bb:" the incredible shrinking index "
hi bobby; 'was thinking about you this week-end. You see, one of the things I do between SEP~NOV is review my CORE portfolio, crunch through all the stuff and make adjustments. One of the things you notice when you do this is that something like 60~80% of the stocks (in a given sector) ...not 60~80% of the capitalization but, 60~80% of the number of stocks - ain't growing.
Just for grins - I turned the tables around, assumed I was managing a bear fund, to see what the result would be.
One result is that: the bellwether (in a given sector) doesn't work. Oh, yeah - it goes down - but, given any whiff of buying, it leads the way up, and so tends to decay less. So, I threw out all the bellwethers.
Another result is that: the index (of a given sector) doesn't work. First, there is the effect of the bellwether, and then the other, large-cap stox that tend to support the index. So, I threw out the indices as bear fund vehicles.
Most of the large-cap components mimic the bellwether, so I threw most of them out, too. What's left over is "everything else", about 60~80% of the stocks but, far less than half of the capitalization.
Assuming you're a BEAR FUND manager, Conclusions are:
(1) if you're gonna short an index you want it to be as broad-based as possible; preferably not only something like NYA.X - NYSE Composite, or RUT.X - Russell 2000, but also global in scope.
(2) you wanna concentrate weighting inversely to capitalization; ie., 1/cap rather than the other way around.
(3) further, you want to de-emphasize (or even eliminate) all "new issues"... there is a direct correlation between smaller-cap decay, and age.
(4) you wanna pick stocks that have low visibility; ie., companies that are members of a sector but not components of some sector index.
(5) you wanna cull out possible takeover targets: these are small-cap, older, non-index component companies with consistent F/A as a result of some kind of stable (albeit small) market share.
Doing this creates a hypothetical "bear fund" with characteristics just the opposite of "the nifty fifty"; indeed, you need a lot of issues: older, global, poorly visible little fish with inconsistent earnings.
the apparent dilemma for the bear fund manager is that there are few, if any simple vehicles (like some index) to ride: you would have to spread out lots of short positions.
also, you'd be alone... everybody on S.I. is thinking about GE, MSFT and INTC, etc. If you're a serious bear, you don't care about what everybody else is doing - you're investing short in a school of little, unknown fish, not trading short the fat, popular fish.
but this works, dude - this works very well, indeed.
There's not much glamour in being a serious bear: forget trying to spear bloated whales like MSFT or DELL or AMZN; volatility cuts both ways, and they bounce as good or better than they plunge: shorting "growth" stocks may be successful in the shorter-term but, makes no sense if you're a bear investor. If you're a serious bear, you gotta stop thinking like a bear, and start thinking like a shark (^_^) - looking for: a large school of sick, old, little fish to dis-invest in !
MUNCH :-()
-Steve |
