The Playbook Says Good Men Prefer to Be Accountable. My Report Card

Sir Michael Edwards once said, “Good men prefer to be accountable.” Sir Michael was a South African businessman who had a reputation for publicly holding to account people who were not accustomed to accountability, writes Landon Whaley Friday.He's presenting at MoneyShow Orlando Feb. 9.

My old man always stressed the importance of taking accountability and, more importantly, being proactively accountable beforesomeone else demands it of you.

This idea of accountability is so ingrained in me that it drives me nuts when I see the Old Institution (and other financial market research firms) sidestepping accountability on their asset management calls at every turn.

Our accountability for our calls is not only good for you, but the ongoing public review of what we got right and what we got wrong helps us improve and evolve our process.
Accountability is critical to our success as a firm and to your success as an investor.

It’s time to put on the big boy pants of accountability and evaluate our market calls over the last year and our resulting 2018 performance.

The Calls

Many people involved with financial markets are prone to trotting out their winners and catching amnesia when it comes to their losers. Instead, I believe in publicly acknowledging the market calls that didn’t go exactly the way I planned.

From a “calls” perspective, 2018 was a flawless year for us here at Whaley Global Research. We nailed all of the big macro moves well before they developed and months before they became headline news:

• Slowing Chinese growth and crashing markets. Check.
• Slowing eurozone growth and crashing German and French equity markets. Check.
• Slowing Brazilian growth and political volatility surrounding the October presidential election and crashing equity markets. Check.
• Slowing South Korean growth and crashing equity markets. Check.
• Telling people explicitly since January, before emerging markets and developed markets careened off a cliff, that “the playbook for anything outside the U.S. is to be short or out entirely—there is simply no middle ground. Given the global Fundamental Gravity, there isn’t an equity market (or currency) on Earth I’d be long right now outside the U.S.” Check.
• Domestically, trading the U.S. Growth a Go-Go theme during the first handful of months of the year, which meant remaining long tech and consumer discretionary before closing our final positions in these sectors on June 25. Check.
• Transitioning to the U.S. Shift Work theme and clearly stating what was going to happen in Q4 by saying in the Gravitational Edge Playbook on September 24: “You can time stamp it, take a picture of it or a Snapchat it (if you’re into that kind of thing). We’re doing our best Babe Ruth impersonation and calling our shot: the world is going to get a heavy dose of FG4 in Q4.” Check.

I’m not surprised by our success on the calls side of the investing equation because for years now, our process has consistently highlighted market developments that others miss. It’s one thing to get the calls right; it’s quite another to trade the calls correctly.

There is no way around it: if you want to be a consistently successful investor, you must be in the business of doing both.

While we were flawless on the former, we showed our humanness on the latter.

The Bad

Our three worst trades this year all occurred late Q2 and early Q3 as I was trying to set us up for the activation of the U.S. Shift Work and Reflation’s Rollover macro themes.

With that as the backdrop, we shorted U.S. industrials (XLI) in the middle of May, got long U.S. Treasuries (TLT) in the middle of July, and shorted Oil & Gas Exploration companies (XOP) in the middle of September.

Not only were our entries too early, but the exit timing of these trades is enough to make a grown man cry!

We closed our short XLI trade for a loss on September 24 after holding the trade for over four months. XLI peaked just seven days later and proceeded to decline -20.6% over the next 18 trading days.

Duh!

We closed our long TLT trade for a loss on October 3 after holding the trade for nearly three months. TLT found its 2018 bottom just two trading days later and finished the year with a +7.8% rally.
I’m starting to choke up …

Finally, we closed our short XOP trade for a loss on October 3 after holding the trade for approximately three weeks. XOP peaked the very next day and declined -43.2% over the next 59 days.
WTFudge?! Have I turned into Jim Cramer?!

The only thing keeping me from being in the fetal position sucking my thumb is that we nailed far more trades this year than those we whiffed on. Now that I’ve embraced my inner Brené Brown and been vulnerable to my mistakes, it’s time to take a brief victory lap on the trades that were pure perfection.

The Good

In April, we got long XOP trading the Rockin’ Reflation theme (which preceded the peak in U.S. inflation and the activation of our current Reflation’s Rollover theme). We held the position for six weeks before closing it on May 31 for a +12.6% gain.

It doesn’t often get better than extracting double digit gains out of a market in less than two months—or does it?

