At first, you might not think that relative strength and philosophy are related in any way. But they are, because every strategy is based on some philosophy of the market. Different philosophies lead to different strategies. We like relative strength because it is simple, straightforward, and performs well over time. Of course, there are other strategies that work also, including some that are quite complementary to relative strength. A nice encapsulation of philosophy leading to strategy appeared on The Bloodhound System blog. A couple of excerpts from the article are instructive. The first is a quote from Rick Ferri in a Morningstar interview:
“Strategy comes from philosophy. If you don’t have a philosophy, you can develop a strategy, but it’s only going to blow apart the next time it doesn’t work for a month or two. And you are going to go onto another strategy, and that’s the worst thing you can do.”
This is very true. Over my career, I’ve seen many investors careen from strategy to strategy, never sticking long enough with any of them to enjoy success. The author of the blog piece, Bill Moore, I think really cuts to the core of why a deeply held philosophy is so important to success. Having some kind of belief system is necessary to have conviction. With conviction comes discipline—and discipline is the key to everything. I put the good part in bold.
…what’s really important is that you have a philosophy that makes sense to you and that you believe in–and that you then create a strategy which you would execute with discipline. As much as pundits might dogmatically espouse one investing philosophy or another–making it seem like it’s their way or the highway–there are thousands of investment philosophies–and in turn strategies. The reason multiple philosophies can work out well is that inherent in having a philosophy, or belief system, is that you have conviction in it. That kind of discipline, not so much the philosophy itself, is the key to an investment plan.
One of our senior portfolio managers, Harold Parker, likes to say “to the disciplined go the spoils.” He’s right. Even a good strategy that is poorly executed will lead to bad results. Every strategy might be driven by some philosophy, but none of them are worth a darn without conviction and the resultant discipline to execute well.
