Beat the Market Strategy

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What is the Beat the Market Strategy?

The Beat the Market Strategy aims to produce a return that exceeds a typical buy-and-hold, 60/40 equities/bond strategy, or any other strategy that is commonly used in the market.

The success of the Beat the Market strategy arises from a few principles.


Principle 1: Risk management is key

One, risk management is key. Protect your downside is one of the most important things you can do as an investor. Far too many investors or traders pile on the risk, invest heavily in a position, leverage, or try to time the market in hopes of getting a superior return. 

The Beat the Market strategy takes an opposite approach, first protect your downside. In times when the market is volatile, and shows potential signs of crashing, the portfolio moves into positions that protect it. This could mean selling positions, moving everything into cash or moving into assets that are not expected to fall as much as the market. 

In this way, when a crash happens, and there will be gut-wrenching ones from time to time, the portfolio is shielded from the declines. Of course there will be times when the market dips, the portfolio sells some positions, the market reverses and heads up, leaving us out of the market. But the sitting out during the dip is far more preferable than staying invested, watching the market go down more, then wishing you had sold off earlier.

This is thus the first principal of the Beat the Market strategy - make sure risk management is front and center in the portfolio.


Principle 2: Don't predict the market (you can't anyway)

Two, don't predict the market. This means that the Beat the Market strategy doesn't predict where the market will go tomorrow, in the next week, month or year, then putting on positions to reflect that view.

The simple fact is that no one can predict the future, not in the past, not now and not ever. It is a fool's errand to try to predict the future, and even more foolish to put down your investing monies to reflect that view. Who knows what will happen tomorrow?

I think a far better approach would be to take the market as it is. This means that the market is efficient and every participant's view is fully reflected in the price. 

From there, the strategy puts on positions that is in line with the market. Is the market bullish? The portfolio will ride along with it. Is the market bearish? The portfolio will reflect that same view. Is the market uncertain? The portfolio will enter positions (or not) that attempts to profit from that uncertainty.


Principle 3: Follow the portfolio systematically

Three, the portfolio is fully systematic. The are rules that tell the portfolio when to buy, sell or stay in positions. Backtesting and the actual performance has shown that the systematic nature is successful.

In addition, discretionary and human judgment is removed, which is important because in times of stress or euphoria, human emotions can usually come at the expense of good portfolio decisions.  


Principle 4: Hedge in times of stress

Four, positions are hedged in times of significant market stress. Whilst the strategy ensures that positions are exited at the early onset of market stress, there could be times when market stress becomes significantly elevated and lengthened. 

In those situations when market stress is expected be extreme, the strategy will implement hedges. These hedges are designed to benefit, even as the rest of the portfolio had already exited into safe positions.

To be clear, hedges are not always implemented - only when market stress is expected to be extreme.

It is my view that hedges are not necessary whenever this portfolio holds positions because of the heavy reliance on risk management and positions being scaled down when market stress increases. Hedges only causes the portfolio to bleed and reduce the overall returns. A far better way would be to focus on risk management and be prudent when the market becomes stressed.


Principle 5: Be macro aware, but not too aware

Five, be macro aware, but don't spend all your waking hours parsing the latest economic readings or geopolitical developments.

While macro developments are important in affecting the movements of stocks and indexes, the linkages between a macroeconomic developments to stocks are usually quite complex. There could also be multiple macro developments occurring, and the effects could cancel each other out.

Furthermore, we would not know all the macro developments that are occurring, much less those that are important and consequential for the portfolio.

As mentioned earlier, trying to predict the future, and in this case macro developments and its impact on the portfolio, is a fool's errand because no one knows the future.

A far better way to manage the portfolio would be to accept the macro environment as it is and manage the portfolio accordingly. Be invested when the market is benign and be careful when the market is volatile. 


Why not just invest through the cycle?


Why avoid drawdowns?


Historical returns of the Beat the Market Strategy

The chart below shows the returns of a public account I use to share with subscribers. I have another account where the bulk of my investments are made, but positions in both accounts are exactly similar.

Trades made in the public account are reflected in the personal account and vice versa.

Starting with an initial capital of $1000, I added $3000, invested it for a while, growing the portfolio from $4000 to $6000 within a few months, then added another $1000, after which I've been investing since then. 

The initial capital was $5000, which has more than doubled in the space of slightly over a year.

As you can see, the portfolio follows signals to invest or exit the market to ensure that any drawdown is avoided. In the even there is any market correction, the drawdown will be slight as the signals pick it up and inform the portfolio to rotate out of positions.

Strategy returns

I also received permission from a client to share their performance, which I show below.


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Delivery format

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