As we kick off the new year, it's important not to confuse trading strategy with investment thesis. I'll give you a few examples, and I'll start with Doug Kass' prescient call on Canopy Growth (CGC) last week as well as the a basket of cannabis MSOs (multi-state operators).
Investment thesis (I'm going to really minimize this, but check out his Diary for the thoughtful analysis behind the thesis) - Doug moved into a basket of cannabis MSOs names on the idea there would be a reverse of tax selling in January reversing the ugly action we saw in the group in the last portion of the year. Additionally, tax-loss selling in the winter exacerbated losses in the group beyond a reasonable measure, creating underlying value in certain names as the supply/demand imbalance should resolve in early 2020.
Admittedly, that's the kindergarten summary, but it's a start.
Trading Strategy - Canopy Growth shares along with the core MSO basket (Trade of the Week) should benefit from an end-of-the-year rally as tax-selling should be complete.
While these may sound the same, they are not. The trading strategy involved a shorter time frame as well as price triggers. When Canopy Growth immediately popped, there was no hesitation to grab double-digit percentage profits. It was a trade, but you'll note the entire position wasn't liquidated, just the trading position.
Thesis and strategy are not mutually exclusive, but when time frames differ (short-term vs. long-term), it can result in actions that may seem to void the other. That simply isn't the case. The long-term investment thesis still exists but the short-term trading strategy saw its goals achieved.
A similar issue has befell my view on China. Throughout December I added several Chinese names to the trading side of the ledger. As you'll find out soon enough, and without giving too much away, China is a core theme behind my 2020 investment views. Despite this, several of the names from December are popping today taking the options positions in the securities much higher. A handful doubled and tripled from only a few weeks ago.
From a risk-management and trading strategy perspective, it only makes sense to book profits, however, that doesn't change my investment thesis for 2020. Again, it is about time frames. For the investment thesis, I'd want to own stock or LEAPs, not options expiring in three weeks, but if you only scan headlines, you could see the selling of existing calls options in iQIYI (IQ) or Bilibili (BILI) , and think I'm changing my investment view. That's not the case. I'm closing a trade that achieved its goal in the same manner Doug grabbed big profits on his Canopy Growth trade earlier in the week.
Trading strategies often dance around investment views with time frame being the differentiator, but try to avoid the mistake of believing them to be mutually exclusive partners.