As my readers know, I do not trade ETF’s unless under very special circumstances and then only holding a position a few hours or days. Today I will give you an example that underscores my belief that ETF’s are not investment instruments, but rather a mega billion-dollar tool used by the owners of computer algorithms to exploit the public, the people who think they are investing because that is what the Financial Services industry is telling them, falsely.
If I don’t give you a simple example, you won’t believe me. Moreover, if I can’t out-perform these ETF’s, then you shouldn’t believe me. All I can do is explain my actions and results. The rest is up to you.
I’m going to use the solar energy industry as an example. I happen to hold SolarEdge Technologies (NASD:SEDG) for some clients, and so I have done the research on the company and the industry. The company is also a Cara 100 pick, at least for now. I may or may not decide on Tuesday, the next trading session, to sell it. I may do that because (i) SEDG is not my child, and (ii) I’m certainly not here to promote it otherwise I’d be a stock promoter or investment dealer, and I’m not. I’m an independent portfolio manager and trader, so every stock is just a price and every holding merely a trade.
Generally, alternative energy investments like those in the solar industry are more volatile on a daily basis and have higher headline risk than other industry stocks as they tend to be more sensitive to commodity prices, economic data, and political and regulatory events.
Commodity prices such as for Oil & Gas fluctuate significantly based on short-term dynamics partly driven by demand/supply and also by investment flows. For the past two years, the Oil price ($WTIC) has fallen from over $100 in June 2014 to below $30 in Jan-Feb 2016. Because demand did not drop, but increased, and supply increased marginally, the cause for the Oil price to drop so steeply is the ones that led to investment out-flow, the ones manufactured by interventionist governments and central banks that wanted to lower costs so that the global economy might grow.
As would be expected, along with falling Oil prices, the Solar industry group stocks also dropped in price. The Guggenheim Solar ETF (NYSE:TAN), which is the biggest solar ETF, plunged from a high of about $50 in April 2015 to about $21 in Feb 2016. However, as $WTIC has rebounded from well below $30 to the $45-$50 range lately, the TAN ETF has lifted a tad and then dropped again to near its lows of the past four years.
Consequently, believing the stock prices in the solar industry group were about fully washed out in July-August, I searched my database for the highest two or three quality stocks to study. Xinyi Solar (HK:0968) appeared to head the list but it trades in Hong Kong while I’m sleeping, so my next pick was SolarEdge (SEDG). That choice for trading was based solely on its Cara 100 placement although the Quality rating has recently dipped a lot based on the company’s Growth ranking dropping to the 53 percentile level among over 7500 stocks in the world and at just 43% in my database (#453 in the universe of 1066 companies), so it will likely be removed from the Cara 100 when I get around to doing the re-evaluation this month.
In any case, why I am holding SEDG in my portfolio is because Oil prices are starting to rebound despite the concerns of industry analysts who must think they will stay depressed for years. Soon there will likely be a rebound in solar industry stocks stemming from the higher Oil prices I predict. Moreover, governments around the world, fearing the return of higher Oil prices, and the impact of Oil on global warming, are passing laws to encourage solar investment. When oil prices rise to a painful level and the public becomes acutely concerned with the global warming issue, I believe these governments in future will be introducing even greater incentives for solar investment.
Solar industry revenues are growing rapidly and the industry’s higher revenues will leverage up higher earnings, all of which will push the stock prices higher. Short covering will give an additional boost to some of these stocks.
So, you ask, why not just buy the ETF (TAN)? A lot of investors have. They regret doing so. As I say, an ETF has Good companies and Bad companies, and even Good companies are often Bad stocks.
TAN’s 3-year average return is -7.7% and its 5-year average return is -16.2%. TAN investors have even lost -30.1% in price year-to-date, which is intensely painful, and while the Dividend Yield is +2.3%, I really don’t like the Total Return. 🙂
Clearly the owners of TAN, where assets are now $234.5 million, have lost a bundle since the beginning of 2016, and over the past three and five years. Yet, corporate revenues and earnings are increasing in this industry and governments are continuing to promote the industry by legislating incentives; so clearly the problem is the Oil & Gas prices. The incentive to buy solar stocks is just not that great as long as Oil &Gas prices are so low. Therefore, if you are invested really long-term, whether you want to or not, you have hope. You can always hope that short covering will give TAN some energy (not a bad pun), but that would only be short-lived because the biggest shorts don’t short sell a rising Trend. They will cover their shorts and go hunting elsewhere for easy prey unless they simply don’t just go from short to long positions in the same companies.
The problem is that TAN investors also hold a bag of Bad Companies as well as the few good ones. After all, solar is a relatively new industry. Remember the Internet industry in 2000? Those ETF’s destroyed capital like never before and yet Good companies came out of that mess in great shape. Amazon (NASD:AMZN) plunged from $100 to $6 over a period of about 19 months in 2000-2001, but now (2016-09-04) is up at $772. Most of the Funds that held AMZN in 2000-2001 are dead. Amazon is an example of why real investing works.
