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Investment Management for Native Americans, Outfitters, Hunters & Trappers

Chippewa Partners Investment Methodology

Our approach to client portfolios is to manage assets on an absolute basis versus a relative basis.

Our first rule is to not lose capital. Our concern is not losing money.

We don’t want our portfolio down 10% when the market falls 25%. Remember, mutual fund managers who are trying to beat a benchmark have less risk than an individual who is concerned simply with protecting his retirement portfolio. If the manager is wrong and top-ticks the market, he is still okay as long as his portfolio doesn’t decline as fast as the market. Losing shareholder value isn't a problem for mutual funds as long as they don't lose it faster relative to a market decline. Clients engage Chippewa Partners to protect their assets and we are not in the business of losing money. Many times our services are engaged after a do-it-yourself investor has had to contend with backward looking sales and earnings numbers, massaged earnings and sales, glossy annual reports full of lies, deceit and fraud by insiders and officers, collusion by analysts with management, hot tips, deceitful brokers and poor trade execution.

We know what to do and are prepared to do it. Our second rule is to not forget the first rule.

In our analysis we study fundamentals in search of long term holdings. We are biased toward the long side simply because markets tend to go up and shorting stocks caps your return at 100% and yet losses are limitless. We generally own companies with good fundamental characteristics, which means they have solid revenue and earnings growth. We spend little time looking at balance sheets, cash flow and book values simply because it’s easy for companies and accountants to manipulate the data. We’ve found that an extremely high level of detailed analysis will not produce better results. Our focus is to look for companies that are in early stages of major sales and earnings acceleration. We also like to invest in certain sectors and themes. If we identify a hot theme or group at the right time, it can work very well.

Our investment strategy for growth consists of trading, sometimes aggressively, around core holdings. This is called a “core-and-satellite” approach. Generally, we manage equity portfolios that are 50% short to intermediate-term trading positions, long or short, and 50% longer-term, core positions which may include individual stocks, index funds and exchange-traded funds.

Our stock selection comes from micro, small, medium and large capitalized companies and we have little regard for fitting into a style-specific category. Our only category is to make money for our clients and to own companies that demonstrate strong revenue gains, earnings acceleration and sustainable growth.

This “core-and-satellite” approach is usually used by institutions, major pension plans and large retirement accounts. We use this approach because it combines the best features of active and passive management styles and is how we manage our personal assets very successfully. We do not invest in futures, currencies or real estate.

We believe that corporate analysis is important when considering how aggressive we want to be, or whether we want to hold a position. When we know the business intimately we feel more confident about how to play it. Our general thinking is that we have no real edge when it comes to fundamental analysis. Fundamental is a word invented by sellers to find buyers.

There is no way Chippewa Partners can compete against firms with dozens of full-time analysts who know all the details of a business. We will never know more about fundamentals than these firms, so why pretend? It is hard to pick stocks timing-wise with proper buy and sell points, with expectation of profits or beating some benchmark as professionals may have superior information and research.

Fundamental research based on cash flow, valuation, relative strength, debt, patent pipeline, new product roll-outs all work sometimes, but how many, including big fund managers with the best resources, beat the index year after year over time?

In my experience, investors that rely on earnings estimates from corporate management teams are usually getting hyped information within the letter of the law. To our way of thinking, the best place is usually the customer base to make inquiry of sales growth. We may talk to customers, suppliers, corporate pilots and especially headhunters to find out the real story of what is going on in a company or industry. Management teams, those who are brave enough to own shares of their own stock and just not free option grants, are usually far too optimistic in their earnings estimates to Wall Street analysts.

The simple lesson to remember is that markets are not logical or reasonable; they are emotional and unstable. And so it goes with the stock market. Today the black boxes at a handful of firms scan the exchange order books every millisecond and automatically execute algorithmic trades, ripping any conceivable advantage away from the public. They are the casino, with structurally embedded multi-billion annual profits — leaving everyone else on the other side of the zero-sum game. We think that sitting and doing cold and hard calculations on valuation levels and the reasonableness of gains is as futile as predicting what a teenager might do at a rock concert. The market is not an exercise in calculus. It is primarily an experiment in crowd psychology. One of the most important observations about the stock market ever made was attributed to the economist John Maynard Keynes: "The market can stay irrational far longer than you can stay solvent."

Over my investment career that started in April of 1982 I have never made money listening to the academic community. We do our work by watching price action and volume For example, the CFA exam says that stock charts have no validity. What they’re saying, in effect is that supply and demand do not work. What we do is watch stock charts and see if there are signs that big buyers are interested and putting money to work. If volume picks up and a stock starts moving, then it's probably a sign that someone knows something positive about the fundamental case. Experience and hard work are our hallmark and we combine both with two decades of personal contacts that we can call on.

In the end, we will always defer to the charts, because there are investors with far more money who know far more about any particular company. When they act the charts tell the story simply because major players can’t hide in the market due to their massive size and we do a credible job of keeping an eye on their trading “tracks”. We monitor block-trading volume and money-flows every day.

