The Milwaukee Brewers just lost the MLB Wild Card Series to the New York Mets. The Mets are moving on in the playoffs and the Brewers’ season has come to an end. I was actually at Game 1 with a great friend of mine, but Games 2 and 3 had me thinking about investing, as a lot of things do.
When I think about the Brewers-Mets games, I’m thinking about the home runs that helped decide Games 2 and 3. I’m thinking about Jackson Chourio who hit two homers and Garrett Mitchell hit one to help the Brewers secure the victory in Game 2. I’m thinking about my son and I cheering at home after the back-to-back home runs by Jake Bauers and Sal Frelick in the bottom of the 7th in Game 3.
While I don’t want to think about it again, I’m thinking about the Mets’ first baseman Pete Alonso in the top of the 9th in Game 3. Alonso was staring at a 3-1 count, with a pitch in the strike zone a high probability. The Mets were scoreless against the Brewers, we were up 2-0. I’m sure Alonso felt some nerves at the plate, but was dialed in, patiently waiting for a pitch to swing at. Brewers’ pitcher Devin Williams winds up and delivers a changeup down the middle of the plate. Alonso swings hard, and the ball goes screaming over the right-field wall for a 3-run homer. Mets are up 3-2. Gut wrenching for a Brewers fan.
While Major League baseball players are professionals, with the Milwaukee crowd keeping excitement throughout the series, you can’t tell me that these baseball players didn’t have at least some nerves when they were up at the plate. One would have to assume, with the Wild Card Series on the line, that if there is a fat pitch right down the middle of the plate, these professionals would be swinging hard. These aren’t my kids who might be nervous to swing the bat when the pressure is on. If the professionals don’t swing, they may not get on base, and the team’s season will end. Baseball playoff games are times to be a bit more aggressive.
As a professional investor with over 20 years of experience, I’m expected to swing. Even when the pressure is on, I need to stay disciplined and try to take advantage of those fat pitches down the middle. I expect to miss some of them, but I also expect to hit some of those really solid, potentially hitting it over the fence for a home run.
Swinging at Those Fat Investment Pitches Down the Middle
In addition to managing traditional asset allocation investment strategies for clients, I also manage more tactical strategies. These tactical strategies are structured to have a heavier allocation to longer-term positions plus a smaller allocation to shorter-term trading positions.
The majority of the assets in the tactical strategies I manage are in longer-term holdings, typically allocated across equities, bonds and income-generating assets. I’m diversified across geography, market caps, sectors and investment styles. I prefer heavy allocations to quality companies and quality investment managers.
With the long-term investments, I’m trying to consistently hit singles over the long-term. I’m not trying to get overly cute with these positions. Just consistently getting on base and advancing slowly can lead to long-term success. I’m not trying to swing for the fences, I just need some solid, consistent contact.
A smaller portion of the assets in these tactical strategies is what I would consider trading positions. For these positions, I’m trying to generate higher returns over shorter periods of time than I might be able to do relative to my longer-term positions.
With these trading positions, I’m trying hit doubles, triples and home runs. If I see what I believe to be a fat pitch right down the middle, I’m swinging harder than I normally do. I might swing and miss, but if I do, I’m swinging even harder the next pitch that comes right down the middle.
When I’m swinging at these fat pitches right down the middle, I’m also using a juiced bat. My boys play baseball and we know that there are some bats where the ball just gets smoked if there is solid contact. The trading positions I swing at are with what I would consider “juiced bats”. In investing terms, my “juice”, is leveraged investments.
Like baseball, there are additional nuances to trading that I’m also keenly aware of, including position sizing and tactical rebalancing. This is really important, as it can help manage risk and add additional value if done correctly.
So how do I translate this baseball analogy to real live investing? I thought I’d give you two examples of some of my investment hits this year on semiconductor stocks and Chinese stocks.
Semiconductor Stocks
Semiconductor stocks have been at the center of the artificial intelligence-related hype this year. Semiconductor chips are needed for the heavy AI infrastructure and investors pushed these stocks significantly higher over the last couple of years.
From the end of October 2023 to a peak in mid-July, the iShares Semiconductor ETF (a proxy I’ll use for broad semiconductor stocks exposure), was up roughly 85%. That’s a big run in a relatively short period of time. I’m generally not a fan of jumping on a heavy momentum trade, but I’m willing to buy pullbacks, particularly if there is some potential for longer-term, fundamentally-driven upside.
