It's a good question, and a very important one. I have a number of think pieces planned -- there is always a backlog -- and this topic is planned for the third installment of the integrated macro analysis series that has gotten underway. (Part II will be a previously promised focus on the blending of top down and bottom up disciplines.) To give you a quick preview (as the full piece could be a while), my terminology in this area is H&V, for "horizontal and vertical exposure." A typical opening position will have planned risk in the neighborhood of 25 to 100 basis points. But this only reflects part of the equation, because one will typically have multiple positions when expressing thematic conviction, for ex. 200 basis points of planned risk as spread out over half a dozen oil service names, or 150 basis points as allocated among agriculture names. "Horizontal exposure" refers to increasing or decreasing total exposure by adding new positions or removing existing ones. "Vertical exposure" refers to leveraging or de-leveraging an existing position (adding shares, lightening up on shares, closing out completely, etc). There are many artful advantages born out of effective H&V management that would take many pages to articulate. Total portfolio management then becomes the act of viewing the entire portfolio as an integrated whole, adjusting horizontal and vertical exposure accordingly in real time as conditions change. As for how to sit on positions, that is a comprehensive process too in which one is constantly considering the inputs of the Father (top down / macro), Son (bottom up / micro) and Holy Ghost (price action). Then, on top of all the above, one adds conviction and equity curve overlays. Closer to the zero line, a high conviction play might warrant only 100 basis points of planned risk. If one is already up 20% for the year, however, there is much more room for an aggressive swing of the bat. Combining all these considerations and inputs for elegant real time result thus becomes part science and part art form. There is enough mathematical rigor in the process to reward strict logic and discipline, but also enough intuitive flourish to make talent and flexibility a critical aspect of the equation.
Global Macro Notes: Knockaround Market 500 fights, that's the number I figured when I was a kid. 500 street fights and you could consider yourself a legitimate tough guy. You need 'em for experience. To develop leather skin. So I got started. Of course, along the way you stop thinking about being tough and all that. It stops being the point. You get past the silliness of it all. But then, after, you realize thatâs what you are. - Knockaround Guys True confession time: I kind of like it when markets get rough. This isn't because I'm a sadist or a masochist. (At least I don't think I am.) It's because rough markets highlight comparative advantage. When you hear stories of how the big name players are struggling... how stuff seems to be slamming around without rhyme or reason... how all is confusion and nobody knows what's really going on... you know that's when the weak get separated from the strong. Read full notes here <object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/0x3-d7_GxNk?fs=1&hl=en_US"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/0x3-d7_GxNk?fs=1&hl=en_US" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="425" height="344"></embed></object>
Weekend Links Roundup: Leaving Las Vegas With the exception of Elisabeth Shue, who was smokin' hot, Leaving Las Vegas is unquestionably one of the most bleak and depressing movies I have ever seen. (If you haven't seen it, you might want to take a pass, unless you're feeling a strong urge to get in touch with your inner nihilist.) As with so many things, however, truth turns out to be stranger than fiction, with developments in the real Vegas even darker than the Mike Figgis film. The fallout from an epic housing bubble bust is still destroying lives, and in some cases ending them. And what about the picture for the broader U.S. economy, and the world? There are glimmers of hope after an incredibly dark August, but Carmen Reinhart -- the female half of the Rogoff-Reinhart duo who conducted an 800-year study on the economic impact of debt crisis -- warns that "the future is likely to bring only hard choices." At least the theme music this week is a little more upbeat... Go here for 09-04 links roundup ~ <object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/DaNqrAl5MkI?fs=1&hl=en_US"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/DaNqrAl5MkI?fs=1&hl=en_US" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="425" height="344"></embed></object>
Wall Street Executive Air <object width="560" height="340"><param name="movie" value="http://www.youtube.com/v/oUosjHiiHTQ?fs=1&hl=en_US"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/oUosjHiiHTQ?fs=1&hl=en_US" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="560" height="340"></embed></object>
Macro Comment: Bullish Dollar, Bearish Euro as "Risk Off" Looms Large We have maintained a bullish stance on the $USD for weeks, as first highlighted in the August 12th global macro notes. We have also maintained a corresponding bearish stance on the euro. We established our $USD base position at attractive enough levels to profitably withstand the recent shakeout move lower, and there are numerous reasons why the $USD is highly attractive as an aggressive long play here if upside momentum is re-established. Read full comment here
I will concede once again that there is no arguing your logic. As it happens, I am just now reading Mallaby's More Money Than God. On page 81, he wrote "...As with Michael Marcus, the charts sometimes came first: Indeed, Kovner once argued that the most profitable opportunities arise when you have no fundamental information." I realize that Marcus and Kovner relied on both fundamentals and charts in the normal course, but it is interesting to note which of the two tools took precedence at crunch time. And, as I understand it, both of these men are of superior intellect. Speaking only for myself, I think it would be a bit presumptuous of me to compete with the likes of a Kovner or a Marcus on a multi-dimensional board such as fundamentals. I would think I might have a more sporting chance against them and those of their caliber with a two-dimensional price chart. And so, in deference to Thoreau, and perhaps Occam before him, I shall heed their advice and simplify for both focus and clarity. I will leave the broader game to you gentlemen.
True confession time: I kind of like it when markets get rough. This isnât because Iâm a sadist or a masochist. (At least I donât think I am.) Itâs because rough markets highlight comparative advantage. When you hear stories of how the big name players are struggling, how stuff seems to be slamming around without rhyme or reason, how all is confusion and nobody knows whatâs really going on - you know thatâs when the weak get separated from the strong. Another way to look at it is the sailing metaphor â âa smooth sea never made a skilled mariner.â When the waters are calm, comparative advantage is muted. Foolishness can even constitute an edge when conditions are supportive.