How LFG Approaches Time Horizon

Time horizon is very important in terms of deciding when to buy and sell. Sure, you want to sell at the top and buy at the bottom, but what does that really mean? That question is particularly true with higher beta and lower quality stocks, as they tend to be more volatile. Risk assets don’t tend to move in a straight line, so how many wiggles do you want to avoid?

Look at something like Micron (MU), a recent darling of the market. Ideally, you would have sold it at the top at $1,255, but to get there over the last year you would have endured a roughly 60% decline around April to get there, along with plenty of other double-digit declines along the path. Even with the recent -30% drawdown, yearlong holders are still up 610%.

So, what do you do? There’s no real, right answer. Most people lack to fortitude to wear a -60% decline with equanimity. Many like to systematize handling declines by automatically selling or trimming when a level is broken. Again, this can vary greatly depending on what sort of investor you are. A shorter-term investor may look at a 9-day exponential moving average (EMA) while a longer-term investor may look at a 200-day moving average to decide when to make a move.

Nothing is perfect, of course. Selling MU during volatility would have limited damage but precluded some giant gains. We can’t know the future. Whatever your preference, I do think it makes sense to have a good plan going in of what you’re going to do under different circumstances.

If you’re a short-term trader, maybe you like MU but are hoping to avoid big drawdowns, so you enter every time it breaks above the 9EMA and sell every time it broke below. At the end of the last fifty-two weeks of trading, you’d have a return of about 330% with 20 buys and 19 sells. Great, but well below the 609% of just holding the stock, due to frequent whipsaws.

Investing in stocks always involves risk and attempts to smooth the volatility tends to depress returns. Unfortunately, that’s life. For us, we tend to be longer-term investors, but that can involve dealing with some big swings while the market moves from fear and panic due to rates, growth, liquidity, or whatever. We get tax benefits, as well, but those swings can induce nausea for some.

In general, we tend to have fundamental triggers on our long-term stocks. As long as the company is doing what it needs to do to continue performing, we tend to hold. We also use technical triggers on the market as a whole, though. If the market falls below our target, we’re quite likely to sell something, as apparently the market is more concerned than we expected.

Another difference we have from most investors is we don’t simply sell what’s already been hit. To me, that fear has already been realized, so you’re closing the barn door after the horse is already gone. What we do is look at what’s held up reasonably well but is at risk if current perceived problems continue.

For instance, we hit a technical trigger in July as AI-fears ramped up. We ended up selling Fortinet (FTNT) as, while it’s labeled as software infrastructure, it sells a lot of hardware that appears with servers. Thus, if there was real trouble with AI, rather than just a positioning unwind, Fortinet would be in danger.

Unsurprisingly, I think our methodology works well, as it tends to get you to sell things closer to highs than lows, rather than what a more traditional method would do. I admit that my method is more complicated, but that’s fine. In this case, while Fortinet is up a little from when we sold, once technical conditions cleared, we were able to use some of the funds to buy Alamos Gold (AGI), which has done quite well for us.

While timing tops and bottoms sounds great, it’s somewhat unrealistic and is also a question of timeframe. A short-term investor is likely to have different criteria of what they’re up for versus a long-term investor. There’s never going to be a perfect answer, so it’s best to decide beforehand how you want to deal with the swings and execute your plan.

NFIB Small Business Optimism grew to 99.8 vs. prev. 97..4, with strong hiring plans leading the way.

Consumer Credit rebounded in June, at $14.17B vs. exp. $11.85B on a surge in credit card debt. This actually came out Friday, but I missed it.

Oil was up 7% since yesterday morning as demands mounted on both sides of the Iran war and odds of a deal faded. That helped create rate stress, which in turn pressured the market.

The RBA(ustralia) kept rates unchanged but warned they may need to hike if inflation stays too high.

There were 19 issuers of investment-grade debt yesterday. On the one hand, that means credit markets remain robust, on the other hand, all that supply helps raise rates.

Yesterday saw the second narrowest range of the year on SPX.

NVDA is teaming up with a financial consortium of APO, BX, and GS to raise a $500B financing program for AI centers.

ADP Employment today.

Bottom line: Iran war deal odds are pressuring markets.

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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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