“When everybody thinks alike, everyone is likely to be wrong.”
Humphrey B. Neill, The Art of Contrary Thinking
ValueTrend’s Contrarian Credo
- Never rely on hunches, fads or macroeconomic events.
- Never subscribe to the buy-and-hold mantra.
- Never trade just for sake of action.
- Always drive portfolio decisions based on facts using quantitative and qualitative filters.
- Always buy when the potential return appears favorable.
- Always sell when the risk of holding outweighs potential return.
LIMIT YOUR RISK, KEEP YOUR MONEY.
In the market massacre of 2008, many concerned investors were told by their investment advisors a reversal of fortune (as much as 30%) was inevitable – a normal adjustment after a period of boom. They were told everyone was in the same boat, it was natural to lose money, and recovery was a matter of time – not true. The truth is not everyone loses money during stock-market crashes.
Buy and Hold vs Active Trading
A natural stock-market cycle should inform good investment analysis and portfolio management, not guide it. A blanket “buy and hold” at-all-costs mentality is actually a riskier and costlier investment strategy than a carefully planned system of buying and selling assets. For more on this perspective, have a look at this Smartbounce blog post: The high cost of buy and hold .
The chart below amply demonstrates the effect that the 2001 and 2008 crashes had on stock portfolios. The indexes were clobbered. From the 2000 peak it took index investors about 6 years to breakeven (early 2007). Same with the 2008 peak – it was 5-year journey (mid-2013) to become whole again for index investors. ValueTrend clients recovered faster. Our Equity Platform was fully recovered by the first quarter of 2009 after the ’08 crash.
ValueTrend prefers a steady rate of return over the more volatile index returns. Capitalization-weighted indices such as the TSX300 and S&P500 tend to overweight the current market darlings. That’s ok, so long as markets are rising. However, performance with lower standard deviation from a mean (average) return is hard to achieve while you chase index-leading stocks that are becoming overbought.
At ValueTrend, we’ve outperformed over most time periods – click here for details. Having said that, we still go through periods of underperformance just like any other manager. For example, we sometimes make a decision to hold cash while others gleefully pile into the market. Sometimes we’re wrong and wish we’d bought. But when we’re right-we’re right. Our biggest and best years are during times when markets act irrationally. That’s a management style that may go out of favor for a while, but any system worth its salt will save you in the long run. We protect your capital!
Our approach to investment analysis and portfolio management uses a unique combination of technical stock analysis and fundamental stock analysis in which both disciplines are placed on a level playing field. One discipline does not rule the other. We perform our own research – we do not rely on an outside analyst to provide us with buy/sell recommendations. We rely on clearly articulated and defined criteria for both entering and exiting positions – this removes emotion from the decision-making process. Your investments are managed based on objective facts, not feelings or hunches.
Technical Analysis Approach
We don’t know the future, but we can increase our odds of success. Our investment analysis and portfolio management approach employs true “market timing”: we buy securities when the risk of holding them is low, and sell when the risk of holding them outweighs their potential return. We don’t pick tops and bottoms – that’s a strategy that relies on blind luck. We measure the risk in the market, and act accordingly to protect your capital.
We use a series of technical indicators to measure the risk and reward potential that exists in the market. This is culminated in our Bear-o-meter reading, which relies on the following signals:
- 2 Trend Indicators:
- 50 day moving average
- 200 day moving average
- 4 Breadth/Momentum Indicators:
- Dow Industrials vs Transports
- Advance/Decline Line vs Moving Average and Divergence
- Percentage of Stocks over their 50 day Moving Average
- NYSE New Highs/New Lows
- 1 Value Indicator:
- Price Earnings
- 3 Sentiment Indicators:
- Smart Money/Dumb Money Confidence Index
- VIX Volatility Readings
- Options Put/Call Ratio
- 1 Seasonality Indicator:
- Best 6 Months/Worst 6 Months
To read more on the Bear-o-meter, check out the following Smartbounce technical analysis blog posts:
Once we have a firm handle on the risk versus reward characteristics of the market, we scan for stocks that are attractive based on a technical analysis perspective.
How We Choose Stocks
The next step in our approach to investment analysis and portfolio management is fundamental analysis of the potential stocks that have passed our technical analysis screening.
Fundamental Analysis Approach
In order to best protect your capital, we take positions in securities that have a strong technical profile, in coordination with the fundamentals that can back that potential for momentum up. For more details on why we consider this a superior method to managing your investments, you can have a look at this post.
Our approach to using fundamental analysis as a component of our investment analysis and portfolio management approach is described here .
Selling Discipline and Risk Control
Many investment managers know how to enter a position, but lack a clearly-defined, rules-based approach for exiting that position when the risk versus reward profile changes.
Fundamental factors may drive our sell decision, although it is typically trend analysis that trumps in this area. Fundamental factors that can influence a sell may include unexpected or disappointing financials or guidance, and/ or deteriorating fundamentals.
Obviously, there is no known technique that will consistently enable a portfolio manager to buy at bottoms, or sell at tops. Our sell discipline allows us to identify the end of that uptrend while taking a reasonable profit. Alternatively, our sell discipline allows us to cut losses before they become out of hand.
Click here to read an article providing greater details on our sell discipline from The MoneyLetter.
So there you have it, a look under the hood of the ValueTrend investment analysis and portfolio management approach. The ValueTrend approach limits your risk, and protects your capital, while still striving to provide a competitive rate of return.
If you have any questions or would like to schedule a no-obligation meeting to discuss how ValueTrend can support your investment goals and objectives, please contact us.
If you would like to arrange for Keith to speak to your group or community organization regarding investment management, retirement and financial planning, or the direction and characteristics of the stock market, please contact our office.