 'contact' page.
Jeffrey Cohen, President, US Advanced Computing Infrastructure, Inc.