Simplicity is the ultimate sophistication—-Leonardo da Vinci
Perhaps no investment method better exemplifies the Zen virtue of simplicity than relative strength. You do not need a complicated, multi-factor quant model to use relative strength. You need only one piece of data—price—and a robust measurement of performance. Then, buy what is performing and hold it until it is no longer performing. Simplicity.
There are occasional critics who believe that relative strength is too simple, too naive to work. They would prefer to analyze reams of data to try to determine (i.e. guess) what will happen next. Zen is focused in the now-moment. Relative strength just measures what is happening now. What is, is. We cannot change the past; we all look forward to an uncertain future. All we have is the present.
Click to enlarge. Source: Ken French
Strong stocks have outperformed weak stocks for decades, laid out perfectly, decile by decile. (If the stock market were really a random walk, this chart could not exist.) If you surround yourself with virtuous friends, your path is likely to be smooth and successful. This is no less true if you surround yourself with virtuous stocks. Simplicity.
Managing a relative strength portfolio is not complicated. Buy what is performing and hold it until it is no longer performing. Simplicity.
The challenge with a relative strength portfolio is emotional. In fact, this is the challenge with all investing. Volatility is a part of any return factor. In fact, it is because of volatility that investors can earn a risk premium at all. Volatility is like an old childhood friend; it should be embraced when it appears, rather than feared. Instead of concerning yourself with the ups and downs of the market, perhaps volatility should simply be viewed as an opportunity to practice your Zen calmness and detachment. Let the path unfold as it wishes. Enjoy the journey. Simplicity.
Posted by Mike Moody 
