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Winchester BluffPure Alpha Fund, LP
Introduction
Characteristics of the fund
The fund measures its success based on the absolute level of profitability and not “relative” performance vs. the market
Invests both long and short to capture profits in both rising and falling markets
Low volatility/beta (currently @ .14)
Low correlation to the broad market
Fund Profile
Ability to trade multiple instruments in asset classes around the world at any time
Employs proven indicators of Point & Figure Charting and Relative Strength
Employs objective technical analysis in conjunction with fundamental research
Our strategy works because we limit risk and adhere to a clear trading plan
Global Macro Strategy
Investment Universe
US StocksCash Fixed Income
Int’l Stocks Currencies Commodities
Fund Objectives
1. Not lose money
2. 15 + percent annual returns over the next decade
3. Continuous improvement by analyzing mistakes
4. Gain partners who share our philosophy of uncompromising risk management & enjoy experience
Investment Process
Active trading around core investments
Defines & limits downside risk by investing in uncorrelated pure alpha streams ("Alpha" in investing language is the return you achieve based on manager skill)
Invests in a core positions ranging from foreign bonds to currencies to commodities to global stocks
Invests in subsidiary holdings at the periphery of the core to enhance returns
Executes this dual complex strategy by constantly analyzing fifteen or more asset classes and simultaneously placing 30 or more trades
Invests in only the most liquid markets that it can get out of quickly if necessary
Portfolio construction process identifies what each position could add in terms of overall risk to the portfolio
Investment Process Outline
CORE POSITIONS
Technical Market
Analysis
Value Stock Screens
Special Situations/Niche Products/ Emerging
companies
Hedges (portfolio
protection)
Event-driven trades/StraddlesChart Pattern Recognition
Growth Stock Screens
Hope Is Not A Strategy
Buy the “Market” in 1929…
It took 25 years to get back to even
Buy it in 1973…
It took 7.6 years to get back to even
Starting in 1987 IBM went down 74%...
It took 10 years to recover
Cisco Systems (CSCO) was as high as $82 in 2000… It has yet to recover
The “buy-and-hold” myth:
Market and sector forces together typically cause 80% of the price
movement in a stock. That means the company fundamentals usually
account for less than 20% of a stock’s price movement. This is the reason a
company’s stock price sometimes seems to move independently of the
fundamentals.
Source: “The Latent Statistical Structure of Securities Price Changes” Benjamin F. King
Causes of Price Movement
Most people, however, spend
80% of their time on stock evaluation and only 20% on
sector and market evaluation. In other words, they ignore where
the greatest amount of risk lies – the market and sector forces.
Source: “The Latent Statistical Structure of Securities Price Changes” Benjamin F. King
Typical Resource Allocation
Fundamental Analysis vs. Technical Analysis
1. When to Buy
2. Positive Trends
3. Relative Strength
4. Broad Market Risk
5. When to Sell
What is Fundamental Analysis? What is Technical Analysis?
1. What to Buy
2. Company Management
3. Earnings Growth
4. Price/Earnings Value
5. New Products
Fundamental Analysis (What to Buy)GROWTH SCREEN
The Investors Business Daily (IBD) 85-85 Index Screen
IBD provides independent data ratings for every U.S. stock, including an Earnings Per Share (EPS) Rating and a Relative Strength (RS) Rating.
Their research shows that in every market over the last 50 years, the best stocks have had EPS and RS Ratings of 85 or better BEFORE they made their biggest gains.
The consistently superior performance of the IBD 85-85 Index reinforces this fact and is why we incorporate this screen as one of our primary tools:
From the total period 11/13/2000 to 2/28/2013, the IBD 85-85 returned 274%, while the S&P 500 Index returned 12%
Note: IBD's ratings are relative, with an 85 rating meaning the stock is outperforming 85% of all stocks in it's peer group. The Index is updated after the market close each Thursday. At that time, stocks no longer meeting the 85-85 criteria are removed, stocks now meeting the criteria are added, and those maintaining their ratings remain in the Index.
Fundamental Analysis, continuedVALUE SCREEN The Buffett/Graham Screen
This screen identifies companies with high quality business at undervalued prices
1. Stock price is less than the net current asset value of the company
2. During the past 12 months, the company generated positive operating cash flow
3. The company has no meaningful debt compared to its cash position
From back testing study 1998-2012, this group had an annual gain of 20% while the S&P 500 index averaged 2% a year.
