The NMTSIC Method
The primary objective of the NMTSIC method is to beat the market. Available investment options are combined such that our expected returns exceed the prevailing market expectation. However, our objective is coupled. We also seek to expose our portfolio to lesser degree of risk than the equities market. This coupled method begins with an optimal balance of cash, equities, and bonds.
Distribution of assets is initially a factor of two, weighting assets in proportions of cash and securities. Securities are then weighted between bonds and equities. Setting the distribution of the portfolio between these three investment options is our most immediate method of portfolio management.
Cash is considered our securest asset during most market conditions. All cash is held in a money market fund. The specific money market fund is chosen such that the real return will be positive. If expected inflation negates the interest rate available in money market funds, short-term bond investments are then pursued.
Bonds establish the base of our portfolio. Over time, bonds offer an investment option with the greatest likelihood of positive returns. However, with time comes inflation. Real return is sought such that the paid price for any bond will capitalize on the risk-free interest rate and negate expected inflation.
Our greatest risk exposure lies in our equities. Our equities are chosen with the objective of attaining our market premium. Choosing equities involves a series of factors:
The NMTSIC equities method involves five phases. For equity to pass every phase it is deemed a beneficial investment. The first phase involves broad observations. Equities are pre-screened for market sector diversification. Equity returns are tested for correlation against S&P 500/DJI returns. A majority of equities in the portfolio are positively correlated. A minority of equities in the portfolio demonstrate uncorrelated returns. These minority stocks hedge against unforeseen market downturn.
The second phase of the equities method determines the financial health of a given equity. The balance sheet is tested for adequate levels of liquidity, assets, and returns. The expected growth of the company’s market sector is considered. The stake the company is poised to take in that sector’s growth or decline is analyzed and results in a formulation of expected cash flows. The market capitalization rate is then weighed against this rate of growth. If comparable equities of similar market capitalization rates do not offer superior growth expectations, then the equity investment is considered further.
The third phase analyzes the equity investment with respect to market valuation. A group of financial metrics (beta, alpha, etc.) are considered. Initially we consider these metrics in terms of the need of the portfolio. If at any given point the portfolio is deemed too risky or too conservative with respect to market performance, the metrics are indicative of the role this new equity will play in its adjustment. We also search for contradictions to our valuations with respect to the financial analysis of phase two. Weighted least is the pure form of media ratings. Aside from bond ratings (which are heavily weighted) media ratings of ‘buy,’ ‘sell,’ or ‘hold’ are noted. However rarely do they offer such a warning as to negate our conclusions so far.
The fourth phase theoretically adopts the new investment to the portfolio and results in a ‘buy’ or ‘not buy’ decision. Portfolio optimization models are applied to determine if the new portfolio assignment provides an acceptable rate of return with respect to the expected risk. The portfolio is examined a second time in terms of correlations in order to avoid ‘duplicate’ investments that do not satisfy diversification needs. If the correlations of returns and the levels of risk are tolerable (if not optimum) then the equity is deemed purchasable. However, it is still not yet purchased.
The final stage involves identifying the most opportune time of purchase or ‘entry point.’ A time horizon is chosen for the stock to reflect how long the club expects to hold the equity. Finally boundaries for the stock are chosen. A ‘take profit’ price is calculated such that if the stock demonstrates the expected return within the time horizon, it is sold for profit. The converse is true for the ‘stop loss’ boundary. Once the point of entry, take profit and stop loss prices are determined, the final decision to buy is voted upon.
A stock is purchased if the majority vote is in favor of its purchase. Proxy votes are accepted within 1 day of the proposed vote via email. An absent vote will never default to a vote of ‘favor’ or ‘not in favor.’ The academic advisor always has power of oversight, including the power to veto. A stock must then be passed by a majority of club members and unanimous in approval by that majority. If tabled, the investment opportunity cannot be voted upon within one month.
Distribution of assets is initially a factor of two, weighting assets in proportions of cash and securities. Securities are then weighted between bonds and equities. Setting the distribution of the portfolio between these three investment options is our most immediate method of portfolio management.
