Examples of Our Investment Strategy

To prevent an endless stream of talk about AI (Anthropic formally filed their IPO today!), I’m going to go over some specific examples of my investing strategy, in the hopes it helps people understand how at least one guy who’s been doing this for over a quarter century looks at things. Our main stock strategy makes a lot of long-term, strategic decisions, while a new, paper-traded potential strategy is more aware of shorter-term, tactical decisions. Let’s take a look at both, starting with strategy.

I think it’s worth talking about why I chose to buy Annaly Mortgage (NLY), last week. It’s a good example of how you want to think about your whole portfolio when you’re looking at a stock and how it can fit. Ideally, you’re working with the intention of increasing risk-adjusted returns for your portfolio. That means putting your whole portfolio may work, but it puts you in danger of a significant loss. A middle road of some diversification is a good idea.

Overall, we’re expecting a likely bounce in tech as we approach and pass earnings and that’s why we’ve held on to a lot of our semiconductor positions. That’s our primary focus into the end of the year, and we’re adjusting around how that looks. At the same time, it’s actually been quite some time since we’ve bought a semiconductor position, as we view it as a fairly mature idea. Instead, we’ve been buying other attractive areas, from insurance (PRU) to electronics (SONY) to med-tech (ISRG) and more, with an eye towards intelligent diversification. To the extent you can diversify your portfolio without giving up much return, you’re doing yourself a big favor.

Along those lines, NLY is very much the kind of purchase I like for our portfolios, right now. It’s not at all associated with our tech hopes, so the diversification box is definitely checked. At the same time, it’s hard to have high confidence rates are going to be continuing down soon, particularly if tech does well. That means NLY may not quickly be a big performer for us.

That doesn’t bother me, as my short-term focus is on tech bouncing back. It’s the mature ideas that need to earn their keep to justify being in the portfolio. NLY just has to work over time. In this case, we get a 16% dividend while we wait for the investment to improve. With that yield, I can be very patient, as I just want new buys to work out over time. It doesn’t hurt that it’s at a bit of a discount versus competitors and the dividend seems reasonably covered, at least for now.

The short-term paper portfolio mentioned yesterday is a nice way to talk about other, shorter-term, tactical investment management ideas. As with all investments, it’s good to have a plan ahead of time. In this case, the two pertinent thoughts I considered are the idea that Thursday marked a bottom for the AI trade and that we want to see credit spreads relax before getting strong confidence in putting money to work more aggressively.

In this case, the idea that Thursday was a bottom is looking better, in part because of the reaction to the Anthropic IPO filing. The Anthropic filing is likely causing the AI bid because it shows they’re well capitalized, which helps the AI space relax on financing fears. Credit spreads still don’t look don’t look better, though.

What I did with that mix of good and bad was put some money to work, moving from 50% cash to 40% cash in the paper account. High credit spreads are likely constraining capital, but at least for today that constraint is being seen outside of the AI space. That can change, but with big earnings coming up this week and AI oversold, I considered it reasonable to put some cash to work, despite the still-present main concern.

As usual, it’s good to have a system and a plan. Then when the chaos of the market comes, hopefully you can act instead of panic and chase. In this case, our real, long-term portfolio is fully invested, with recent buys working towards diversification and long-term risk-adjusted success in reasonable areas. Our paper-traded short-term account added risk but is holding off getting aggressive until we see stronger improvement, particularly from credit spreads. Hopefully this strategy and tactics talk gave you some food for thought on how you may want to think through markets.

Chicago Fed National Activity Index was 0.07 vs. exp. -0.1, with production improving.

Dallas Fed Manufacturing was 13.4 vs. prev. 9.8.

Anthropic formally filed for an IPO. One thing that probably gave the AI space a lift off this was the disclosure they have almost $132B in cash and equivalents. AI trade funding looks fine.

Korea’s Kospi index was up 3% overnight and Japan’s Nikkei was up 2%, but that’s not creating much lift over here.

META filed to sell $37.5B in stock and convertible offerings, with companies like NVDA, AMD, and AVGO expressing interest in investing. They also filed an ATM of $60B for potential future sales. After some volatility, they ended -2%. Not such a horrible reaction as we’ve become used to seeing.

ADP Employment, Durable Goods Orders, and New Home Sales, today. We also have SK Hynix (SKHY) and Seagate (STX) reporting tonight for a check on the AI space.

Bottom Line: Anthropic gave the AI trade a boost, but weak liquidity is making it harder to see a sustained bid.

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This content is intended to provide general information about Lloyd Financial. It is not intended to offer or deliver investment advice in any way. Information regarding investment services are provided solely to gain an understanding of our investment philosophy, our strategies and to be able to contact us for further information.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable

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