We feel very comfortable buying a company purely on a chart basis and don't find it necessary to know the entire fundamental picture if the technical pattern looks promising and the stock is under accumulation with positive money-flows

We know that good money management is more important than good stock-picking. We think of money management as defense and stock-picking as offense. Defense is what keeps us in the game. If money management defense is poor, stock-picking mistakes can put us on the sidelines. Our most precious commodity is our capital, and money management is the way to guard it. It’s impossible to be a consistently flawless stock-picker. Every great investment management firm will have losing trades and losing quarters and strict money management will protect capital when the offense goes cold.

The vast majority of commentary about the stock market focuses on stock-picking and market-timing, which causes investors to presume that those are the ultimate determinates of success. Money management is a much more complex topic, is fairly boring and is difficult to explain. It also kept our capital out of significant trouble during the massive bear market of 2000 to 2003 and kept us from losing money in 2008. Our position-sizing algorithms have been developed over two decades and are the finest defense mechanism we have in protecting our capital. When we review position sizes in our portfolio’s we test our conviction by asking if a stock is a “buy” or a “sell”. A “hold” isn’t an option. Either a stock deserves incremental capital at the current price point or it doesn’t, in which case we sell and deploy capital in a more promising security.

Success in the stock market requires a curious mix of emotional attributes. The savvy trader needs to question the conventional wisdom constantly. He needs to set aside the biases and keep a very open mind while seeking a trading edge. Our goal each day is to put aside prejudices and biases and look at the market for objective clues about the shorter-term direction. Our goal is to protect capital, and that's a job that must be done on a daily basis.

Our feelings and opinions about the market are primarily a function of the hundreds of individual charts we look at throughout the day. We can act quickly when we see something promising and are generally able to catch a good part of the move. Stock moves often last longer than we think they will, and a reactive approach keepsuse in and helps maximize gains. We prefer to hold for weeks and months when we can catch a stock at the right time.

Generally I am very bullish when I see a large number of stocks moving on increases in volume. Volume is the key to our decision-making. It is my main measure of the emotional state of buyers. When there are big volume increases, I have much greater confidence that a price move may develop some meaningful momentum. Volume creates demand. Stocks don’t go up because companies do well or do poorly. Stocks go up and down depending on supply and demand. If a stock is marketed well enough to create more demand from buyers than there are sellers, the stock will go up. I think of volume as the fuel that drives a stock. It doesn't matter how good a stock is if it doesn't have fuel it isn't going to go far. Institutional buying and selling can be spotted by watching for surges in trading volume. A useful way to spot institutional trading is by using the volume percentage change figures. A large spike in volume at the time a stock goes up is generally a clear sign that major investors are moving into the stock. On the other hand, if a stock's price drops on heavy volume, it could indicate large investors are moving out of the stock.

The best possible quality the market can possess is “follow-through”. Strong follow-through is what produces big gains. When we buy a stock as it begins to move and works steadily higher as more buyers pile in, the gains can come very quickly. Ultimately that is what trading is about. The goal is to catch a stock when it begins to make a meaningful move. When buyers are anxious to put capital to work, those moves can be very big.

We know without a doubt that we are going to have losses. Losses are the cost of doing business. If I was averse to losing days, it would have a very negative impact on my trading. Show me someone who doesn't make mistakes and I will show you someone who doesn't trade. Mistakes are inherent in what we do. All we can ever hope to do is to reduce the damage they cause.

I employ a hybrid selling strategy and generally make partial sales into strength and use loose trailing mental stops on another portion. I generally have multiple time frames for positions in the same stock. I'll look for quick profits on a portion and give another portion more room to make a bigger move. I almost never make a single buy and sell of a stock. I try to be anticipatory to some degree and will do partial sells into strength rather than wait for them to break down. We do not use pre-determined price targets because the world changes and we continually re-evaluate our positions.

One of the major reasons for many market participants' losses is the inclination to shrug off short-term problems because of preconceived opinions about where the market is heading. They dig a hole for themselves because they are certain that things will work out. They often do this because of the recommendations of their “professional” advisors. Stockbrokers are trained to tell investors to “sell” when they make a small profit and to “hold” onto shares that have gone down. Brokers are trained to give this advice for two reasons. First they understand that psychologically most people have a huge need to be right. They know that if you have lots of “wins,” no matter how small, you will feel good about yourself. Second, they also know that most people cannot psychologically accept losses and that is why they tell their clients to hold onto stocks that have gone down. Another reason this advice is sometimes given is because the broker wants to continue to make commissions when you sell and then reinvest (over and over again). This is called “churning” and it generates a steady stream of commissions for the broker.

Our clients are well aware that there is no shortage of investment advice or advisors eager to offer their services to potential customers. This situation has created a paradox, which is the foundation of our success: the need for intelligent, unbiased advice in an endless sea of conflicting investment offerings.

Investors today are faced with myriad solicitations from brokers, mutual funds and others recommending their own form of investment advice and products. Our answer is to furnish unbiased, objective advice, taking into account a client's personal and unique circumstances. In so doing, our firm avails itself of all the investment alternatives and critically evaluates them to provide the most efficient combination of investment solutions.