Brian Portnoy of Forbes identifies one of the longstanding challenges of the financial markets: Choice.
In the modern world of investing, complexity dominates. Thousands of difficult-to-assess choices present themselves, often with the perverse result of confounding us further rather than solving a problem. In response, the principle of “simplicity” is ascendant among advisors, fund managers, brokers, and authors.
But what counts as simple? Unfortunately (and ironically), the answer is elusive.
This is where clients of Dorsey Wright & Associates have a clear advantage over the competition. It is a common occurrence for me to hear from a subscriber of our research or user of one of our managed products that finally they have a game plan. The concept of relative strength is not complex. In fact it is really quite simple—a security can gain relative strength by going up more than the market in an uptrend or by going down less than the market in a downtrend. Relative strength measurements and rankings are what determine what our models own and when they will make any necessary changes to adapt to new leadership. With some reasonable amount of due diligence and investment in becoming fluent with our process a financial advisor can look at the financial markets with an entirely different perspective. No longer is there a need to feel completely overwhelmed by the ever-expanding universe of securities and without plan for risk management.
I have been on the road much of the past couple of weeks making presentations on our line-up of PowerShares DWA Momentum ETFs and in introducing the DWA PowerShares Power 4 Model. This particular model is resonating with financial advisors in a way that has made me realize just how hungry people are for this type of logical, rules-based process that is based on the powerful concept of relative strength and that also provides clear guidance on how to incorporate cash as a risk management tool. Click here for details of this model.
This topic always brings be back to “The Hedgehog and the Fox.”
In his famous essay “The Hedgehog and the Fox,” Isaiah Berlin divided the world into hedgehogs and foxes, based upon an ancient Greek parable: “The fox knows many things, but the hedgehog knows one big thing.”
The fox is a cunning creature, able to devise a myriad of complex strategies for sneak attacks upon the hedgehog. Day in and day out, the fox circles around the hedgehog’s den, waiting for the perfect moment to pounce. Fast, sleek, beautiful, fleet of foot, and crafty—the fox looks like the sure winner. The hedgehog, on the other hand, is a dowdier creature, looking like a genetic mix-up between a porcupine and a small armadillo. He waddles along, going about his simple day, searching for lunch and taking care of his home.
The fox waits in cunning silence at the juncture in the trail. The hedgehog, minding his own business, wanders right into the path of the fox. “Aha, I’ve got you now!” thinks the fox. He leaps out, bounding across the ground, lightning fast. The little hedgehog, sensing danger, looks up and thinks, “Here we go again. Will he ever learn?” Rolling up into a perfect little ball, the hedgehog becomes a sphere of sharp spikes, pointing outward in all directions. The fox, bounding toward his prey, sees the hedgehog defense and calls off the attack. Retreating back to the forest, the fox begins to calculate a new line of attack. Each day, some version of this battle between the hedgehog and the fox takes place, and despite the greater cunning of the fox, the hedgehog always wins.
Berlin extrapolated from this little parable to divide people into two basic groups: foxes and hedgehogs. Foxes pursue many ends at the same time and see the world in all its complexity. They are “scattered or diffused, moving on many levels,” says Berlin, never integrating their thinking into one overall concept or unifying vision. Hedgehogs, on the other hand, simplify a complex world into a single organizing idea, a basic principle or concept that unifies and guides everything. It doesn’t matter how complex the world, a hedgehog reduces all challenges and dilemmas to simple—indeed almost simplistic—hedgehog ideas. For a hedgehog, anything that does not somehow relate to the hedgehog idea holds no relevance.
To be clear, hedgehogs are not stupid. Quite the contrary. They understand that the essence of profound insight is simplicity. No, the hedgehogs aren’t simpletons; they have a piercing insight that allows them to see through complexity and discern underlying patterns. Hedgehogs see what is essential, and ignore the rest.
The future is very bright for those financial advisors who can clearly articulate a logical investment process to their clients and have the tools and skills to execute. Dorsey Wright can help put advisors in that position of strength.
A relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Past performance is no guarantee of future returns. Potential for profits is accompanied by possibility of loss.
