After a very successful 2018, the Smart Money portfolios are off to a rip-roaring start in 2019. Table 1 is a summary of returns for each of the Smart Money strategies during January 2019.
Table 1. Summary of returns for all Smart Money strategies
The results for January have been outstanding. The only strategy that under-performed the market was the Pairs Trading. I’m not sure why this strategy under-performed, but I suspect it has to do with the short trades losing out in a strong market. I believe that this strategy will perform much better in a weak market, as history has shown.
Table 2. Smart Money Top 10
The Smart Money Top 10 is designed for long-term investors rather than fast traders. This list doesn’t change much from month to month because the stocks tend to be steady performers with less price volatility than those in the other lists.
Table 3. Smart Money High Conviction
Several subscribers have asked me what the difference is between the Top 10 list and the High Conviction list. The short answer is the size of the bets on these stocks. The more money these institutions invest in a name, the higher their conviction. These stocks tend to be more volatile than the Top 10 stocks, but the Smart Money has high confidence in their potential.
Table 4. Smart Money Contrarian
In this strategy we have value considerations as the primary driver. These stocks tend to be beaten down, and underpriced relative to their fair value. The key to success for this strategy is knowing which of the beaten down stocks are true bargains, and which are “value traps” which means that they may be cheap today, but they will get much cheaper tomorrow.
Table 5. Smart Money Momentum
Over the past 50 years momentum has been one of the most profitable strategies in the factor universe. But momentum can also bring pain and disappointment, especially when the market enters into a weak period or a bear market.
Momentum is not for the faint of heart. To use this strategy effectively, one must be willing to suffer significant short-term pain in order to benefit from the long-term gains.
Table 6. Smart Money Pairs Trading
This strategy was the only under-performer in the Smart Money stable. In a rapidly rising market like we’ve had during January, the shorts tend to get killed as short sellers are forced to buy back their positions at ever-increasing prices.
When the market becomes steadier, or begins to decline, this strategy tends to shine.
How to take advantage of these Smart Money strategies
Each of these strategies has a unique risk and return profile. Momentum, for example, can be volatile when the market is volatile. The Top 10 strategy focuses on high quality companies that tend to hold up under hostile market conditions.
High conviction stocks can also be volatile, but not as much as momentum stocks.
Contrarian stocks have great upside potential in a rising market but can be vulnerable in a declining one.
If you would like to try your hand at these strategies, you can subscribe to the one that fits your investing style on a month-to-month basis. If you would like to see all of the strategies, subscribe to the All Access newsletter.
How you choose to approach these strategies is a matter of personal preference. There is no right or wrong way to do it. There is only the way that you feel most comfortable with.