How we make money.
Step 1 - Research and identify price movements that repeat over time.
The combination of human nature and money often results in herding, hope, greed, fear, denial and panic. While no two situations are alike, human nature causes people to take similar actions under similar scenarios. Thus, history seems to repeat itself (or at least rhyme) time and time again in financial markets. These observable patterns are the first thing we look for. Acorn researches and identifies price movements and seeks to rapidly adapt to take advantage of these opportunities.
Some examples of simple repeatable patterns are shown below. We are sure that any experienced investor can relate to at least some of them:
Step 2 – Maximize and multiply opportunities.
These broad patterns are common throughout complex systems in nature. They are seen in viruses, animal populations, urban growth, weather, technology adoption and of course, financial markets. Our focus is of course the financial markets. We maximize the number of opportunities available to us by eliminating the constraints and biases that many other managers are subject to. We are able to invest in any market sector, instrument and direction (long or short) to ensure that we can capitalize on all opportunities across a wide variety of investment cycles. Our approach is independent and focused on producing strong results rather than trying to beat a benchmark index. Over many years, Acorn has developed an in-house database that provides us with a vast collection of investment opportunities. As our track record illustrates, more tools, greater flexibility and a larger universe results in superior absolute and risk-adjusted returns.
Step 3 – Know the way out before getting in.
Every day, each investment in the portfolio has a clearly defined exit price. In fact, no opportunity is acted upon without determining the exit price first. Knowing the way out before getting into any investment allows for a comprehensive and proven capital preservation plan based on actual numbers rather than statistical estimates or risk management theories.
Step 4 – Winners Stay. Losers Go.
Once an allocation to a new opportunity is determined, the rules at the portfolio level are:
Winners Stay. Losers Go.
These clear rules are the heart and soul of our investment process. This idea works equally well in business and in life. For example, imagine two bakers who both decide to set up new bakeries. The first baker pays close attention to what sells and what does not sell each and every day and is careful to allocate and adjust his resources to the bakery items that are selling while reducing or eliminating resources allocated to the items that end up in the trash bin at the end of the day. The second baker believes that he has all the answers and thus, he decides on his own what should and what should not work.
Which baker is most likely to succeed?
Quite simply, observation and careful measurement, responsibility, and most importantly, adaptation to change are all rules of success that have stood the test of time.
The following animation provides an example of how this process is applied to an investment portfolio. Notice how the losing positions in red are quickly exited while the winning positions in green stay in the portfolio longer and are allowed to grow more profitable. Press play on the animation below:
NOTE: To see a full presentation on "Winners Stay. Losers Go." click below: