Robert Kendall Managing Director
Many times I've discussed and suggested that advisors should always use process over attitude. When I say this, am I just saying to follow the buy and sell signals in the allocations that VPM is generating? The answer is a simple no!
While part of the process is following the suggested buy and sells and reallocations, there's a much further process that is happening behind the scenes.
The training videos on our website in section 4 direct advisors to build a tracking manual. There are four primary reviews that should be performed on an ongoing basis. They are weekly, monthly, quarterly and annually.
The reason for these reviews is to establish a dynamic process over time that fits the philosophies of your firm as well as the different variables that occur during the walk forward process of VPM. The reason why these reviews are important is that they help to develop context to understand decisions that need to be made around different market cycles, as well as circumstances that happened in different asset classes, as well as the individual symbol considerations.
Some people think when I talk about Process Over Attitude that all I say is do the signals. While that's true, there are times when events occur, both in the markets as well as individual stocks, that require a little bit more thought.
One of the issues that have always been in play, and I have discussed this in the training videos, is when stocks get extended, it is critical to make sure that you review stocks that are in upward runaway patterns as well as downward spirals. They might be causing the positive and negative effects on your portfolios. This does not apply so much to ETF's or mutual funds
In the case of extended stocks, these are stocks that you are concerned that they have gone up too fast. There are a couple actions that you could take that would still involve being in what I would consider process. For one, there is the simple review of a stock that has ratcheted up very quickly due to a proposed buyout. These are always easy. You can just go ahead and take profits as they’re trading near the buyout price. It is not likely to move much above that price if there is a deal in the works. If this stock has spiked and VPM is issuing a new buy, then you should not execute that order. You'd want to deactivate the symbol to avoid this coming into your portfolio because often times the stock has already experienced the returns it would due to the buyout.
But there are other circumstances that need to be reviewed and processes that needs to be put in place, such as extended moves that have exceeded both holding periods and expected returns that VPM demonstrates in its trade profile stats. There are two ways that you can handle this. One would be to track the stock on a daily model and exit it on a sell signal 100%. Another option would be to sell off half of the position and exit the balance of the position when the weekly models issue a sell signal.
Other corporate events such as news, negative or positive, can also be evaluated and tracked at a different level. I think it's critical to understand that when I wrote the articles several weeks ago titled “The Value of Process,” there are events that you, the advisor, should be involved with in the decision process.
The value of utilizing the review process and documenting it is that it will help you to understand some of these actions as you move forward. Any action that is taken should be documented and then reviewed on the quarterly basis to determine the validity of the action. One question that should be asked is “Was the action appropriate? Did it add value or did it take away value?” If you see that these actions are not adding value as you go through the evaluation and updating process, then what you want to do is document which actions are positive and which ones are negative.
Through that evaluation process, you start to develop a dynamic process that operates within the context of your practice and your philosophies and is validated through positive occurrences.
By doing this, you will be documenting actions on different types of events that need to be thought through before executing or even adding new client funds to trades. This is the key. By having a documented reviewed process, it gives you the context to know that the decisions that you're making as you walk forward the VPM process are valid.
When utilizing the indexing, such as mutual funds and ETF's, many of these considerations are not valid as they do not have the dynamics that an individual stock portfolio will have. With most of these strategies, you will initiate and follow the process. Buys and sells should match the current positions when you're bringing in new money. However there may be circumstances within current market dynamics that may cause you to consider certain types of actions. All of these actions should be directed through either the daily or weekly models determining on what you're trying to achieve.
My main goal is to make sure that decisions that you're making in deploying capital or executing trades are based upon logic not emotion. There are many circumstances in which you can use some of the daily models to help you to guide your decisions versus making an emotional one.
In my view, as you are the advisor with fiduciary responsibility, it is important to make sure that all considerations are pondered before implementing and deploying capital. Advisors need to ensure that their fiduciary responsibility has been handled appropriately. With many of the new regulations that are coming into play, these actions most likely will need to be documented which furthers the case for doing written reviews on our suggested increments. It appears more and more that documentation will become key in your practice remaining in compliance.
I will write further articles on some of these concepts to bring an understanding of the benefits of reviewing your portfolios on the daily, weekly, monthly, quarterly and annual basis.