I had been patient this year on the space, without any dedicated exposure to semiconductors, but I assumed volatility would pick up at some point. After some patience, a downturn started in July and semiconductors declined over 25% through early August.
Towards the end of July, I took a swing at semiconductors with my juiced bat. With short-term valuations that seem stretched, I was really just looking to hit a quick double, maybe a 20% return. I “hit” the trade and the position started to rally a bit, but then subsequently turned quickly lower. To me, that was a swing and a miss.
As semiconductor stocks quickly declined further, I took another swing, and swung harder with my juiced bat. I thought maybe instead of a double, it could turn into a triple if investors swoop back in. After the second swing, semiconductors rallied quickly higher, up over 20% from the August lows.
As I reached second base, and I scored a couple of RBIs, my discipline didn’t allow me to try to reach for third. I wanted to lock that solid hit in and took some profits, essentially cutting my position in half. I’m still on base and may still advance if semiconductors continue to rally. If semiconductors take a drop to the downside, I might even get another chance at bat to swing hard again. If semiconductor stocks just chop around, I’ll just be standing on base, patiently waiting for my next move.
Source: StockCharts.com 10/3/24
Chinese Stocks
I’m not a huge fan of investing in areas where a government has a significant amount of influence on companies’ success. Sure, the U.S. government has some influence, but the Chinese government is much more restrictive.
I’ve always considered my dedicated position to Chinese stocks as a trading position. You can read my note on Chinese equities on April 23, 2024 here: Quick Look: Chinese Equities. Chinese equities had been in a significant, persistent downtrend and I would hear some investment professionals stating that China was “uninvestable”. When all you hear is negativity and an investment is down significantly from its highs, it doesn’t take much for a spark to generate a significant reversal higher.
My interest in Chinese stocks began after the significant selloff from the peak in February 2021. As Chinese equities were hitting levels down 30%, I was swinging, hoping for a double. That first swing was a quick swing and a miss.
Chinese equities continued to decline, and I believed the pitches became fatter and even closer to the middle of the plate. I brought out my bigger juiced bats and started swinging even harder. Chinese equities declined 60% from its peak, so I swung hard.
My first solid hit occurred when Chinese equities hit that deep selloff in the fall of 2022. From there, Chinese equities rallied significantly through the end of January 2023. From the October 2022 low to the January 2023 high, the iShares China Large-Cap ETF (my proxy for Chinese equities), rallied roughly 60%. While I didn’t hit the ball right at the absolute bottom, I would consider that hit as a solid triple. I did my job, I brought in some runs, and I took some profits.
While I didn’t sell everything, I was still on base with Chinese equities. Following the profit taking, Chinese equities took another drop lower. I was given another chance to swing that juiced bat again as the pitch was right down the middle.
Chinese equities declined to a low in January 2024 and I swung hard again around those lower levels. Remember, when I’m swinging, I have no idea if I’m going to hit it or how far it might go. Like baseball, that’s the risk you taking when swinging.
For months, Chinese equities chopped around, but then picked up steam and rallied to a little peak in June 2024. I was on base and took some profits again, but remained on base. Not sure if I’d/Chinese equities would be advancing or if I’d get another chance at the plate.
Fast forward to September 2024, and China’s government announced its plan for significant economic stimulus. Following that announcement, Chinese equities shot straight upwards. You can see it in the chart below. It’s this image plus the Brewers playoff games that made me think of writing this piece.
The iShares China Large-Cap ETF jumped over the 200-week moving average (red squiggly line), almost like a baseball going over the fence for a home run. You could almost hear Bob Uecker shouting “Get up….get up….get outta here…Gone!”
Chinese equities continued to rally higher, eclipsing the level that I stopped at third base and took profits the last time. From the February 2024 bottom to the recent October highs, it’s been 70% move higher. You can do the math on how far my juiced bat might have hit that ball.
As I did last time, after I brought in some more runs, I took profits and have cut my trading position to less than a third of what it was at its highest allocation. I’ve already gotten to third base twice with these trades, and I’m still on base. If Chinese equities continue to rally higher, I can round third and come home, fully exiting the trading position. If Chinese equities take a deep downturn form here, I’ll have my juiced bat ready to swing hard again.
Source: StockCharts.com 10/3/24
As an investor, I like to keep things simple. I try not to get nervous or emotional at the plate. Give me consistent singles all day and I think I’ll get around the bases plenty of times over the longer term.
BUT…
As long as I remain patient, at some point there will be another fat pitch right down the middle. I’ll be ready, I’ll have my juiced bat and I’ll be swinging hard!
GO BREWERS!