Most investors focus exclusively on the “buy low, sell high” phenomenon called “value investing.” At its core, it looks for companies trading at a discount to fundamental value, usually determined by crunching numbers from a balance sheet and earnings statements. With a little bit of work and a spreadsheet, it’s been a good strategy that’s been popular since the 1930s. But what if there existed an even better approach that worked more consistently, provided more upside, and carried far less risk? Welcome to the world of “buy high, sell higher.”
Over the last 30years, the buy high, sell higher approach called “trend following” has spread from academic curiosity to empirical fact. Once derided as a statistical blip, investing in the uptrend has led to larger and more consistent gains than any other popular method of investing, including value, small cap, global, buy & hold, and passive index investing. Here are two recently published academic papers (among many) with the proof:
The Trend is Our Friend, published at City University London: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2126478
Fact, Fiction and Momentum Investing, published at Journal of Portfolio Management, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2435323
Plus a third article in plain English from the Financial Times: http://www.ft.com/intl/cms/s/0/01b1afe6-864c-11e2-8f47-00144feabdc0.html#axzz3CSwR6dEJ
I understand that buying a company that’s already had a big winning year seems counterintuitive to most people. That’s probably one of the biggest reasons it works so well. Since most investors have been trained to buy something that’s been going down in search for “value”, few even look at past winners. But the next time you’re considering buying something that’s gone down, ask this question: is it more likely that a successful company is going to keep being successful, or are am I the lucky person that’s going to buy a struggling company just in time for a big turnaround? The math says you’ll do better by sticking with the winner.
There’s nothing wrong with value investing if you have the guts for it; it will work over the very long term if you have discipline and patience for losses. But if you’re looking for a more efficient use of capital with less risk, going with the trend is much simpler and easier. By definition, you’re avoiding investments that are going down. Combining these value and trend factors, as I’ve been doing with the Growth and Income Portfolios, leads to even stronger results altogether.
Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc. in Toronto. He offers financial planning and investment management for high net worth Canadian investors. Ben focuses on high quality investments, the Growth and Income Portfolios, low risk investing, and reducing tax.