Investing Strategies: Why We Favor Market Timing and Technofundamental Investing
● Buy and hold: Among a large number of investing strategies, the buy and hold strategy relies on periodic purchases of the given financial market over time. There is an implicit averaging in component to this. More stock, bonds, or whatever is being bought and held is averaged into over time as the investor either deploys new or saved money.
The disadvantage of a buy and hold strategy is that there is no attempt to look at the relative value of the investments and no market timing component that will maintain profits once gained. Why have a big profit and then ride the ETF, stock, bond, or commodity "down the hill" so to speak? Why not lock in profits if a given investment turns south? Too many investors gave up their gains in tech stocks in the 2000-2003 Bear market and again in the 2007-2009 Bear market!
● Value Investing: This investing strategy distinguishes itself from other investing strategies by relying on buying stocks, bonds, or other financial instruments when they are cheap in price relative to historical levels and/or cheap relative to other financial instruments and selling them when they are overpriced. More often it's practiced on an absolute value basis. Investors such as Warren Buffett feel that they can estimate the future earnings of a company and then discount the cash flow that that reflects into the future, hence determining what the earnings power or earnings yield is of the company or index such as the S&P-500, in which Mr. Buffett has made some big derivative bets.
The problem with pure value investing is that an investment bought at a great price may simply sit there for days, weeks, or even years. It is among the investing strategies that does not look for an up trend prior to buying. Why not buy it as it's moving up rather than waiting for the up trend to begin for years? Even Warren Buffett has admitted making premature purchases or purchases at exactly the wrong time such as his purchase of Conoco Phillips when oil was near it's peak of around $147 per barrel.
The second issue with value investing is that the value investor may sell simply because a stock or index is overpriced, despite the fact that the up trend is still intact. This violates the rule of "letting your winners ride." The biggest gains in indices and stocks come when we are patient and invest with the trend. When the trend changes, you can be quick to take your profit. It is not that often that markets will tumble suddenly, particularly if you are invested in a diversified ETF. Even if it is diversified over a sector, you still are protected should a single company miss its earnings in many cases. If it's a general issue with the industry, it will quickly be seen in the chart and a Sun and Storm Investor™ would be a seller
● Our Approach of Combined Market Timing and Fundamental Investing: This is the style of this newsletter and website with a tilt toward technical analysis. The power of this method compared to other investing strategies is that this combined method takes into account economic trends and dovetails that understanding with technical analysis of the given market trend. For example, if gold is in an up trend but is tremendously overvalued as compared to oil and U.S. stocks for example, we may suggest taking profits or at least narrowing the sell stop (the degree of loss from the top that we'll accept).
This combined approach, sometimes called Technofundamental Investing enables one to deploy cash into or remove it from various markets when it makes sense from the standpoint of government policies, interest rate levels, energy prices, and economic statistics such as inflation. We always allow the trend to confirm the fundamental call however and that is where we differ from other investors who skip this step. Technical analysis has the last word in the system. If the investing fundamental thesis is simple wrong, we will be out of the investment or trade and not need to know why.
Becoming attached to your investments is deadly to your capital. That is often a combination of greed and/or fear that drives the attachment (read more on that here: How Fear and Greed Work Against You. So we avoid it. We are humble enough to say that we were wrong and we would not hold an index while it careens south anymore than we would have held onto Enron on its way to zero. Or Citibank from $57.00 to $0.97. Yes, 97 cents!
If you've made that mistake at times, join the crowd. But the point is that you don't have to hold without thinking any longer. Once you have a system in place to GET OUT as well as GET IN, you can finally make money in the markets.
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For more on our system of market timing and investing follow this link:
Investing Strategies that Work: Our System of Market Timing and Investing
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Sample Issues of The Wall Street Sun and Storm Report™
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