Overtrading & Procrastination

Learning to Use the Hedgeye Process My Way.

Every couple of months, my wife drops a large envelope on my desk like the one in the picture above. Inside is a fat stack of white paper sheets, the latest a half an inch thick, comprising dozens of approval forms for employee transactions. 

I have to sign off on trades in my personal account, as does she, for compliance reasons, because she manages my retirement account as a registered portfolio manager and CEO of a boutique investment company.  

One time, she laid the envelope on my desk and said with a hint of derision,

“You’re a day trader.” 

I don’t think of myself as a day trader. To me, those are people who sit at their screens throughout the trading session making dozens of trades trying to shave off small profits.  

Not me. My trades are based on what Keith McCullough is doing within his long-only “Mucker Family Office” account made up of macro ETF positions.

The daily trades of the founder and CEO of Hedgeye Risk Management are emailed weekday mornings to subscribers of the company’s Portfolio Solutions product.

McCullough’s trades this past Friday looked like this:

Keith's Commentary: "In the PA today, I added NLR and KBA at my mins. Sold all IDX and UNG. Sold 100bps GLD and PPLT. Sold 50bps AAAU, GII, XLRE, EZA, SLV, FUTY, AMLP, WOOD. Bought 50bps BUXX."

The emails also include a daily ETF re-rank of McCullough’s positions based on position sizing, and a breakout of top movers and bottom movers over one-week and one-month periods.

A snapshot of Portfolio Solutions on Friday, October 11, 2024

I base my equity positions on companies that are on Hedgeye’s Investing Ideas list and/or Signal Strength Stock list, and/or are ranked by Hedgeye analysts as Best Idea Longs such as Newmont Corp., ULS Solutions, and RH (Restoration Hardware).

A glimpse at the Investing Ideas - Levels list from Monday, October 7, 2024

But these heavy, tangible stacks of paper helped me realize how much I trade within the Hedgeye process. They also made me question how I was using the process and if there was a different, less active way to do it to suit my risk tolerance. 

After all, I’m not Keith McCullough. I’m not a former hedge fund manager who devised and refined his own macroeconomic, multi-factor, multi-duration, fractal math-based trading system which has him touching multiple positions a day selling SOME here and buying SOME there. Keep that inventory moving. They’re just tickers, as he likes to say.  

Trading Too Much 

I realized I was out of my comfort zone by trading so much and I didn’t want to be that active. If, for example, gold has been bullish trade and trend for months, I’ll now just hold my position of, say, six per cent and ride it. Of course, if gold went vertical, I would take some profit or if it broke its trade level, I would reduce my position and wait and watch. 

Procrastinating on Commissions

Another reason I thought I was trading too much - a big one - was that I was still using the discount broker I had used for eleven years, which charged a minimum of five dollars per trade.  

I know, I know, why the hell was I still paying for my trades and not using a broker that offered commission-free trading? Why the hell, indeed? 

The answer is that I procrastinated for a couple of years. I assumed moving my account to another broker would be a pain in the ass, so I kept putting it off.

McCullough had sometimes mentioned that he uses multiple brokers and never pays commissions. “Why would you still be doing that?”, he said. Exactly. 

I estimate I was paying about $5,000 per year in commissions, give or take. Great for the broker, but not great and rather stupid for me.  

I wound up liquidating my positions in my personal account to help pay some taxes, but also as a fresh start and a re-set in my new, commission-free account. It’s liberating to execute trades, knowing there is no commission. What a concept.

Replicating McCullough’s Trades 

I often think that when I’m retired and have the time to fully devote myself to investing the Hedgeye way, I will replicate McCullough’s trades. It would be hubristic to think I could achieve better returns on my own or by deviating from the process.

There would be times, as there are now, when I would front run McCullough if a certain ETF or stock is, for instance, a screamingly obvious buy because it is:

• in the right Quad,

• bullish trade and trend,

• at the low end of the Risk Range,

• on decelerating volume,

• with low volatility. 

It’s very satisfying to execute a trade like that and see a Real-Time Alert moments later from McCullough confirming the same trade. He likes it when subscribers don’t always need their hands held.

What Works for Me

But, until I reach that stage, I’ve come to a compromise of sorts on how to use the process. I’ll buy the core ETF asset allocations within the current Quad, which, as I write this, is Quad 3, featuring decelerating economic growth and rising inflation.

Gold and commodities are among the asset classes that back test well in Quad 3, according to Hedgeye. And the best equity sectors include Utilities, Energy and Technology, so I’ll supplement my ETF positions with some stocks from those sectors.

(McCullough always advises to not just allocate to asset types and equity sectors because they perform well historically within a certain Quad. They don’t always work. They need to be monitored. Keep those two opposing thoughts in mind.) 

Where I deviate from McCullough is that I don’t short stocks or ETFs except for the occasional use of an inverse ETF. If the Russell 2000, for example, is bearish trade and trend, then I may short it at the top end of its Risk Range while always keeping one of McCullough’s mantras in mind,

“Don’t short and hold.” 

Being long-only, I’m missing out on a large part of the process by not hedging my positions, but I’m fine with that for now. That’s a next level, “power user” method and I’m not there yet.  

I also don’t replicate every one of McCullough’s positions, especially ones that appear to be non-core and on the fringes of his portfolio. These are ETFs that, I’ve noticed over time, can often vacillate between bullish and bearish trade and trend.

The result of this approach has me content with the level of my trading activities. I don’t pay commissions anymore, and I’m always working on ways to not procrastinate.

Best of all, my lovely wife will drop much slimmer envelopes on my desk from now on.  

Next Saturday: Warning: Don’t Go Rogue from the Hedgeye Process.

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Disclosure: I do not have any financial arrangement with Hedgeye. I do not intend for this series to be instructional nor promotional. Dan Holland, Hedgeye’s Head of Media and Public Relations, has been gracious in making my writing available on Hedgeye’s website.