Every year, financial markets offer more choices to investors. More choice can be good, if investors have a logical framework to analyze this broad universe of securities. We know that the financial markets offer ample quantities of both risk and return. In fact, it is because of the risk that the return or reward is possible. We believe financial markets continue to provide the best available opportunities for investors to build and preserve long-term wealth. However, to capitalize on the opportunities in the financial markets, an investor should have a systematic investment strategy. Our Relative Strength philosophy offers just such a systematic approach to investing.
We rely on Relative Strength to manage our clients’ portfolios because of its adaptive nature and its long-term track record. Relative strength is simple in concept, yet powerful in application. Relative strength is simply the comparison of price performance within a universe of securities. Analyzing securities by their relative strength provides a way to identify the current leaders. It is those market leaders that we want to own. Relative Strength also allows us to identify the laggards. Successful investing also requires avoiding big losers.
Relative Strength analysis is not confined just to the financial markets. If you were given a list of all the college basketball teams and asked to pick who you thought would be in the top ten at the end of the year, who would you pick? My guess is you would pick the current top ten to be in the top three months from now. Even if I asked you to pick the ones who would be in the top ten next year, you would probably pick the current top ten. At the end some would have fallen out and some would have moved up, but the majority would still be in the top ten. It relates to Newton’s Law of motion, which suggests that objects that in motion tend to stay in motion until an external force acts upon them. So, in the financial world this means that stocks that have good fundamentals, in a market that in general is supporting higher prices, tend to continue to do well just as basketball teams who have good fundamentals, are in good shape, and at the top of their game, tend to continue to do well.
Until next time, cheers!