Use Beta to Become an Alpha

Estimated read time: 3 minutes 7 seconds

In this week’s market recap email

1. Market recap

2. Skills/methods I used this week

3. What's in and what's out of my portfolio

What Happened This Week

*Market recap as of Thursday, July 21st*

Wow, what a week for the market! The bottom is in! Cramer says buy!

Full disclosure, I got body-bagged this week.

As of mid-day Thursday the S&P has rallied north of 5%, Nasdaq 6.5%.

I'm not one to sit here and ask "why" we are rallying amidst a growth-slowing period; instead, I'll continue adding to my short side knowing damn well that the road ahead is bumpy as hell.

Cramer can keep saying the bottom is in all he wants - remember that he lives a fairy tail life spitting nonsense on TV without repercussions.

Look at the numbers. Look at the companies that have already reported earnings. Look at the obvious GROWTH SLOWING.

While body-bagged this week, it could have been much MUCH worse had it not been for my teaching moment this week (keep reading, you'll learn something valuable I promise).

Teaching Moment

Last week I introduced an important concept about position sizing.

This week I am going to discuss a topic that compliments positions sizing - BETA

The put it simply, beta is a way of measuring volatility relative to the market's volatility. In these scenarios the market always has a beta of 1.

If you are invested in a stock that has a beta of 2, you can expect it to return (on average) two times the market's return. On the other hand if the market returns a loss, your stock will lose double.

This brings us back to how we combine the two concepts in order to arrive at beta-adjusted position sizes.

Recall our position sizing guidelines (not actual holdings, just an example):

Currency: 12-13% -Dollar, Gold, Euro

Fixed Income: 10% -Bonds

Equity: 6-7% -Stonks

Commodities: 4% -Oil, Natty Gas, Copper

Let's drill down into the Equity section for a stonk with a high beta. Mr. Elon and Tesla, you're up - equity beta is just over 2 (I use Yahoo finance to find beta).

While Yahoo uses 5 years/monthly data to compile beta, in relative terms a beta of 2.11 tells me that Tesla will return more when the market is up, but lose MORE when the market is DOWN.

Our equity position sizing max for equities is 6% - beta adjusted sizing for something with a beta of 2 would be a 3% max.

Beta-adjusted position sizing = desired position max / beta

Adhering to the rule of beta-adjusted position sizing will ultimately mitigate risk in your portfolio. Stay nimble out there.

In The Account | my top holdings

1. Cold. Hard. Cash.

   1. I don't nee to go into detail here, although I will say this position is smaller because I've been buying more of #2 this week

2. $UUP

   1. We got our first correction in the Dollar in quite some time. Last week I was selling the rip, cutting my position sizing down to 8%. Now I'm just north of 10% - my position sizing rule allows me to get up towards 12% in this position so I will continue to add on red

On The Radar | positions I want to build / sizing up

1. $BAB

   1. Don't fall out of your chair when you find out what this ETF tracks - municipal bonds. Ooooo, sexy! While not all bond proxies are signaling it's time to jump on board, Muni's look like they're flipping and holding a bullish trend. Other bonds on my radar are in the 'treasury belly' realm ($IEF/$IEI)

Off The Grid | removed positions / short selling opportunities

1. Rather than go off on a tangent, here's a running list of the top holdings I am short/active in outs

   1. $XRT, $JETS, $KRE, $XLF, $XLK, $QQQ

   2. Translation: all things financial, tech, consumer discretionary

Until next week....

-BW

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.