Values and Valuation
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The Systematic Seven
1. The context of macro economic and political conditions is an important backdrop. Consider the large scale economic, political, and social conditions that will drive not only the financial data but also investor psychology and the perception of risk.
2. Use systematic models as a framework to provide a reference point for the current conditions of relevant financial markets. Incorporate crucial indicators that describe the performance and value of equities and fixed income assets as well as economic, monetary, and sentiment conditions.
3. Macro conditions and systematic indicators will drive decisions about the type of risk to assume (market exposure), overall portfolio allocation, hedging actions, and position sizes.
4. Craft screens to find individual trading vehicles that meet criteria based upon work in steps 1, 2, and 3. Develop standard factors for comparison that project the relative value of the individual trading vehicles in order to determine which have the best potential reward to risk.
5. Proper trade management...Once portfolios positions have been assumed establish hard stops, trailing stops, and targeted profit goals to take partial profits. Ensure trailing stops for segments of profitable positions that allow large trends to be followed. Stocks and bonds have personalities, consider back-testing and optimizing different types of stops for each trading vehicle.
6. Monitor and track the progress towards your overall portfolio goals. Continually conduct steps 1-5 and assess your current status in relation to your overall goals. Re-focusing on the strategic picture will help highlight any shorter term or tactical actions that might be needed.
7. Continually look for an edge in light of individually specific conditions. For example, a person with an expected holding period of 20 years might approach stop loss methods in an entirely different manner than someone who will need to liquidate the same position within 1 year. The longer time frame might provide for a higher risk tolerance and the ability to ride out volatility that comfortably allows a longer term perspective on short term issues.
