Proprietary Methodologies

We have developed quantitative tools to aid and complement our analysis, selection and trading of our investments.  Our implementation of these methodologies is not a “black box” process.  Rather, these proprietary tools are used in conjunction with our bottom-up fundamental research and overall macro outlook.

Trapeze Ratio of Adjusted Capital (TRAC™)

In the long run, stocks tend to converge to their Fair Market Value (FMV).  However, in the short run, stock prices are governed by investor psychology and can fluctuate widely at levels above or below FMV.  Prevailing sentiment toward a specific stock, sector or even the overall market is constantly changing, influenced by factors such as economic data, exchange rates, regulatory events, news releases and even stock price behavior itself.  TRAC™ is a framework we use in an attempt to capture—in real time—this changing sentiment for individual stocks, sectors or overall markets.

TRAC™ charts “Economic Capital”, which is derived by summing operating assets and then subtracting certain liabilities.  Economic Capital is the financial and physical capital used to produce goods and services which translate into cash flow and earnings—the critical inputs to our calculation of FMV.  We adjust Economic Capital and apply an array of multiples to adjusted Economic Capital. These multiples tend to act as upper and lower valuation boundaries for a security’s trading price.

While we always remain focused on the ultimate magnet—FMV—we believe modeling these valuation boundaries can aid in optimizing our buys and sells. Figure 1, below, provides an illustration of a hypothetical stock’s TRAC™ boundaries overlaid on its historical trading price. Our goal with TRAC™ is to purchase stocks trading at (or inflecting up from) a lower boundary and to avoid, sell or short sell stocks trading at (or inflecting down from) an upper boundary.

Figure 1.  TRAC™ Example for Hypothetical Stock

Trapeze Relative Indicator of Momentum (TRIM™)

TRIM™ is a market risk tool we developed in 2009-2010 that focuses on the movement of entire markets, sectors and commodities. TRIM™ is an algorithm that combines market volatility and momentum to model transition points that forewarn of a potential shift from a bull market to a bear market (a market decline greater than 20%).

We use TRIM™ to monitor numerous markets around the world. For example, applying TRIM™ to the S&P 500 Index between 1950 and 2009 identified nine negative transition points. Although not all of those transition points were followed by a bear market, the average decline of the S&P 500 Index after each negative transition point to the subsequent low was 23%. Figure 2, below, illustrates the two negative transitions in the S&P 500 Index for the last two bear markets, where the Index value broke below the TRIM™ band.

Together with TRAC™, TRIM™ can act to corroborate “sell” signals, hopefully allowing us to raise cash, short stocks, and/or hedge our portfolios with options strategies where we are so authorized by clients.

Figure 2.  TRIM™ Transitions for S&P 500 Index 1998-2009