From the Archives: Hobo Investing

Investing, at its core, is a simple process.  You need to determine if the train is going north or south, or just sitting on a track siding doing nothing.  Once you’ve found a train going north, you need only to hop aboard.  If the train starts to go south, you need to jump off.

The concept is simple, but sometimes investors make the execution more complicated.  For us, relative strength and trend following provide the tools and methodology to find the northbound trains.  The same tools and methodology can be used to tell you when the switch engine has come along and started to move the train south.

The problems happen when investors deviate from the simple goal-directed hobo mentality and get too clever for their own good.  Can you imagine how irrational some investor behavior must look to a hobo?  Here are the top six dysfunctional hobo sayings:

1. I wanted to go north, so I hopped on an out-of-favor southbound train, hoping it would go north eventually.  (value hobo)

2. I got on a northbound train, but it only went north a few miles.  A switch engine came along and started to take my boxcar south.  How embarrassing!  This train owes me.  I’m not getting off.  (ego-attached hobo)

3. There are so many trains going north.  I want to hop on one eventually, but I’m afraid it will go south right after I get on it.  (failure to launch hobo)

4.  This northbound train is picking up speed.  I’d better get off.  (premature ejection hobo)

5. I want to go north, but my train pulled on to a siding and stopped.  Maybe I’ll just sit here and see what happens.  (buy-and-hold hobo)

6. There are so many trains going north without me.  Eventually they will all have to go south, and then I’ll have my revenge!  (bitter hobo with economics background)

If you want to go north, get on a northbound train.  KISS really applies here.  On our good days, we all know this, but it’s so easy to forget.

—-this article originally appeared 5/26/2010.  Investing need not be complicated.  Relative strength investing, in fact, is pretty simple.  However, simple is not the same thing as easy!  There is a real skill to the disciplined execution of this strategy—or any other strategy.

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