Cash is considered our securest asset during most market conditions. All cash is held in a money market fund. The specific money market fund is chosen such that the real return will be positive. If expected inflation negates the interest rate available in money market funds, short-term bond investments are then pursued.
Bonds establish the base of our portfolio. Over time, bonds offer an investment option with the greatest likelihood of positive returns. However, with time comes inflation. Real return is sought such that the paid price for any bond will capitalize on the risk-free interest rate and negate expected inflation.
Our greatest risk exposure lies in our equities. Our equities are chosen with the objective of attaining our market premium. Choosing equities involves a series of factors:
The NMTSIC equities method involves five phases. For equity to pass every phase it is deemed a beneficial investment. The first phase involves broad observations. Equities are pre-screened for market sector diversification. Equity returns are tested for correlation against S&P 500/DJI returns. A majority of equities in the portfolio are positively correlated. A minority of equities in the portfolio demonstrate uncorrelated returns. These minority stocks hedge against unforeseen market downturn.
- Diversification
- Uncorrelated market sectors
- Equities with Returns Correlated with Market Returns
- Return- Hedging
- Equities with Uncorrelated Returns with Market Returns
The second phase of the equities method determines the financial health of a given equity. The balance sheet is tested for adequate levels of liquidity, assets, and returns. The expected growth of the company’s market sector is considered. The stake the company is poised to take in that sector’s growth or decline is analyzed and results in a formulation of expected cash flows. The market capitalization rate is then weighed against this rate of growth. If comparable equities of similar market capitalization rates do not offer superior growth expectations, then the equity investment is considered further.
- Financial Health
- Balance Sheet
- Expected Growth of Cash Flows
- Ratios (Liquidity, Etc.)
- Market Capitalization
- Book Value of Stocks versus Market Valuation
The third phase analyzes the equity investment with respect to market valuation. A group of financial metrics (beta, alpha, etc.) are considered. Initially we consider these metrics in terms of the need of the portfolio. If at any given point the portfolio is deemed too risky or too conservative with respect to market performance, the metrics are indicative of the role this new equity will play in its adjustment. We also search for contradictions to our valuations with respect to the financial analysis of phase two. Weighted least is the pure form of media ratings. Aside from bond ratings (which are heavily weighted) media ratings of ‘buy,’ ‘sell,’ or ‘hold’ are noted. However rarely do they offer such a warning as to negate our conclusions so far.
- Stock Metrics
- Betas, Alphas, EPS, etc.
- Media Ratings
The fourth phase theoretically adopts the new investment to the portfolio and results in a ‘buy’ or ‘not buy’ decision. Portfolio optimization models are applied to determine if the new portfolio assignment provides an acceptable rate of return with respect to the expected risk. The portfolio is examined a second time in terms of correlations in order to avoid ‘duplicate’ investments that do not satisfy diversification needs. If the correlations of returns and the levels of risk are tolerable (if not optimum) then the equity is deemed purchasable. However, it is still not yet purchased.
- Portfolio Effects
- Overall Risk
- Overall Returns
- Unnecessary Correlations
The final stage involves identifying the most opportune time of purchase or ‘entry point.’ A time horizon is chosen for the stock to reflect how long the club expects to hold the equity. Finally boundaries for the stock are chosen. A ‘take profit’ price is calculated such that if the stock demonstrates the expected return within the time horizon, it is sold for profit. The converse is true for the ‘stop loss’ boundary. Once the point of entry, take profit and stop loss prices are determined, the final decision to buy is voted upon.
- Buy / Not Buy Decision
- Execution
- Entry Price
- Return Limits (Take Profit, Stop Loss Boundaries)
A stock is purchased if the majority vote is in favor of its purchase. Proxy votes are accepted within 1 day of the proposed vote via email. An absent vote will never default to a vote of ‘favor’ or ‘not in favor.’ The academic advisor always has power of oversight, including the power to veto. A stock must then be passed by a majority of club members and unanimous in approval by that majority. If tabled, the investment opportunity cannot be voted upon within one month.