Here is a recap of 2019 market predictions from Landon Whaley.
It feels like just yesterday I was writing the first Playbook of 2019 quoting South African businessman Sir Michael Edwards who said, “Good men prefer to be accountable,” and now we’re staring Q1 2020 dead in the face. As is our custom, it’s time to put on the big boy pants of accountability to discuss where we were right and, as importantly, where we were wrong.
Where We Were Right
Our trade ideas for the Gravitational 15 portfolio skewed the odds of success in your favor during 2019 as we clipped 77.9% winners of all closed trades (long and short) and 86.2% winners over the last 29 closed trades.
In addition to our trade ideas, our macro themes focused your attention on the U.S. markets with the best risk-return profiles on the long side.
Our U.S. Shift Work call to be long utilities (+25.9%), REITs (+28.9%), gold (+17.9%) and Treasuries (+14.1%) got us paid, with minimal year-to-date drawdowns of -5.4%, -5.4%, -6.6%, and -8.2%, respectively. We also positioned you perfectly in gold miners, capturing a 26.3% gain before closing that bullish Focus Market call.
You’re probably thinking, “Everything went up last year, getting longs right in that environment is a given.” To that, I channel my inner Lee Corso, “Not so fast, my friend!”
Most investors forget that not all returns are created equal from a risk perspective. We aren’t trying to generate returns based on the beta, or the embedded risk in the market, alone. Anyone can ride the beta wave up; the problem is you’re forced to ride it on the way down as well!
In contrast, we focus on generating the best absolute, risk-adjusted returns the prevailing Fundamental Gravity environment will allow.
For instance, both biotech (+25.2%) and utilities (+25.9%) delivered fantastic double-digit returns, but biotech experienced three times as much drawdown risk (-15.4% versus just -5.4%). The $64,000 question is: which 25%+ return would you rather have?
One look at the reward-to-risk (R-2-R) profiles of our long calls, and you’ll notice that the R-2-R profiles are more than three-to-one, meaning you’ve only had to experience a dollar’s worth of drawdown to earn $3.
We’ve been riding and dying with utilities, REITs, gold, and Treasuries since mid-2018, and there is no reason to change horses now. The fact that U.S. growth will continue to slow ensures that the Fundamental Gravity environment will remain bullish for these asset classes as we traverse Q1 2020.
Where We Were Wrong
Hindsight is a beautiful thing? Hindsight tells us that U.S. equities (the S&P 500) just experienced one of the 17 best calendar year performances since 1933! Boy, I certainly wish Miss Cleo would have told me that during our annual conference call back in December 2018, because 2019 was a brutal environment for short-sellers.
Even with the U.S. economy toggling between Winter and Fall FG environments all year, small caps (+22.0%), retailers (+14.1%) and basic materials (+24.1%) followed the broader market higher and posted phenomenal gains.
Despite the uber-bullish price action last year, our timing for short trades in the Gravitational 15 portfolio was better than bad with a 75.8%-win rate on the 29 closed short trades.
I’m not one to stubbornly stick with a call for ego or any other humanness-driven reason. We are in this business to get more calls right than wrong and to make sure we get the correct calls really right and the wrong calls only slightly wrong.
We’ve stuck with these bearish biases because the data has backed our play, even if the price action has not. Our call is to remain bearish on basic materials and small caps (U.S. Shift Work) as well as retailers via the Retail-iation macro theme.
The Bottom Line
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 for several hundred markets in all four major asset classes across more than 30 economies globally. Beyond that, it takes a unique skill set to contextualize all of that data to formulate accurate market calls (our macro themes) and then to trade those calls in a risk-conscious manner profitably.
As I’m fond of saying, we done good, but we got to keep doing good. The 2019 calendar year is in the books, and it’s time to get back to the global macro grind because the 2020 investing game is on!
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