Adding Technical Analysis Fundamental research tells us what ought to happen with a stock, while technical
analysis tells us what is happening with respect to supply and demand
Technical analysis, and in particular “Point & Figure” technical analysis, gives us the discipline to make decisions based on price
This logical approach helps reduce uncertainty in the market. It allows us to recognize market risk and therefore:
Move to cash/short assets when market indicators dictate that supply is in control Invest long and more aggressively when demand is in control
The ability to perceive and manage risk, and thereby preserve our investors’ capital, is our primary objective at Winchester Bluff
Supply and Demand We all understand the basic
forces of supply & demand
The same forces that affect prices in the supermarket also affect prices in the stock market
Stocks, sectors, and asset classes move in and out of favor just like produce at
the supermarket
Point & Figure Basics
Prices represented by X’s and O’s
Alternate columns of X’s and O’s
as the price changes
X’s = Price is rising
O’s = Price is falling
Trend-line shows strength or weakness
Chart Source: www.dorseywright.com
Why We Use The P&F Method:
Patterns are easy to recognize Trends lines are readily identified Objective price entry points can be establishedWith this tool, we can see both the near term and long term position of a stock
23 X <- Demand 22 X X X X X wins 21 X O X O X O X O X 20 X X O X O X O X O X X O X O O X O X O 19 X O X O X O X O X O 18 X O Notice that supply and demand X battled it out for a full year 17 X until demand won at $23 0 <- Year 0 0 1
Positive Trend Lines
Negative Trend Lines
Stock Filtering Process
45 OO X XO X O X O X XO X O X O X O X OO X O O X O X O
40 O X O X O OO O O
B SX X XX O X O X X
35 X O X X O X O XX O X O X O X O XX O X O X O OX O OX
30
Stock A Stock B
Measuring Market Risk
Now that you understand Point & Figure charting basics, we can move on to our most important indicator, the NYSE Bullish Percent.
NYSE Bullish Percent
Our Primary Market Indicator
Tells us whether to have the offense or defense on the field
It is calculated by taking the number of stocks in the NYSE on a buy signal, and dividing by the total number of stocks in the NYSE, resulting in a percentage
For example, if there were only 1,000 stocks on the NYSE and 500 were on buy signals, the resulting NYSE Bullish Percent would be 50%, which is then plotted on a Point & Figure chart.
Bullish Percent Chart:
• X’s = Offense – Wealth Accumulation
• O’s = Defense – Wealth Preservation
• Two Important Areas: 30% and 70%
• Measures Risk in the Market
• Does not have to move in tandem with the S&P 500 or the Dow Jones.
Market: Offense or Defense?
One of the most important considerations when investing is determining whether to take an offensive or defensive posture
When offense is suggested we employ the fund's assets by making stock purchases
When defense is suggested we work to protect existing positions and take advantage of shorting ideas
The Playbook – Offensive Plays
Buy Exchange Traded Funds (ETFs) Buy stocks on breakouts Buy leaders Consider deep value plays Employ liberal stop loss points Buy Offensive sectors (BP & X’s) Focus on strong technical stocks Buy on pullbacks Use trend-line stops Focus on strong relative strength Buy Call Options
The Playbook – Defensive Plays
Trim or take profits Short equities Reduce equity exposure Raise cash Sell weak RS stocks Buy Inverse funds Buy protective puts Tighten stops on long positions Increase non-correlated exposure
Winchester Bluff Pure Alpha Fund
How our process helps us invest with discipline
Common Investor Behavior
Over the past 30 years:
The average stock mutual fund has returned 10.7%
The average investor has returned only 3.7% The difference can be attributed to investors making
emotional decisions
For Example…
Removing Emotions
DECISION INPUT
WB Process Decisions are clear-cut
Emotion-based Investing Input comes from many sources and leads to second-guessing
AT DECISION TIME
WB Process Portfolio construction based on a set of rules
Emotion-based Investing There are no rules
Removing Emotions
COMFORT LEVEL
WB Process Investments are easily reevaluated as indicators change
Emotion-based Investing Decisions put off due to difficulty
EMOTIONS
WB Process Emotions are not a part of decision-making
Emotion-based Investing Emotions cause errors that can have disastrous effect
Removing EmotionsREACTING TO NEWS/MEDIA
WB Process No effect - we stick to an organized plan.
Emotion-based Investing The news causes most investors to panic
PEACE OF MIND
WB Process A lot
Emotion-based Investing None
Proprietary Process Recap
Investment Decision
Asset Evaluation
Fundamental Research
Independent
Statistics
Web-Based
Technology
Asset
Inventory
85-85
Screen
Value Screen
Portfolio Risk Analysis
Technical
Research
Market
Risk
Sector
Risk
Trend
Lines
Relative Strength
Chart Patterns
Continuous Improvement Process (Trade Evaluation Checklist)
Stock: Date:
Sector:
Positive (Y) Negative (N) CommentsMarket BP Sector BP
Value Screen
Growth Screen
Trend
Pattern
Consistent with current DALI
Favored Sector
Technical Attributes
Stop Loss %
Sell Analysis:1/3 when up 30%1/3 when up 50%When broke trend lineWhen Relative Strength changedWhen dropped back to first 1/3 sellWhen nothing happening 1+ monthHow did stock perform after sale
Long-Term Goal
Fund launch
Investment Process
&
Risk management
10-year average annual return goal: 15%
$100M AUM
Related Documents
Fund
Summary
Private Placement
Memorandum
Limited
Partnership
Agreement
Subscription
Agreement
Final Thoughts
What is most important is seeing that your money manager has a coherent process. PROCESS is the key.
Does the concept make sense? Is it robust? Is the organization committed to its discipline? Is risk managed during the inevitable downturns?
Over long stretches of time, having a strong process and good discipline makes all the difference.
Identifying good managers is a tough decision. Of course, we hope that your choice of a manager will be Winchester Bluff. The path to good returns is simple: find a manager whose process you are comfortable with and hang on through thick and thin.