We shorted Brazilian equities via the iShares MSCI Brazil ETF (EWZ) on August 3 based on our “Cry for Me Brazil” macro theme, and five trading days later we closed the trade for a +9.7% gain. Nine percent in five trading days is pretty damn good, but we didn’t stop there …

U.S. semiconductors (SMH) have been our whipping boy during December. We took our first shot on the short side on December 3, and we closed the position just four trading days later for +9.3% gain.

Now that’s what I’m talking about!

While it’s nice to highlight the best (and painful to discuss the worst), your annual returns in the trading game are the sum total of all the trades you’ve taken, not just a few at the top and bottom of the P&L ledger.

Just the stats, ma’am

Here’s the stark truth for the year we’re about to farewell.

The Gravitational 15 gained another 15 basis points last week, bringing our 2018 performance to a world-beating +14.95%.

We initiated 52 trades in the G15 this year and closed 51 of them. Of the closed trades, we closed 41 for gains and 10 for losses, giving us a batting average of 82%. We traded both sides of the market well, booking gains on 72% of our 25 bullish trades and 88% of our 26 bearish trades.

By any measure imaginable, we’ve absolutely crushed it this year. We’ve outperformed just about every asset class, money manager (hedge or mutual fund), registered investment advisor and research firm on Earth.

Great relative returns are nice and great absolute returns are essential, but anyone who has followed us for any period of time knows we are hyper focused on understanding and managing the myriad risks that percolate throughout economies and markets.

Risk conscious

From a perspective of drawdown risk, not all returns are created equal. You should judge the performance of any investor based on the amount of risk they have to bear in order to earn the returns they generate.

Against a 2018 backdrop of foreign and domestic market crashes (peak-to-trough drawdowns in excess of -20%) across all four asset classes, the G15 not only delivered healthy double digit returns but did so in a risk-conscious manner.

The Gravitational 15 portfolio experienced a -2.28% drawdown from July 9 to July 27. In August it emerged from this drawdown to set a new high-water mark by gaining +5.3%.

This risk conscious aspect of our approach is what I’m most proud of, and it’s an additional dimension of our process that greatly differentiates us from the rest of the world.

When it comes to drawdowns, there are two aspects that need to be evaluated: magnitude and duration.

You want drawdowns to be shallow—this is the aspect that everyone and their mother focuses on. But the second aspect is essential because whether the drawdown is shallow or deep, you don’t want to live in it very long!

The G15 nearly gained back the entire July drawdown in the very first week of August, growing by +2.13%. The portfolio was officially out of the DD and back to new highs the following week of August 6, having gained a further +2.50%.

In the grand scheme of drawdowns, a portfolio that experiences just a -2.3% drawdown that lasts only four weeks and leads to a full-year return north of +14% is pretty much the cat’s pajamas.

Assuming the bottom is in, how long do you think it’ll take the S&P to gain back its current -15.1% drawdown? How long before the Nasdaq gets back its nearly crashworthy -18.1%? Or the Russell 2000 recoups its crash-tastic -23.2% drawdown?

The answer: a lot longer than four weeks, and that’s if we have now reached the bottom.

The bottom line

The bottom line is that very few are able to play the game at our level. Our track record—accurate big picture market calls plus the ability to successfully trade those calls—bears out this fact.

Capturing economic and financial market data and contextualizing it is something the Old Institution and its followers find very difficult to do. It takes a disciplined, time-tested approach to measure the slopes and extremes in economic and financial market data across several hundred markets in all four major asset classes across 27 economies globally. Beyond that, it takes a special skill set to contextualize all of that data to formulate accurate market calls (our macro themes) and then to profitably trade those calls in a risk-conscious manner.

As I’m fond of saying, we done good but we gotta keep doing good. The game is always played in front of us and never behind. The year 2018 is in the books, and it’s time for me to get back to the global macro grind because the 2019 investing game is starting in 3, 2, 1 ….

Please click here and sign up if you’d like to receive the latest edition our research reports as well as to participate in a four-week free trial of our research offering, which consists of three weekly reports: Gravitational Edge, The 358 and The Weekender.

Watch Landon Whaley’s 3 Ideas for Investing and the meaning of coddiwomple in a short video here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 6:42.

Watch Landon Whaley discuss When Markets Cycle  in a short video here.
Landon Whaley: We have a generation of investors and asset managers who know only one market. The reality is markets and economies cycle and catch people off guard.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 5:51.

Landon Whaley interviews Adrian Manz: How I approach stocks here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 7:48.

Landon Whaley interviews trader Jackie Ann Patterson: How I got started trading and how I approach it with my Truth about ETF Rotation here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 6:14.

Landon Whaley interviews John Carter: How I started trading here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 5:37.