Within our tenets of investment philosophy, the types of investments we engage in typically fall into one of few categories. However, there are also certain
types of positions we never undertake except as temporary or transitory states.
A. Primary strategy
Our primary strategy is long biased, based on a blend of fundamental and DCF analysis; we will identify well-run companies, those with potential for growth, as well as ones with steady cash flows and go long on them.
In general our approach is concentrated and loosely diversified under normal economic conditions. We do recognize that the pitfalls of increasing correlations under recessions. but our risk management strategy kicks in before fully experiencing such effects.
Based on our past experience and comfort level, the main areas we currently invest in are:
We favor companies that tend to solve key problems, create highly differentiated products or service, have strong management that tend to deliver on their promises and generate financials that reflect their actions. These companies normally trade directly in the US or often through ADRs, but we may trade in countries that have well-established markets.
In addition to reviewing SEC filings and investor materials, our analysis is based on pulling together information from a variety of research reports, speaking to experts in the field, hands-on product review, and “material” information that is legally obtained to create financial models and put together independent opinions.
We typically take a bottom-up approach to evaluate companies, often in light of macro conditions but may occasionally start with small positions to “get in early” and then scale in as we continue to gather evidence that provides us confidence. Under such situations, we will often hedge our initial positions with protective puts or stop orders to limit possible losses.
In general we prefer to avoid shorting company stocks except as a sub-strategy described later. We do not actively seek out companies to short, but may encounter them in the course of analyzing companies that we wish to take a stake in. Should we choose to short, we will often pair them with protective calls as a hedge against upward moves.
B. Auxilliary strategies
In conjunction with our core strategy and hedging with options, we often engage in a variety of volatility plays, spreads and market neutral strategies. The techniques we use are fluid, always evolving, and usually restricted to less than a quarter of the portfolio.
Common options strategies include buying strangles or reverse iron condors, bull spreads and bear spreads, but the range of combination positions is influenced by market conditions and our risk management approach. The decision for such plays is normally sparked by companies we have been following or comparing for analysis. Pure directional play for options is rare and they normally exist in our portfolio as remnants of legging in and out of combo trades.
In addition to combination option plays, we engage in classic pair trading. While the technique resembles statistical arbitrage relying primarily on historical correlation, the underlying choices for selecting legs of the pair to go long or short are based on fundamental analysis rather than technical.
Finally, we do a limited amount of day trading of stocks and options based on our belief of short-term market corrections or search for efficiency. The universe of stocks we select for day trading is restricted to the companies we have followed closely or studied for the purposes of staking positions in. This is a volatility play, where we attempt to take advantage of “noise between the release of material information”.