Defining a Core Position v. A Trade
There are a lot of ways to go about investing and there is a noticeable difference in a trade v. an investment. In DeltaOne the philosophy that we (again not all) apply is typically a mix of Core Positions (investments) and trades, so when I mention investments, I mean Core Positions. If you read the DeltaOne Philosophy, we believe in holding a few core positions at a time. They can last anywhere from min. 2 months to 6+ months at a time and have to meet certain parameters to be deemed an investment v. the parameters that a trade would need.
I am going to explain both of them and show you a recent example of a core position and the idea behind it.
Core positions can be a mix of parameters, but they cannot be speculative stocks. In this example, $STKS was placed into The Long Vol Report under the Value Tracker in November 2022. Usually core positions are pulled from The Value Tracker, Swing Tracker or Special Situations Monitor within TLV report.
With $STK, it met a few parameters like earnings growth, a management team that was focused and then a great technical overlay that presented an ideal entry. How the trade is expressed (selling puts, buying calls, buying shares) is left to the individual – each member in DeltaOne expressing it as they saw best.
I like investing but not in names that are covered by the street (Apple, Amazon, GOOGL etc). I’m looking for names not covered by media. Companies with good management, great balance sheets and/or even a catalyst like a share buyback, which, $STKS had the potential in doing. They can also be companies in a sector that is inflecting due to government policy change, macroeconomic policies or some other tailwind that will drive the value higher, or lower – and by that I mean 2x/3x, not 20% over the course of two years.
With a core position I want to avoid having to hold for more than 6 months to see a return, but I’m willing to let that go up to a year, in special circumstances. However, the financial markets are constantly inflecting and there are usually positions (like $STKS) that can move +30%/+40% within 1-2 quarters and without them being a highly speculative stock.
These are not trades therefore I am not worrying about watching the P&L on a daily or weekly basis but on the same account I am not recklessly just buying in without a market-timing overlay. A quality market-timing overlay is key, but not as big as a deal because a core position usually is driven by a thematic tailwind or fundamentals of some kind.
Then you have trades. Trades can be anywhere from a week to 180 days in time. They come in the form of locating some dislocation or event in say an overbought $SPX, as an easy example. They can be a situation like Carvana last year where, it was not really an investment, but a trade, because of an understanding of their balance sheet (in depth) and their loan with Apollo/Pimco. With trades you want to keep capital allocation smaller than an investment position because they’re trades and not investments so I expect there to be more volatility in them so I want to measure that as a tool for position risk.
Unique trades present themselves all of the time but when I look at them, I want to understand two things:
What are the potential upsides on the trade?
How can I structure it to minimize the loss/or keep the loss small?
If I can answer those questions first, then I can measure whether or not the trade makes sense for the portfolio. I want these to work rather quickly, inside 6 months, and better, if inside 60 days if at all possible. And because these situations tend to present themselves rather often, I get extremely picky on finding what I consider to be the best ones based on the above measurements.
With trades I don’t want to get married to it an make it an investment. The idea is to generate alpha and get back to cash. Sure, there are times where it may work out really well and something changes, so I am not opposed to trimming the position and keeping some for an upside. This is something that I did recently with some of my real estate basket ETFs – they had great gains over a 6-week period.
We can usually screen for both of these within DeltaOne due to the TLV Report and research within the community but it’s how we treat both in terms of duration and risk that makes the difference in how our portfolios are managed.