“Easy way to ride a hot market”

This week’s blog is a commentary on a recent AFR WEEKEND article that appeared under the Smart Money section entitled “Easy way to ride a hot market”. This same article can be read online under the title “How to make the most of the market’s upswing? .

It is one of the better newspaper articles that I have read in quite some time because it does not entirely focus on a solution that is skewed towards the ‘big end’ of town like so many articles that have huge biases towards managed funds and financial planners, who always seem to be the interviewees in the financial press.

The article makes the case that the Australian share market has been and still is “rising nicely” and that “we still appear to be in the early stages of a multi-year cyclical market upswing.”

In answering the question that he poses “How to Invest?” to take advantage of the positive share market, David Bassanese offers five approaches in the following chronological order in the article:

1. Establish your own share account and “do your own research or subscribe to tip sheets to get ideas about what stocks to buy.”
2. “Simply hand your money over to a professional money manager who will promise to try and beat the market in exchange for a fee.”
3. Managed Funds. “Disenchantment with actively managed funds is perhaps not too surprising given consistent survey evidence that suggests many funds struggle to beat their benchmarks over time.”
4. Index investing which is a “much simpler and cheaper strategy than active management. And while you won’t outperform the market over time – you won’t underperform either.”
5. ETFs. “In recent years, another increasingly popular option for index investing is via the purchase of listed exchange traded funds – effectively index funds listed on the ASX [and other stock exchanges].”

There are, of course, other instruments and strategies such as CFDs, Futures, ETOs, Forex, Hedge Funds, CFDs of ETFs, etc., however they all basically fit into each of the above 5 categories one way or another.

David Bassanese asks the question: “What’s the best approach?” A great question and one that most investors don’t put the necessary effort into thinking about and answering. Most investors are merely swayed by the most recent bit of ‘noise’ that influenced them into a particular approach of investing.

He continues: “As always, it really depends on your level of expertise and risk preference.” In my view it also depends on your level of desire and your investing objectives. With the desire to gain knowledge and acquire active investment skills most people have the capacity to handsomely outperform the professional money managers, managed funds, index funds and ETFs.

Desire will determine where investing lies in the pecking order of your life’s priorities. If desire is low then you will put up with sub-average to average benchmark returns. To decently outperform the benchmarks’ will require effort of some sort that is greater than the effort you need to put into any of the last four categories which all underperform, match or slightly outperform the benchmarks.

For the purposes of this blog, I include all personally managed strategies, regardless of the instrument used, to fit into the first category, that of managing your own account. For example, an active ETF strategy could be pursued where ETFs are actively traded.

David Bassanese interestingly finishes his article on an approach that fits into the first of the above five categories! “… remember that one strategy, if used with discipline, that investment research suggests could produce reasonable market-beating returns over time is momentum – or buying a collection of stocks that have tended to display the stronger price performance over the past few months to one year.”

He continues: “Indeed, many highly priced hedge funds, or so called quantitative investment managers, are nothing more than very disciplined momentum or trend-following stock investors.”

Nice to read this in the mainstream press! This is the approach that, in my view, is the only approach that, in the long term over a large sample of actively managed positions, will allow the private investor to consistently outperform the market benchmarks’ without using any leverage while still allow the investor to get on with the rest of their life.

Our publicly traded portfolios and 100’s of 1000’s of simulated portfolio equity curves that we have researched and published have demonstrated this for many years now. We use technical and quantitative analysis to detect momentum and trends to follow, how much to place in a momentum position and when to step aside from the market altogether and await another high probability entry point for our portfolios.

I agree with David Bassanese when he says: “..due to the frailty of human emotion, consistently delivering returns with what appear simple strategies is often easier said than done.”

However, it can be done and the reward is worth the effort for private investors who, as the Davids’ of the financial industry, have many advantages over the Goliaths’ of the financial industry.

There is plenty of good stuff in David Bassanese’s article. I suggest you read it in its entirety rather than just read the sections that I have quoted.