Gordon Gekko Got One Thing Right

Greed is not good. It’s what leads investors to disastrous losses.

But Gordon Gekko, the fictional character from the infamous movie Wall Street (1987) got one thing right: “Ever wonder why fund managers can’t beat the S&P 500? ‘Cause they’re sheep, and sheep get slaughtered.”

Golden Lesson Yesterday

Most investors (and their fund managers) are lemmings. Or as Gekko would say sheep that simply follow the “herd” to the slaughterhouse. Therefore up to 80% of them fail to outperform their own benchmarks. Why they behave in this manner is discussion for another time.

But a classic example of this was yesterday’s sell-off in gold prices. The gold market experienced its worst loss since 1983. Why? Apparently over poor Chinese economic data which signals a slowing global economy.

Based on our analysis of the gold price collapse, it had nothing to do with the Chinese data. It was simply an excuse to sell-off gold which we warned the previous week with a NEGATIVE rating alerted our clients to on April 5th http://www.sialpha.com/gold-prices-at-key-support-level/

Our quantitative investment systems have been alerting us to poor price action and money flow over the past month as monitored by our analysis of the Gold ETF (GLD) which has lost over 13% in the past month.

On Friday morning our systems became extremely negative on Gold in the immediate term and we exited all our commodity large cap and ETF positions. Alerting our clients and posting on twitter @BuyandManage at 10:54 am EST:

“Time for caution. #Gold $GLD prices down 3.57% breaking through key support at the $1525/oz on route to $1350″

After our twitter post on Friday afternoon a massive $20 billion sell order hit the gold market. I can assure you it wasn’t us. But likely a hedge fund or algorithm that came to the same conclusion as we did in the morning.

That large sell order foreshadowed the panic selling on Monday morning. I’m sure some frantic calls were made in hedge fund circles as money managers tried to figure out who was selling and why?

And you can imagine John Paulson’s investor relations team must be fielding higher than normal call volumes as his funds reportedly lost over a billion dollars on their gold positions since Friday.

What to do now?

Well I can’t tell you what to do. But if your financial adviser or money manager is selling gold now or failed to reposition your portfolio against an obviously overheated market, you likely have a “sheep” working for you.

But I will tell you what we’re doing on our own investment portfolio. We actually share our performance results every month with our research clients and for anyone that wishes to follow us. View our monthly results here.

Our SiAlpha portfolio yesterday was actually up almost 1% as the markets were down on average 2%. Now how is it possible for us to completely avoid losses when the broad markets are sharply lower?

How We Make Money?

Well first, we did not go short the market, gold or any individual stock. Going short would enable us to profit from a decline in the value of that asset. We’re not speculators. We are investors. We did however have some long/short positions on same stock to hedge our current positions and avoid losses.

Neither did we buy heavily into stocks that were sold off yesterday. Although we couldn’t avoid extremely oversold companies and did take small positions in commodity producers such as Barrick Gold (ABX) and Suncor Energy (SU) which fell by 10% and 5% yesterday.

The reason we are able to achieve a positive rate of return even when the markets are falling is the fact that we construct a portfolio of 70-100 companies with low correlation. These companies represent either very good value or very strong positive price momentum with a high probability of asymmetric returns.

Simply we invest only in businesses and assets (such as commodities) that have a high probability of large profits relative to their potential loss. So we are looking at earning a profit of 30% on a potential risk of 10%.

This is low risk-to-reward investing, cornerstone of our investment selection and risk management process. It has enabled us to deliver an outstanding 46%+ compounded annual return on our funds since inception. A hundred thousand investment would have grown to over four hundred thousand in less than four years!

The process is managed by SiAlpha, our proprietary Quantitative Value and Momentum Investment System. Learn more at http://www.SiAlpha.com