Five Ideas For 2009

I thought I would summarize a few ideas mentioned on World Beta over the past few months as potential trading ideas based on some simple quant research. 

1.  Follow a simple tactical asset allocation model.  With returns near flat the model performed admirably in 2008 – look for an update to the white paper with out-of-sample numbers sometime in late January.  The model is currently 100% in cash/bonds.

2.  Look for a particularly pronounced January Effect in beaten down microcaps.  I found that following the worst 10 years in stocks since 1927, the average return for microcaps in January was around 18% with no down years.  An investor could either go long microcaps outright or created a hedged position by shorting large caps.  Sample small and microcap funds are PZI, FDM, and IWC. Large cap ETFs include SPY and VTI.   I mentioned a screen for beaten down microcaps here

3.  Look for a bounce across the board in January.  In one study I examined asset class performance after a really bad month and the take-aways from this study were:

– It does not pay to buy an asset class after a really bad month for the following 1 month.
– 12 months later the return is not much different than average.
– 3 and 6 month returns, however, are stronger. You pick up on average about 3-4% abnormal returns buying after a terrible month.

4.  Follow the smart money.  A simple method of following the most popular stock holdings of the Tiger Cubs would have beaten the market by 12% a year since 2000.  Current holdings include:

Qualcomm (QCOM)
Visa (V)
Mastercard (MA)
America Movil (AMX)
Priceline (PCLN)
Transdigm (TGM)
Snadridge Energy (SD)
SBA Communications (SBAC)
American Tower (AMT)
XTO Energy (XTO)
AlphaClone lets you create an custom group of managers (and while I am biased it is a lot of fun to play around with the software).  In a future post I will take a look at the Hedge Fund Consensus and Hedge Fund Best Ideas Portfolios that would have outperform the market substantially over the past 8 years.
5.  Get long Japan.   Japan is back to where they were in 1982, and have experienced three down years in a row – a setup that generates large returns of around 20-30% historically.
I am sure there are some more I missed, but I will take a look when I get back to the US.

Happy New Years!