Personal Insights from a Global Hedge Fund Trader

Capitalist Exploits's picture

By: Brad Thomas and Chris Tell

This week Brad discusses his view on short and long term trading ideas, and outlines the criteria he uses to screen the companies.

If you have any questions, thoughts or comments for Brad feel free to drop them here. Brad is a trading veteran with 20+ years of experience under his belt. His specialty is hunting for deep value asymmetric payoffs in the equity markets.


The following is an email exchange I had with a subscriber:

Brad, you have started to post up weekly short term trade ideas along with long term ideas - what is the essential difference between short and long term trades?

Well, if I could sum it up in a one liner - it's momentum vs. value.


Specifically, the short term strategy has a "look out window" of about 3 months. I look for stocks that have gone sideways for at least three months but appear to be breaking to the upside out of their trading range. Generally, when a stock breaks out of its trading range it does so in an explosive fashion and this momentum carries it higher for the following 3-4 months. But there is more to it than the behaviour of a chart. There needs to be a solid underlying reason as to why a stock is breaking higher.


I also employ earnings momentum into the criteria. I want to see positive earnings for the last 12 months and earnings estimate upgrades. Using both price and earnings momentum produces a powerful combination. But there is one more aspect to my short term trading strategy criteria. I don’t look at valuation multiples. I believe that what happens to a stock over the short term has little to do with its valuation.


The long term strategy is very different from the short term. This is a classic contrarian strategy where I look for large cap stocks that are offering "deep value". The typical candidate would be a stock that has the following traits:

  1. Over the preceding 5 years, the price has gone down or at best nowhere such that anyone who bought it "on average" during that time would not have made money (or at best very little). If few have made money in a trade over the preceding 5 years then it is highly likely that the stock isn't widely held by the investment community (i.e. it's not a crowded trade).
  2. Over the last 12 months the stock has outperformed the general market. One wants to be reasonably sure that the long term under performance has been arrested and that one isn't catching a "falling knife".
  3. There is little in the way of bullish commentary about the stock - if a stock is moving higher or is out performing the market and there is little accompanying bullish commentary surrounding it then it is highly suggestive that the stock isn't widely held.
  4. Low price multiples. I pay attention to the P/Book and P/Sales multiples. I have a strong bias to buying stocks below P/Sales of 1x or below a P/Book of 1.5x. I won’t touch anything if it has a debt/equity level above above 50%.

So that is the difference between the criteria you look for in the short and long term strategies, but that is only "half" of your overall strategy. It's really the application of your strategy that makes you very different from the "average" short term trader or value investor.

Yes, you are right. I express my views via options. Options give me a non-linear or exponential return, which means I don't have to be so reliant on a high win/loss ratio to be profitable in both trading strategies. It isn't difficult to achieve 1000% returns in trades and just one of these trades can make up for 10 other losing trades.


It seems simple but what is the catch?

There is no catch... but it isn't that simple. On selecting short and long term candidates there is a final filtering process. For all the candidates I need to select only those that have cheap options. The cheaper the option, the more exponential the payoff of the trade. It is one thing to find a favourable earnings and price momentum (with respect to short term trades) or to find value (for long term trades) and it is another to find cheap options.


However, generally if a stock has gone sideways in the preceding for a lengthy period then options tend to be underpriced as people have an innate tendency to transpose the behaviour of the recent past into the future. So, if a stock hasn't been volatile in the last 3-6 months then option writers tend to price this in for options expiring 3-6 months out. The same applies to long term trades.


Do you keep your short and long term trades in separate accounts or lump them all together in one account?

It is imperative to keep them in separate accounts due to the differing levels of cash associated with each strategy. The short term strategy only engages about 20% of the portfolios capital at any point in time whereas the long term portfolio can be up to 80% engaged.

Next question is about the trade idea on Treasuries that I mentioned last week.

Brad, loved your trade idea on Treasuries in your recent alert. Timing worries me, though. There seems no end to the ability of central banks to keep rates low.

Trading the markets now for over 20 years, I've learned there's always money to be made in any and all market conditions, but always the biggest returns, which tend to make for life-changing trades, are to be found in asymmetric trades. Present day bond markets provide us with such a setup.


