Dogs Chasing Cars.
Dogs Chasing Cars.
A more efficient approach to investing.
If you missed the article of the week you can watch it here or listen on Spotify here.
It’s a 3-day weekend and if you’re a workaholic like me that just means more time to get things done so I’ll keep this blog post brief.
Dogs Chasing Cars
If you’ve heard the term “dogs chasing cars” it’s used in all sorts of ways to describe various ideas:
“Chasing something you can’t have”
“Not sure why you’re chasing it but you might be for the thrill”
Some dog’s tend to chase cars at random never catching them or maybe just doing it because they’re bored or for the thrill - or some say it’s predatory instincts.
Whatever it is there seems to be an aimless effort to doing it and that was a thought I had this morning sitting in the steam room trying to work out this kink in my neck.
(Don’t ask why that came to mind but sometimes I do the best thinking in the steam room, smoking cigars or on rides - none of which are related)
This week I posted the article of the week titled “Ahead of The Curve” the main bullet points were:
The Fed Cuts in September
Revisiting my analysis at the start of July saying they would/forced to cut in September
Discussing stocks that had and will rally because of it
Discussing PZZA 0.00%↑ stock and EOG 0.00%↑
The point, in short, was that there is a rhyme and reason to stock and trade selection: it is not random and it is not impulsive.
What I find in investors is that, for many, it is random and it is impulsive: dogs chasing cars.
Just this week I had a few questions from readers of the report that had nothing to do with the theme going into the next 6-months and they’re welcomed, to be clear - however, it leads me to a belief that most are not sure where to go or why.
There’s no rhyme, nor reasons other than a) The thrill b) Personal accomplishment and /or c) Just making money by any means possible.
I’m here to tell you in this post that there’s a better way so that you don’t have to be a dog chasing cars. So, what I am going to share with you are three different approaches and mental models to the markets that should fit any and all readers here regardless of account size and/or experience.
The goal: to give you clarity on the approach to start to go with.
Short-Term Trading
There’s one simplistic approach to repeat until you reach $100,000 in capital and that’s short-term trading. If you’re trading with a smaller amount of capital it’s the best and most efficient use of your time to trade short-term. I don’t care if that means you:
Only trade SPX/SPY options
Only trade Crude oil futures
Only trade the 10-15 stocks in our Momentum Monitor
New investors come into capital markets and think what Warren Buffet does and says applies to them as they start with $30K - It absolutely does not. Think through this if you have too but it doesn’t.
My view is very simple:
Trading the same thing over and over is the fastest, most direct way. You don’t have to pretend to quote Warrant Buffet, worry about CPI prints, recessions or any macro - you can just have tunnel vision to wash, rinse and repeat over and over.
If you can do that then you’re ahed of the curve. One of the things I’ve seen new investors do is “chase cars” - they don’t know what they’re after but they’re excited and that excitement leads to chasing pointless paths that usually, waste time.
The direct path to $100K is what I listed above. I’ve stated this in this manual I wrote in 2015 called “Small Account Tactics: $50K to $350K in 18 months” - where I documented the framework for trading short-term with small size over and over to just generate profits.
It’s the same framework Bryan (AgileGnome) is applying in the Active Trader Membership.
My best advice is to tune the rest of the noise out, for now, at least and just focus on repetition and make it BORING. The time to be an analyst or portfolio manager is later (if that’s even what you want) - but the time best spent for many, is just getting $100,000.
Investing
What is investing? Again, it’s important to define what things are and clarify them, in detail, before one starts an endeavor. For any of you ever involved in buying/selling a business the legal paperwork is usually long and detailed and you need an attorney to help very clearly define each clause/paragraph.
Investing to me and my firm is what we call Core Positions.
We invest in turnarounds, companies with free cash flow, good management and or sectors/situations that are undergoing an inflection. We have an investment mandate for our firm and it lists that we do the following with our long/short strategy:
Average hold times 6-24 months
Shorts usually expressed with options or options like structures
Mainly invest in US equities above $1B in market cap
Focus on FCF, good management and quality companies
Turn arounds are a strategy but sized smaller and with options structures
That’s a defined approach. We’re not chasing cars at random. We know what we do, why we do it and what we’re looking for.
This approach is also not ideal for those who don’t have the capital to justify a return/holding period.
A stock I’ve talked about on the AOTW. That’s a turnaround, in our view. It will take 9-18 months to see some sign of what they promised work or not work and it may increase (our view) 40% if it does give or take - so if you were to read this and are just chasing cars using a $30K account then it’s probably a waste of time.
