Relative Strength is just that-a method of measuring strength not in absolute terms, but in relative terms. It is one thing to attempt to assign an intrinsic value to a given security in isolation and another thing entirely to assign a relative value, or relative rank, within the context of a universe of securities.
I am reminded of a line from the film Crocodile Dundee, when a street hoodlum pulls a switchblade against our hero, Paul Hogan. “You call that a knife?” says Hogan incredulously, withdrawing a bowie blade from the back of his boot. “Now this,” he says with a sly grin, “is a knife.”
One of the biggest challenges for an investor is to be able to make the best use of limited resources. After all, the value of every investment portfolio is finite. How can you be sure that you are allocating your finite resources to those securities that represent the “best” investment opportunities and not just “good” or “acceptable” investment opportunities?
The elegance of systematic relative strength models is that all securities in the investment universe are evaluated relative to every other security in the investment universe. With this knowledge you can be sure that each of the final holdings has superior relative strength characteristics and, therefore, gives you the best probabilities of successful investment results.
HT: Dan Ariely, Predictably Irrational
