Author: Zeelotes

Subject: Managing Risk in Volatile Picks

Date: 11/23/2021

Recommendations: 65

In the spirit of thanksgiving, I thought I`d take a moment to propose my own solution to the volatility of investment picks that are highly volatile like those selected by Saul`s Board. This is not welcome on their board, but those here may find it instructive. There is a relatively simple way to avoid the damaging impact that picks volatility can reap on one`s portfolio. Let me illustrate using the picks that Saul posts monthly so that it can be repeated by those who are interested. Benchmark - Monthly Rebalance of the Top Six Saul Picks This produces a return of 353.81% from 1/1/2020 to present with a drawdown of -33.92%. Clearly these are amazing returns and to be applauded. The CAGR over this time period is 122.70%. The gain is 191.19% in 2020 and 58.91% in 2021 (again up to 11/22/2021). This is equal weighting in each pick, as is the case with the method that follows. A Solution for Managing Risk in Volatile Picks Years ago I discovered that it was relatively easy to take a basket of stocks and determine points when they were excessively overbought and when they were excessively oversold. When the percentage of this group of stocks (whether Saul picks, the Nasdaq 100, the PHLX, etc.) hits an extreme it is time to do one of two things - go to cash, or sell the stocks short. How does this turn out from 1/1/2020? And to be clear, you can take this back to 2000, or 1990, or whenever and it works in any period. The CAGR using this method and shorting stocks produces a return of 650.76%. The 2020 return is 1,174.77% and the 2021 return is 253.60%. If you opt to go to cash and not short the stocks, the CAGR is 343.59% with a 2020 return of 588.14% and a 2021 return of 142.42%. The maximum daily drawdown is -16.58%, which is one of the primary reasons I bother trading picks like these in this way. Using cash during the dangerous periods results in being invested in the more volatile investments just 69.71% of the time. In other words, you sit in cash about 30% of the time. Here are the actual returns and trades - you`ll note that no rebalancing is done between signals. Date Signal % G/L % G/L to Date 1/2/2020 BUY 25.90% 25.90% 2/11/2020 CASH 0.09% 26.01% 3/16/2020 BUY 209.95% 290.57% 9/1/2020 CASH 0.01% 290.59% 9/17/2020 BUY 37.46% 436.91% 10/13/2020 CASH 0.00% 436.93% 10/28/2020 BUY 28.16% 588.12% 12/21/2020 CASH 0.00% 588.15% 1/4/2021 BUY 15.60% 695.53% 2/8/2021 CASH 0.00% 695.56% 3/4/2021 BUY 10.22% 776.85% 4/13/2021 CASH 0.00% 776.88% 5/11/2021 BUY 16.46% 921.19% 6/11/2021 CASH 0.01% 921.27% 7/19/2021 BUY 36.08% 1289.77% 9/3/2021 CASH 0.00% 1289.83% 9/29/2021 BUY 20.02% 1568.06% 11/5/2021 CASH 0.01% 1568.17% 11/22/2021 BUY 0.00% 1568.17% 11/23/2021 END If there is interest I can provide further guidance as to how this is done. The point is that these are actually great stocks to be invested in, but they have a tendency to get a bit ahead of themselves, and there is a relatively simple way to avoid the drawdowns that follow when they do.