Importance of Risk Management

The goal of the Satori Fund is to be an “all weather fund” that can protect capital or generate positive returns even during severe market declines.  As such, I believe in good RISK ADJUSTED returns.  This is one of the reasons why our Fund was able to produce positive returns in 2022.  Additionally, and for the record, we are up this year (2023) including the months of August and September (month-to-date through 9/12) while the S&P 500 finished negative in August and is down again in September.

1. One of the metrics that we use is the RSI (Relative Strength Index.) To oversimplify, if this gets above 70 or “overbought” as defined by the index, we will think about trimming a position. 
2. If a stock that is overbought also reaches a price level that has acted as a temporary ceiling in the past, this will increase our likelihood of trimming. 
3. If the stock has had some fundamental development recently, resulting in a surge in the stock price to overbought levels (e.g. new product launch, positive update to business trends, positive earnings release, recent bullish presentation by company management) this will also increase our likelihood of trimming the position.  In effect, the news or event we were waiting for has now occurred and is priced into the stock.  Apple (AAPL) product launches are a good example.  AAPL is up nearly 70% of the time in the month prior to a product launch with an average gain of over 3% but then is typically down the day of the event.
4. If multiple wall street analysts that cover the stock have also recently upgraded a stock or raised their price targets after the stock has elevated to an overbought level, this is also a warning sign for us to trim the name.
5. If valuation is high relative to the history of a stock, this is another warning sign that any pullbacks or disappointments could be more severe than normal.
6. If there is an earnings report coming up, and the stock is overbought heading into the event, we will trim an even larger amount of the position than normal or even all of it. We did this even in front of the recent NVDA results even though it is probably the hottest stock in the market right now.  We will typically reduce an oversized position into an earnings event unless we have extremely high conviction AND it is an out of consensus view.
7. If the earnings event happens and it is fundamentally not what we expected, as long as there is enough after-market liquidity to be able to sell the stock at a level that is not considered oversold, we will do so.  This is not only good risk management but also helps us clear our head and make better decisions.  We are not married to a position just because we own it already. A great example is our sale of META in the after market on 2/2/22 despite the stock being down ~15%.  It closed the next day down 27%.
8. If the position is oversized (over 10% of the portfolio in our case) and it is now overbought, this is also a good reason to reduce the position size even if there is not fundamental news event coming up.​

INTC - Intel

1. The stock reached an RSI of 74 during the day on 9/11 following the news that they were selling a stake in IMS to TSMC. The stock intra-day was up 51% YTD.
2. This follows the CEO giving a positive update to earnings guidance earlier in the month and announcing a prepaid customer for their foundry business.
3. The position grew to be one of the largest in years.

​Our plan with all trims made to a position due to risk management reasons and NOT due to fundamental reasons, is to buy some of it back when it is no longer oversold and back at an interesting technical level.  This is the case again with INTC which we trimmed yesterday.

ORCL - Oracle

1. The stock reached an RSI of 71 the day of their earnings release and was up 55% YTD
2. Two major Wall Street firms upgraded the stock in the two weeks prior to the earnings release
3. The position had grown to ~10% of the portfolio

We sold most of our ORCL position on 9/11 prior to them reporting earnings and hated doing it given our belief that it would be a beat and raise quarter (we were wrong.)  But we try to stay disciplined to our risk management principles above which have served us well over the nearly 20 years of running the fund.

When ORCL, reported revenues a touch below consensus, we sold the rest of our position in the aftermarket down roughly 5%.  This slight revenue miss was fundamentally NOT what we expected.  Then on the conference call later that day they guided both revenue and EPS below expectations for the upcoming quarter and the stock went down further.  Finally, yesterday (9/12) the stock closed down 13.5%. 

Our risk management principles, though we hated doing it at the time, saved us from losing much of the substantial gains we had achieved.  In investing, it is a batting average and over-time, our risk management principles have improved that average.

At this point, our plan is to do more research including data from ORCL CloudWorld next week before deciding what our next move will be on the stock.  At a market PE of 20x, ORCL is appealing to us versus the 32x PE for Microsoft (MSFT) for what we still believe should be somewhat similar earnings growth over the next few years. We still believe that ORCL is becoming a credible #4 cloud provider behind Amazon ($AMZN), Microsoft ($MSFT) and Google ($GOOGL) but Oracle’s recent guidance below the street expectations for both revenue and EPS for their upcoming quarter does not fit well with that belief.  In the technology industry especially, things are always changing and for us, facts always trump beliefs.

“When the facts change, I change my mind - what do you do, sir?”
― John Maynard Keynes