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Ignore the Headlines: Buy the Dips

January 15, 2018
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One of the first rules of successful investing is to pick a management style that makes sense to you, and then to stay with it, even when other styles are outperforming. This either sounds easy or stupid; Easy, because if you feel you have done your homework, why would you run contrary to your conclusion? Stupid, because if your investment strategy is under-performing when your goal is to make money, then you likely need to change, or worse you need to re-evaluate your strategy. The statements sound easy enough to adhere to, but in real time, these statements will likely cause you to chase the market. You will be the investment equivalent of a dog chasing its tail. The results will be similar and you will look just as ridiculous.

#1 Rule of Investing: “…pick a management style that makes sense to you, and then stay with it, even when other styles are outperforming.”

There are many investment disciplines to choose from: Standard Asset Allocation (often over simplified and implemented incorrectly), Tactical Asset Allocation, Core and Satellite Portfolios, Direct Indexing, and Advanced Indexing and Momentum Investing just to name a few. All models have their strengths and weaknesses. These strengths and weaknesses are immaterial to the point of this article but I do understand that further elaboration may be of interest to many of you. Stayed tuned to future posts!

Most investors bail on their model at its weakest point and shift to another model that’s exhibiting strength. This is better known as “sell low and buy high” and it’s never a good idea!

Don’t chase the market! “You will be the investment equivalent of a dog chasing its tail. The results will be similar and you will look just as ridiculous.”

Throughout my career in finance, I have, at one time or another, used all the above listed strategies, and even tried to merge a few of them together! The results have been all over the map. I will spare you the walk down investing-memory-lane for now. That’s fodder for another post…

The main goal of most of our clients is twofold:

  • Growth, when possible, and
  • Avoiding Large Losses

The goal itself provides the answer to the question of which money management strategy to employ. The two parts are in direct conflict, which means to achieve the desired result, the portfolio will need to adapt to market cycles. Adaptation is a nice word for change! NOT constant change, or even trading-just-to-trade change, but instead adjusting at a macro-level to the areas of the investing world that are gaining, while diminishing the areas of under-performance.

Momentum is the strategy used to identify such trends. Momentum investing carries with it a sell-discipline. A tenant of the strategy is before an investment is added to the portfolio, before any transaction is initiated, one determines the buy price and sell price. The selling price is adjusted over time based on the individual performance of the investment.

Momentum Investing can broadly be defined by a strategy that holds the winners and sells the losers. Momentum can be as simple as looking at the trailing 12-month price movements of different asset classes, sectors, or individual securities, holding the investments that are higher and selling the ones that are lower. Comparing the movement of any variable against its past, or comparing any variable to another variable, is using some form of momentum.

Momentum Investing is not done in singularity but can comprise of endless combinations of variables. Like most investment strategies, there is a discipline within the discipline. Sorry folks, I know there are a lot of people who would like you to believe that investing is quite simple, but all you have to do is Google some questions from a college finance class, or from an MBA program, or from the ChFC, CFP, or CFA exams to know that one needs some education, formal or informal, before starting their investing career. My Grandfather gave me a great piece of advice when I was little. He said, “you hire the people to do things you do not know how to do or that you do not have time to do.”

The biggest question we are getting in the office currently from people who want to invest now is, “How do you know what to invest in when the market has gotten ahead of itself?” This question has surfaced several times since the last major market drop in the summer of 2011 which was just shy of the dreaded negative 20% (defining for some an official market correction). The problem with that question has been the same for years; Who said the market is ahead of itself? We have had slow growth with little to no inflation, low volatility along with a Fed that only moved from accommodating to do no harm.

I know it is difficult to reconcile positive momentum with the turmoil in Washington, but the markets and politics are rarely on the same page. The political headlines through the last several administrations have been negative and Congress continues to enjoy an extremely low approval rating. As more and more company’s stock prices reach new 52-week highs, I take it as a sign, that unless something big happens in the political world, the day to day Washington bickering is irrelevant, from an investment standpoint anyway. One measure used to see the effect of new company highs is the advance/decline line. The advance/decline line is the difference in the number of stocks advancing vs the number of stocks declining in price in any stock index. The advance/decline line moves up when more stocks are advancing in price and down when more stocks are declining in price. These two pieces of evidence, Washington turmoil and stock prices reaching new 52 week highs, cannot exist together if high correlations existed between politics and the stock market. Since most of the negative news lately is purely political, I say “Ignore the news and buy the dips.” I trust the movement higher in the advance/decline line more than I trust Washington politics.

“… unless something big happens in the political world, the day-to-day Washington bickering is irrelevant, from an investment standpoint anyway.”