The 4 Reasons Traders Underperform and How to Fix Them

Key Concepts

• Alpha: The ability to outperform the market by selecting the best stocks and knowing when to sit out (cash).
• Volatility Adjusted Beta (RVAB): A proprietary calculation comparing a stock's beta and Average True Range (ATR) to the S&P 500 to normalize risk.
• Positional Risk Parity (RPRP): A methodology to size positions so that each stock contributes an equal amount of risk to the overall portfolio.
• Open Heat (Balance at Risk): The total percentage a portfolio would decline if all current stop-losses were triggered simultaneously.
• Easy8 System: A trend-following strategy where leading stocks are held as long as they ride above their 8-day Exponential Moving Average (EMA).
• Offensive vs. Defensive Selling: Selling into strength (e.g., 3-4 ATRs above the 21-day EMA) versus selling when a technical support level (like the 8-day or 21-day EMA) is broken.

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1. Investment Philosophy and Risk Management

Don Vandenborg, CIO of River Asset Management, emphasizes that risk management is the number one priority. His firm, an SEC-registered investment advisor, operates with full transparency, managing individual accounts with a "Growction" strategy designed to grow assets during uptrends and protect them during downtrends.

• The 200-Day Rule: The firm views the 200-day moving average as the critical threshold for bear markets. If the market breaks and stays below this level, they significantly reduce exposure.
• Avoiding "Soldout Bulls": A common mistake is panic-selling during normal corrections. Proper position sizing is defined as a size that allows the investor to remain in the trade without being shaken out by volatility.

2. Methodologies and Frameworks

The 10-Step Checklist (Bottom to Bull)

Vandenborg uses a 10-step checklist to transition from a bear market to a bull market, including:

1. Regaining the 8-day EMA.
2. Regaining the 21-day EMA.
3. Achieving a "follow-through day" (O’Neil methodology).
4. Ensuring no distribution days follow the follow-through.
5. The 50-day EMA crossing above the 200-day EMA.

Aggressive Index Re-entry (RARE)

To solve "cash drag," the firm uses RARE rules to re-enter the market. They maintain a core 30% position in the S&P 500 to capture market rotation (where value may rise while growth falls), which helps smooth the equity curve.

3. Technical Tools and Indicators

• Relative Strength (RS) Line: Vandenborg asserts that "no chart is complete without a relative strength line." If a stock's RS line is flat while the stock price rises, it is not outperforming the S&P 500 and is not worth the single-stock risk.
• 60-Minute Stochastic: Used to identify low-risk entry points. When a stock is oversold on the 60-minute stochastic, it acts like a "coiled spring" for potential breakouts.
• Volatility Factor: A calculation (74% Beta + 26% ATR) used to normalize risk across different assets, such as comparing a stable stock like Apple to a volatile one like Coinbase.

4. Key Arguments and Perspectives

• Conflict of Interest: Vandenborg argues that large Wall Street firms are "too big to turn" and have a conflict of interest because they are incentivized to keep clients fully invested rather than selling to protect capital.
• The "S&P 500 Benchmark" Test: He advises beginners to split their portfolio 50/50 between the S&P 500 and individual growth stocks. If the growth portion does not outperform the S&P 500, the trader is failing to generate alpha and should refine their selection process.
• Psychological Discipline: Knowing one's "Open Heat" (the exact percentage at risk) is the primary solution to emotional panic during market plunges.

5. Notable Quotes

• "Risk management is our number one priority. If you minimize the drawdowns, the gains will take care of themselves when the market rights itself."
• "There’s nothing worse than a soldout bull."
• "The proper position size is one that you can stay in without getting shaken out by a normal correction because you panic."

6. Synthesis and Conclusion

The core takeaway is that successful trading is a mechanical process of varying beta as a form of alpha. By utilizing proprietary metrics like Volatility Adjusted Beta and Positional Risk Parity, investors can smooth their equity curves and avoid the "soul-killing" drawdowns of bear markets. The firm’s strategy relies on identifying leading stocks that respect the 8-day EMA, maintaining a core index position to capture rotation, and using strict, data-driven sell rules to lock in gains before they are surrendered to the market.