Callahan Capital Management's Hybrid Investment Management Approach
“You win by not losing.”
Callahan Capital Management’s Hybrid Investment Management approach is different than most as we blend passive value based investing with active tactical trading strategies. Many investment advisors focus on the upside of their investment strategies, but focusing only on beating the markets in a relative sense—in both good and bad markets—can lead to large losses at times. Giving up 40 or 45 percent when the markets move down by 50 percent and calling it a victory is not very helpful to clients—this is still a large decline. We believe that you win by not losing. You may scroll to the chart below to see a visual representation of our approach.
Research has shown that investors dislike losing money by a ratio of three to one when compared to making money. This corresponds to losing 10 percent on an investment evoking the same degree of emotion as gaining 30 percent. This knowledge of investor psychology has led us to create an investment approach that keeps investors engaged in the markets, while actively attempting to limit losses.
Our Hybrid Investment Management approach is built upon a core allocation in each model. This core is made up of individual stocks, selected using a variety of fundamental factors. Fundamental factors are used because investing in good companies that pay dividends achieves steady positive returns over the long term. However, there is a downside to this buy-and-hold strategy—time. There are periods in which nearly all investments are out of favor, correlate highly and move lower. This potential for high correlation and lower movement is exactly why we maintain a portion of each model outside of the core positions. This tactical positioning of the models plays a crucial role in mitigating risk across the entire model.
“The tactical trading we do is based on math and historical movements…”
Tactical investing holds different meaning for different individuals; some think of the HFTs (high frequency trading) firms and others think of people (or zoo monkeys) guessing what to own by throwing darts. There are many varieties of tactical investing, some that make sense and others that do not. The tactical trading we do is based on math and historical movements, which are used to gauge when the time is right when attempting to limit downside risk.
Tactical trading can be used to add risk to the models if the environment is ripe for the market to move higher or it can be used to de-risk the models when the markets appear risky. When we receive signals that trouble could be ahead, we will purchase positions (inverse positions) that move in the opposite direction of the markets.
An example of how an inverse position should act: when the S&P 500 moves down by 10 percent the inverse funds should go up by 10 percent and vice versa. This is the key piece to adjusting overall risk in the models. In periods where the markets are susceptible to significant downside risks, the inverse funds balance the risk the individual stocks positions take on. As volatility or risks are alleviated, we move out of our inverse positions and into other investments.
When we are fully invested in the markets and wanting to take on market risk the tactical allocation in the models utilizes a wide variety of strategies. Relative strength is one tool we use because it shows areas of the markets that are currently out performing others. Momentum investing is another tactical strategy we utilize from time to time, because leadership in the markets tends to be persistent in a market that is moving in one direction.
Price is what you pay. Value is what you get.
Special situations, such as deep discount situations, also come into play in the tactical allocation. We like buying good investments at great prices. We keep in mind, however, that poor investments can be trading at what looks like great prices for many different reasons. After finding a deeply discounted potential investment, we attempt to determine the cause for the discount. If the cause looks temporary we may be interested in digging in even more prior to making a purchase.
Utilizing an investment strategy that combines fundamental value based investing with tactical investment management, one achieves the best of both styles. To find out more about this unique investment strategy please call or e-mail us to set up an appointment to discuss your potential investment future.