top of page
  • Sunil K Pai, CFA, ProForza Advisors

Shoot for the MOON or for the STaRs?

Have you ever wondered what it's like to invest in a stock that goes up 2400% within 7 months?! I do and did it this year on a stock called NIO.

Anyone that has kept up with most of our prose on investing knows that we eschew fundamental analysis, technical analysis, big data machine learning and the like in favor of a robust systematic mathematical construct applied to prices-only on a basket of stocks. Evidently, the big guys should take note.

And, I regularly refer to such voodoo investment approaches as "cowboy trading"-- you know its those advisers/investors that make trigger decisions on buying/selling individual stocks based on the notion that their crystal ball or some CNBC "expert" has somehow got it all figured out. Never ceases to amaze me, but I concede such "investing" is central to an efficient market price discovery process so I'll digress.

Alright back to NIO.

So, I get plenty of such smart advice from others and came to learn of NIO and its electric car prospects in late 2019. My interest was piqued due to the sheer fervor over Tesla (TSLA) and how both stocks started trading in tandem. Considering the massive difference in market valuation between the two companies, it seemed like an interesting play on a simple idea that NIO, then trading at only about 1% of the value of TSLA, could be a great play on buying a Chinese Tesla-like company at a mere fraction of TSLA itself. And, with my fundamental analysis hat on, there are some aspects of NIO's business model that are superior, in my opinion, to that of Tesla.

Armed with all this great "analysis", never did anything with it until late March of 2020. Quite literally, I mentioned to my wife that we have some cash laying around in some personal accounts and gave her two options: 1) Buy KOMP, a decent State Street exchange traded fund (ETF) product that invests in next generation stocks, or 2) Buy NIO and say your prayers (small money involved, no real prayers necessary). She preferred NIO for the electric car, environmentally conscious side of her (prefers and insists on driving Prius(s) since 2005!). And, that resulted in our personal accounts buying into NIO around $2.50. This is not a recommendation of any form to buy or sell NIO.

Yes, she now takes full credit for her astounding decision to go with NIO over KOMP and it is likely I will hear about it for many years to come.

But, here is where it may get more interesting to you.

My fundamental and technical skills are actually quite strong versus that of most investment folks, but my pure quant sense is that I am not really that smart. The NIO move was more luck than brains and to reprise the NIO trade, I decided to use my more humble quant sense to build a new index product around this concept of investing in early stage, potential high flyers so that we can skip the prayers (tongue in cheek).

Then, somewhat ironically, an email landed in my inbox from my contacts at Direxion Shares, which detailed out their new Moonshot Innovators ETF offering (trading symbol MOON). MOON is based on the Standard & Poor's Kensho Index KMOON, which is specifically geared to finding early stage companies, equal weighting them and rebalancing semi-yearly. Perfect!

Our products (there are many) are generally geared around existing ETFs so we can simply pull their holdings, run our algo training process on a subsect (usually 30) of the individual stock holdings and then out pops a much better risk/return profile using our proprietary daily rebalancing and equal weighting scheme. AADR and ESML are just two live examples of such for international and ESG exposure, respectively--both demonstrating superb returns at lowered risk relative to investing in these ETFs. Simple!

So, peering under MOON's hood was intriguing because guess what its largest current holding is? None other than my better lucky than smart stock pick, NIO! Meaning, now I know that whatever S&P Kensho's high-zoot machine is doing (some AI-based review of unstructured public information) to select early stage stocks, it generally coincides with what I am looking for. Run our algorithm on the holdings, review the new index results (send us a note if you want to see them) and we are ready for live trading of this new product, ARBiSTR, on our managed account platform.

In fact, comparing the holdings of MOON to that of our ARBiNGN (Next Gen) shows no overlap whatsoever, which is good. This means by generally mimicking MOON holdings, we can provide a unique portfolio set versus anything else offered in our bullpen.

As an aside, our ARBiNGN is largely based on the ARK Innovation ETF (ARKK) constituents but will never put over 10% of the fund into one stock. ARKK's massive gain this year, 100%+(!), is largely due to its extraordinarily heavy bias to TSLA, which is up about 500% YTD. By comparison, our ARBiNGN is up only 69% YTD but without resorting to biases to any one stock, e.g. equal-weighted across all of its 30 stocks (including TSLA) and did not suffer the massive -50% drawdown during the COVID crisis in March 2020.

New product intros are always exciting because it showcases how strong our algorithmic process is to ultimately deliver alpha on diversified index-based products that meet the interests and needs of our clients.

In this case, who doesn't want the next NIO high flyer in their portfolio? But, its tougher than you think. The kicker is finding the high flyer, surviving its inevitable volatility and being there when (and if) it flies. This is where what we do (or MOON to a much lesser extent) can get you there in a safer, smarter way then simply relying on lucky hits like my NIO one.

Stay tuned for performance updates on our newest product, ARBiSTR-- why shoot for the moon when you should always reach for the stars--credit the wife for that line too!

This message (including any attachments or links) is for informational purposes only and is not intended to be, and should not be construed as an offer to sell, or the solicitation of an offer to buy , any interest in any entity or other investment vehicle. All information contained in this message is subject to the legends and disclaimers set forth in the most recent advisory agreements you have received (if any) regarding a managed account or any investment structure that may be related to this email. Any information relating to past performance of any fund(s), managed account(s) or investment strategies offered, developed or licensed by ProForza Advisors LLC should not be construed as an indication of future results. Performance results may be hypothetical rather than live, audited results and, in either case, will have inherent limitations relative to what ProForza Advisors may attain in the future under live market conditions. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. This email message has been prepared using information believed by the author to be reliable and accurate, but ProForza Advisors LLC makes no warranty as to its accuracy or completeness.

84 views0 comments


bottom of page