I am of the belief that there are certain shared attributes of those advisors who gravitate to relative strength investing. My first experiences in this industry, as an intern at a brokerage firm in Denver, CO in the summer of 2001 made this clear and it has been repeatedly confirmed since that time. Just in the first couple weeks as an intern, I became aware that some advisors are pre-occupied with the hunt for the bragging rights that come with buying some obscure stock that rises from the ashes like the phoenix. They will invest in stocks that have very weak relative strength, losing money and time, waiting almost without condition for the chance of being proven right. Other advisors concerned themselves almost solely with raising assets and managing relationships. They farmed all the money out to their firm’s recommended money managers. When times were good for these advisors, they were great. And when they were bad, they were awful. Not having much depth when it comes to how to construct a well-thought-out asset allocation has its downside—specifically, losing the confidence of their clients over time. Other advisors, bought into the strategic asset allocation models constructed by their firm. They would say, ‘Let’s face it, who am I to think I can compete with the brightest money managers in this industry?’ Those strategic asset allocation models certainly weren’t disasters. They were ok, but they didn’t do much to leave their clients with the feeling that there was anything special about their financial advisor.
However, that summer and in the years since I have had many experiences that have allowed me to get to know advisors who are drawn to relative strength investing. In some ways, these advisors have very little in common—they come from every geographic location, many different educational backgrounds, many different firms, etc. However, they do tend to have the following attributes:
Pragmatic: While some are greatly impressed with the pundit who told everyone to get out of the market in October 2007 because there was a massive bear market coming, this advisor looks further and realizes that the pundit also told everyone to get out of the market in 2003, 2005, 2009, 2011… While some are greatly impressed with Modern Portfolio because it is so elegantly taught in textbooks in Business schools around the country, this advisor asks about MPT’s track record. When this advisor reviews the body of knowledge of relative strength investing, he sees results. He sees it isn’t perfect and that it has periods of underperformance, but he is impressed with the weight of the evidence in its favor.
Process-Oriented: Focus on process and the results will take care of themselves. This is a philosophy that appeals to this advisor. This advisor is looking to stack the odds in their favor. They have seen the studies that make it clear that there is momentum in the market and that the best probability of finding a future winner is to buy a current winner and stay with it as long as it remains strong. They look at stock selection in the context of portfolio management rather than as isolated trades.
At Peace with What They Can’t Control: Relative strength is a trend following methodology. By definition, you will never buy a security at the exact bottom or get out at the exact top. This advisor has come to terms with this and they don’t bother themselves with finding the elusive crystal ball. That crystal ball doesn’t exist. Nobody knows what the future holds. Pretending that you do, or that you can find someone who can, is madness. However, what this advisor knows is that having a crystal ball is not necessary to succeed in this industry. This advisor has also come to terms with the reality that certain environments are not favorable for relative strength strategies—namely, choppy trendless markets and markets with major reversals in leadership. So what if it doesn’t work all the time. Does it work most of the time? Do you expect it to work over time? Those are the right questions.
Competitive: This advisor want to do right by their client. They want to make a great living. They want to generate favorable investment results over time. And they conclude that relative strength is framework within which they will operate in order to achieve those goals.
If you are already using relative strength, chances are that those attributes do a good job of describing you. If you don’t currently use relative strength, but are attracted to those attributes, then I recommend that you give it a closer look.
The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value.