It serves no purpose from an efficient use of capital standpoint to invest in.
You can trade short-term and find a better yield on your money in a shorter amount of time and with less capital.
But, I don’t think investors separate this. Everything to the at-home investor is the same - money = money so what does it matter as long as I get it?
That’s first order thinking. You tie up capital in an idea that can be used elsewhere to return more and at a faster pace.
But, for someone, or say a fund, investing $10M into a deal like this and getting an expected IRR of 40% then, then, it makes sense.
Why? Because a fund or larger investor is not going to (some try and fail) trade short-term options futures with the P&L fluctuations with $10M expecting to garner steady returns - it doesn’t exist.
Some of you reading this may think it does - likely because you haven’t considered what it takes to run money at even that smaller size to generate returns.
Simply put: as the capital changes the strategies and allocations change.
Put even more simple: it’s like you walking into Vegas with a $5K bankroll and deciding you want to go straight to high-limit black jack playing $2K a hand - you sure as shit better get it right the first few hands or you’re over at Circus Circus playing penny slots while getting free Popov and sodas to make the pain go away.
Swing Trading
Swing trading tends to be a sweet spot for both smaller capital investors and larger capital investors - I don’t care if you have $20K or $20,000,000 everyone can swing trade and generate returns.
Definitions of swing trading range so let me define ours as we label it for our AST Alerts Portfolios (BTW AST = Active Swing Trade)
We define them as 7-90 days holds. No more, no less.
That’s the sweet spot to catch a “large” enough move on an underlying stock or ETF long OR SHORT to capture returns.
You can use the equity or options to express the view. The way we do it is through a deep in the money call/put structure as to act as stock replacement.
Example: I have a $20,000 portfolio but I don’t like the stress of short-term trading so how can I leverage the capital to grow it, risk defined, and, with leverage.
Answer: Options + Time + Intrinsic value which just means DEEP IN THE MONEY.
With Swing Trading you don’t necessarily have to invest either, it can be a technically driven trade, fundamentally driven, macro or, sometimes, all 3 at once.
There’s leeway here to get creative.
There’s even more leeway to mitigate the risk because you have a defined cost in an outright purchase of a call or a put. BUT, you also have time to allow the idea to work.
The returns with swing-trading vary because of size and structure so you have to dial that in a bit so you’re not still, a dog chasing cars.
With the approach we use from The LongVol Report Swing Monitor we expect that the trades yield 30%-50% at each clip - though, the last 2 months it’s been a lot more.
That 30%-50% clip is calculated and one may think “Well if I can make that then I can just size higher and make more” - you can but then you defeat the purpose of the portfolio which is: passive, low volatility returns.
So, you want to keep the size consistent and returns in that range.
And they work because the options pricing is usually more so a $20.00 call yielding 40% is $800 - not a home run but not drinking Popov at Circus Circus either.
The point is, with Swing Trading you have freedom to be flexible and while some call it a “strategy” there’s more than goes into it (as you can see) than just saying “Ya Im a swing trader” WTF does that even mean?
Conclusion
Dogs chase cars at random with no rhyme or reason and that analogy is perfect for most investors in global markets. The excitement of making money and doing something can take over the senses making many to act irrational. It brings out greed and emotions some thought they had hidden away and for others, it becomes a game of needing to “be right”. You don’t want to be a dog chasing cars and if you do there’s hundreds of Discord rooms where everyone is yelling to share their opinion v. listening to others to actually make money - again, dogs chasing cars.
Most don’t define what it is they’re after and when you don’t do that you get the wrong product, approach and portfolio that does everything but what you thought you wanted.
So, I leave you with this - write down what it is you want from the markets in 6/9/12 months and if that’s $100K first then stick to the Short-Term trading approach - it’s as real as it gets and people print using the Small Account Framework model used in Active Trader. If you’re capitalized already and want a mixed approach portfolio then The LongVol Report is just that:
Cross asset trading long and short
Active Trading
Swing Trading
Investing
All of it, in one. You pick, you choose, you have direction.
And with that, you’re not a dog chasing cars.
Thanks for reading.
Dan
P.S.
In honor of Labor Day and this new tax nonsense being pitched by the evil empire all products (Active Trader & LongVol Report & AST Alerts) are 30% off through Monday with the code: dontaxmebro
📈 Running a portfolio? Use our LongVol Report and AST Swing Portfolio
🖥️ Trading with less than $30K or part-time? Check out Active Trader
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