THE most important alpha generation tool
It's fundamentally sound, its efficacy has been proven numerous times and its profundity remains underappreciated.
Positioning trumps valuation. It ultimately determines valuation. If valuation appears overextended when positioning is not, the analyst should revisit their valuation framework.
It feels weird for me to say that. The system has hammered all the intricacies of the art of valuation into my brain during business school, the CFA program and the subsequent decade that I worked in various finance jobs. But I could not be more convinced that the intro above is true. First and foremost, valuation needs to be acknowledged, not traded.
Positioning can be traded. It’s full of signal. Short where masses have gone, long where they have come from. Mean revert everything.
There is a structural and a cyclical component in the asset allocation of all investor portfolios combined. Typically, there is limited signal in the structural component. It would be absurd to argue that we need to buy railway companies because their portfolio share is much lower than 100 years ago. As our economy, society and technology evolve, various types of assets gain and lose in importance. For example, information technology assets claim a much larger portfolio share today and there are good reasons that this will persist.
But there is typically a lot of signal in the cyclical component. Asset classes are falling into and out of favor based on thematic and macro cycles. We can isolate the cyclical positioning component in positioning data by combining it with macro research. That’s how we gain clarity on the story that Mr. Market is telling us every day.
Here’s what he’s saying right now.
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