We hope you all are enjoying (have enjoyed) the extended weekend and Holiday. We certainly appreciate all those who have given their lives and are willing to give their lives so we can live in a land of Liberty.
The weekly briefing has been updated.
Sequences:
In prior briefings, we have referred to the term "sequence". Many have asked what this means, so I've decided to summarize for all. But first, let me explain the environment in which we work.
Since there isn't such a thing as "perfect" in the investment arena, when we are wrong and take a position that is a losing proposition, we want to get out of it quickly so it doesn't do any damage to the portfolio.
We expect to having winning positions only about 60 or 70% of the time. Our desire is to let the winning positions "run" and gain more on average than the positions that lose. If our winning positions gain 3% on average and the losing positions only lose 1%, then we only need to be right 1/3 of the time for our portfolios to break even. In order to accomplish this, we only take new positions when we know exactly where we will get rid of them if they go bad. For instance, if the market bottomed at the same point (floor) a couple times, then we know the buyers like that price and become stronger than the sellers, thus causing the price to start going back up. We call this price point a Support Area. If we always buy near support, then we won't lose much if, after taking a position, price turns and falls through that support area.
Position Sizing:
Sequences fall within the larger category of position sizing. Since we work with market cycles, and are interested in capturing as much of the upside of a cycle as possible (so our average return for a winning position is increased), we must buy as close to the beginning of that cycle as possible. Unfortunately the beginning of a new cycle is where the greatest possibility of being "wrong" is. The good news is that cycle bottoms (the place where a new cycle starts) is also a support area, so when we take a position here, we will only lose a little if we are wrong. An effective sequence will place only a portion of our portfolio into the market at this early position. As we get more confirmation that we are truly in a new upward cycle, we will take another position and upon even further confirmation will complete the position. Through this "sequence" of buying three different times to fill one position, we decrease the average loss percentage when we are wrong without giving up much return when we are right.
The more aggressive your Risk Profile the larger position you will receive on the early purchases.
The same thought process occurs when we believe a cycle top has occurred. We won't sell the entire position in case we are wrong and price continues to rise. But at this point, the amount of the position that gets sold, "locks" in those gains, while the rest of the position remains invested and continues to add gains to our portfolio.
I hope this has helped. Let us know if you would like further clarification. Have a great week and enjoy the Briefing Room Update.
