The Sabinal Approach to Investing in the Stock Market

Sabinal uses a proprietary methodology for stock selection and portfolio management in the management of client accounts. The following describe the general approach taken (to read more detail about these Rules, please read “10: The Essential Rules for Beating the Market”, available on Amazon):

1. Think Like a Fundamentalist – If we buy a stock, we want it to represent a fundamentally strong company. Fundamentally strong stocks tend to hold upward trends more consistently over longer periods of time. We have developed a scoring system that scores thousands of stocks which ranks this universe of stocks from best to worst. We want our clients to own the best stocks.
2. Avoid Expensive Stocks – Our stock selection criteria includes an analysis of each stock Price/Earnings ratio in comparison to its peer group. With all things being equal, we want my clients to own stocks that are not overvalued to the stocks peers.
3. Trade Like a Technician – Where fundamentals tell us ‘what’ to buy, technicals tell us ‘when’ to buy. Timing entry and exit points is critical to reducing risk and increasing return. Our client accounts will only hold those equities that are exhibiting strong technical up trends for EQUITY I, II & III. EQUITY IV will hold long positions in upward trending equities and short positions in downward trending equities.
4. Always Have an Exit Strategy – Buying the right stock at the right time is important, but significantly more important is selling the right stock at the right time. We have a sell strategy that is unique and utilizes a proprietary algorithm for calculating the best price to sell a stock when its trend moves from bullish to bearish. We endeavor to never hold equities too long. Our goal is to put profits in the bank early and often. We may sell too early on some occasions, but never sell too late.
5. Never Marry a Stock – We are agnostic investors, with respect to equities. Our job is to have a strong attraction to making our clients as much money as we can; not to have a strong attraction to any equity. We are rules based investors and depend on those rules to get us in to the right stock at the right time and out at the right time. We don’t care what company the stock represents; only that the stock is appreciating in share price.
6. Watch the Insider Buying – Insiders will only buy when they believe that the share price of their company is inexpensive, relative to the future. Insider buying is a good indication of future price appreciation. When selecting an equity for our client portfolios, we always consider the additional merit of recent insider buying.
7. Monitor Institutional Ownership – Large institutions spend enormous amounts of money in company research activities. In the US, large institutions must publish the list of stocks and how much of those stocks they own, base on the results of that research. We monitor and chart the accumulation or distribution large institutions have of outstanding shares of stock. Too much institutional ownership is bad; too little is bad. Our ‘sweet-spot’ is 30% to 60% institutional ownership.
8. Stay Diversified – Our goal is also to keep investor accounts diversified. Regardless of how good we are at picking the right stocks at the right time and getting out of those stocks at the right time, the market can still react completely contrary to the best of strategies. Rarely, though, do all sectors and all industries move down in tandem. The old adage of never putting all your eggs in one basket is never truer than it is for stocks in your portfolio. Our rule is: Never have more than 30% of the portfolio invested in any single sector; and, never have more than 20% of the total portfolio value invested in any one industry.
9. Keep Holdings Equally Balanced – Much as a corollary to Rule 8, this rule keep the portfolio from coming too heavily weighted in any one holding. Our application of this rule is to keep the positions relatively equally balanced and never let one position become more than 50% overweight to its normal equal weight condition. If a stock’s share price moves up to the point that the stock becomes more than 50% overweight, we will divest enough shares of that stock to move it back to an equal weight condition within the client’s portfolio.
10. Time the Market – Our proprietary programs, algorithms and rules are dynamically in play within each of our client portfolios all the time. These systems provide a strong indication of when markets are becoming overbought, underbought or nearing a correction. When domestic or global economic forces come in to play to the extent that more risk moves into the market, we put on strategies that tend to move client portfolios to cash. Likewise, when markets have bottomed and the opportunity exists to capitalize on strong upward moves, we put on strategies that tend to move client portfolios to 100% invested.

In addition to these 10 Rules that are used in the buying and selling of equities, we use specific trading strategies that are designed to reduce risk and increase total return, including but not limited to:

• Cash as a strategy: We believe in putting profits in the bank and avoiding losing unrealized gains. We are not afraid to hold our client accounts in cash for a significant period of time (weeks, in some cases), while we wait for better market conditions.
• Inverse ETFs for down-trending markets: In declining markets, inverse or short ETFs offer an excellent choice for staying in a long position that is short the focus of the ETF. Our software systems monitor all available inverse and correlated ETFs and continually provide us with a viable selection of ETFs to use in both up and down trending markets. We like to keep my client portfolio in a healthy mix of stocks and ETFs.
• Leveraged Call Options: We have developed a Call Option strategy that can have significant upside potential than holding an equivalent investment in shares of stock, while mitigating the percentage of downside risk. This strategy is not for all markets and does not work for all stocks. We have developed a screening and timing application of this strategy that has proven very successful for our clients. We especially like to use this strategy when faced with volatile markets and uncertain market trends.
• Covered Calls: We trade covered calls for our clients very atypically. Our goal is to find strong stocks with strong upward pricing trends. We buy a stock and sell an out-of-the-money call as a single trade. Then, we put on a sell order to execute as soon as I have made my clients a net 5% or more in profit. Often, this kind of trade only takes a few days to execute. 5% may not seem like a lot, but 5% in just a few days; repeated over and over; adds up to a sizable annual return.