What I've found works is to ensure that you don't over commit on any trade of this nature while ensuring that you can live to fight another day. You don't want to be out of bullets when your ship comes in. Remember, everything was fine in Greece, too... until it wasn't. Don't believe the herd. Trees don't grow to the moon, and when everyone thinks that this is the way things will be forever is often the maximum point of the bubble.


The government bond markets right now present one of the most one sided trades I've ever seen in my professional life. Sure, this particular strange set of circumstances can continue for a few more years. As a trader I have to view things dispassionately and looking at the market fundamentals you're silly not to have a small position.

- Brad


Thank you for joining us. As mentioned earlier, feel free to pick Brad's brains about trading and his macro views here.

Additionally, you can access Brad's trading ideas here.

Have a good weekend!

- Chris


"If you want to have a better performance than the crowd, you must do things differently from the crowd." - Sir John Templeton

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New American Revolution's picture

Interesting.  But which side of the bond trade is he suggesting?  Longa or shorty?

AdvancingTime's picture

We may soon be forced to face our economic Armageddon. The forces that have driven stock markets ever-higher and upward may be beginning to wane. Many markets became distorted years ago when QE and super low interest rates hit the economy in an effort to lessen many of the missteps of recent years.

This has been more helpful in holding up the underlying value of assets and derivatives it now appears than helping to repair a wounded economy. QE has up to now stopped an implosion of derivatives including the resulting contagion and shock that would have spread throughout the financial system. Unfortunately the economy has not fared as well as these asset prices and in many ways these policies have harmed Main Street. More on this subject in the article below.

buzzsaw99's picture

fundamentals are crap. buy the shittiest most shorted names or go broke.

SaudiMail's picture
The sneaky secret behind a "stimulus package' It's a slow day in the small town of Pumphandle and the streets are deserted. Times are tough, everybody is in debt, and everybody is living on credit. 

A tourist visiting the area drives through town, stops at the motel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night. 

As soon as he walks upstairs, the motel owner grabs the bill and runs next door to pay his debt to the butcher. 

(Stay with this..... and pay attention) 

The butcher takes the $100 and runs down the street to retire his debt to the pig farmer. 

The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Co-op. 

The guy at the Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit. 

The hooker rushes to the hotel and pays off her room bill with the hotel Owner. 

The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything. 

At that moment the traveler comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves. 

No one produced anything. No one earned anything. However, the whole town now thinks that they are out of debt and there is a false atmosphere of optimism and glee. 

And that is how a "stimulus package" works.

Hilroy's picture

What happens when the hotel owner wants to eat again? He doesn't have money from a guest so he'll have to go into debt with his butcher once more. What if the butcher doesn't want to give him credit? 

What happens if someone decides to charge interest on the debt?

Puncher75's picture

Of course, the hotel owner is out $100. He isn't feeling so great.

slightlyskeptical's picture

This is exactly what needs to happen in the world today (and is to some extent). Monetize all the payables and recievables, let the central Banks become the owners of all debt. Then put the end to fractional reserve banking and hypothecation.

Then the economy will dance like Chef Irvine.

disabledvet's picture

"Like taking candy from a baby."

Anyone listening to this wacko will soon be parted with his/her ill forte gains.

Options valuations have been off the charts valuation wise for a VERY long time now.

It's hard to swallow "being poor" (trading with interest rates his low...and heading lower it would appear.). But most of the folks who've been advocating swinging for the fences (short equities , short treasuries, long gold) have been utterly annihilated!

"The best defense is a good offense."
If you get lucky...and the long equity folks have been beyond lucky here (save for General Electric of course) the payoff's have been stupendous.

If you're sitting on Tesla, Amazon, Google, Apple, Netflix, from many years ago" you are some of the richest people in human history right now.

The question of transferring those outrageous wealth gains into "something other than bankruptcy for the State" however has been a challenge indeed.

Perhaps if the hearings concerning the NSA scandal got underway those who have so much my take an interest in not "blowing the bureaucracy to pieces."

slightlyskeptical's picture

"Options valuations have been off the charts valuation wise for a VERY long time now."

Not sure what options you are looking at but as a whole options are cheap. So cheap that I have had to abandon selling calls for the most part. I really like this man's strategy.