Yes, after the turnaround in the solar stocks’ price Trend, which will be caused mostly by the rising commodity prices, the price of TAN will lift, but in the long-run by not as much as the prices of some of its highest Quality components. The real investors – the ones who understand that some of these TAN components are simply BAD companies based on their understanding of disappointing corporate earnings (if any at all), flat to falling revenue, terrible operating and profit margins, heavy debt, insider selling, and so forth — will only buy high Quality companies.
It’s your choice: you can buy the ETF with little to no real understanding of its components, which I call a pig in a poke, or you can invest in Quality company stocks. Good companies often are linked to Bad stocks for all the reasons I’ve given. When the tide ebbs, all ships drop; but when that tide flows, not all ships lift with it. Some stay under water and some barely float. ETF’s will not remedy their condition. The fact is you get stuck with the Bad as well as the Good. Since I don’t like losing money, I learned how to properly trade prices.
The situation is a simple one. Serious investors win more often than they lose. Their average winnings are bigger than their average losses. On the other hand, gamblers will never beat the house no matter what the house tells them their chances of winning are.
On Friday September 2, I beat the house as I have almost every day for many weeks except for the one day (Wednesday) when I moved into a new trading strategy. For that account (Adaptive Portfolio Strategy), I was down -0.56% that day, which I said I didn’t mind because nobody picks tops or bottoms. Real traders try to paint the bottom. Unlike the crapola spewed by the Financial Services industry, real traders average down by buying into weakness – as long as their investment theory remains intact. But, then my performance had gains of +1.20% and 2.24% on Thursday and Friday, which, if next week continues higher, tells you what you need to know about this strategy.
Btw, concentrating a portfolio is akin to what professional traders do. When trading their own money, they trade just a couple stocks, and possibly just a single one. They understand the instrument. They earn their income from volatility. They buy low, buying into weakness, and sell high, selling into strength. They trade company stocks and research everything they can about the companies whose stocks they trade.
Same thing for the proprietary trading groups of the same financial services companies that are advising their clients to diversify. You don’t find their individual prop traders holding 20 or more positions, and their algos meanwhile are trading the ETF’s.
You sell, they buy. You buy, they sell. Interesting how they never tell you that.
In the Adaptive Portfolio Strategy account, I bought a single Oil stock for two main reasons: (i) this particular stock had been considerably over-sold relative to the commodity price ($WTIC) that drives the stock price, and (ii) I believed that the commodity price was going to reverse Trend following the release of oil reserves data on Wednesday. The actual reserves data, however, was a disappointing build rather than my anticipated draw-down figure. But then I saw the washed-out stock hardly declined in the face of a major price drop for $WTIC, so I bought more stock on Wednesday as the investment theory was proving to be an accurate one.
On Thursday as the stock price started rising despite an even bigger drop in the $WTIC, I bought a lot more of this Oil company stock. Thursday was a good day for my performance, and by the close I knew this investment decision had been a good one. On Friday, at the open, based on weak Employment data, which the media played up as a sign that Fed rates would remain the same and not be lifted (all of it nonsense, but whatever), the $WTIC popped and so did the Oil stock price, so my Friday’s performance was even better.
Because I decided to keep substantial cash in that account until I could determine if the stock price Trend had clearly reversed, the account performance on Friday (+2.24%) was actually down from my overall All Cap Growth strategy, which gained +2.52% on the day. That +2.52% gain actually includes the +2.24% gain as the new strategy is still part of the All Cap Growth strategy until I decide to separate the two or change the All Cap Growth into the Adaptive strategy. I will only do that if, as and when I believe that the market is simply too unstable to be holding numerous positions.
Financial Advisors may not appreciate what I’m saying here, but diversification during periods of extreme volatility is actually a riskier strategy than concentration. That’s because in fast markets traders need to focus, and trade, as Good companies can quickly become Bad stocks, which is just another reason btw that ETF’s make no sense. In volatile markets, ETF’s are completely under algorithm control, and the financial media is used as a tool to elevate human emotion so that concern becomes fear, and fear causes investors to sell, probably at the wrong time.
Proof is in the pudding. On Friday the All Cap Growth Account soared +2.55% compared the S&P 500 gain of +0.42%. For the past week, this All Cap Growth Portfolio (which is my main one) was up +2.71% versus the S&P 500 gain of +0.50%, and since the end of July is up a whopping +4.56% compared to the S&P 500 ($SPX) gain of just +0.29%, which is definitely pleasing.
The Consolidated Account also lifted Friday (+3.29%) because of the Goldminers, which were making many traders happy, but not me so much because I am still uncomfortable with what I see happening in the Goldminer segment of the market. In any case, my Goldminers on Friday were up an average +3.87% versus the benchmarks GDX (+3.52%) and GDXJ (+5.90%).
I continue to pare down the number of Goldminer instruments in order to cope with the extreme volatility.
At the end of the day, we portfolio managers, whether it is for clients or as individuals for our personal accounts, must be responsible. All of us. But, without knowing what we are trading, I don’t see how that is possible. Of course, Financial Advisors and the Financial Industry as a whole will argue that point because trading ETF’s is their main strategy.
I’ll make my point every day by showing performance that ETF’s do not and cannot match active trading of companies because of what they are – holders of Good companies and Bad, Good stocks and Bad, and they trade against computer algorithms that have been designed to exploit the public, like a casino beats its customers.
As I say, I’m in it to win it.
