Feature Article #1 on Business First Magazine January 2017 Issue

Increasing the Odds: The Top 5 Strategies to Aim for Outperformance

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By Gabriel Yi, Managing Director of M3 Investment Group

Whether you’re talking about the stock market in the boardroom, the golf course or the backyard BBQ, the age-old question still remains and is hotly debated, “How do you outperform the markets?” The value investors quote long-term fundamental strategies while the short-term traders quote technical strategies. Each of the strategies have merit and both could lead to outperformance in the markets, but it invariably comes down to execution. However, it is our belief that by implementing some key elements of both fundamental and technical strategies, we can increase the odds of outperformance.

  1. Fundamental Analysis done, what next?

Fundamental-based stock picking is a very important aspect of portfolio construction and it can be done in a number of ways. Determining the intrinsic value of a stock using a combination of a discounted cash flow valuation and a fair/intrinsic multiple valuation is the leg work but what next? Is it a simple matter of then adding every single stock that is trading below intrinsic value into the portfolio? Perhaps not.

Using the intrinsic value as a target price and taking into account the near-term earnings trajectory, potential catalysts and technical picture can help identify downside risk, and as a result, allow you to develop an entry/exit strategy for the stock. This can establish a disciplined approach to the trade/investment.

  1. Timing the markets

It’s an almost impossible task to pick the absolute bottoms and tops of stocks due to the inherent risks of the market as well as the global economy. However, identifying the early stages of uptrends and downtrends can once again increase the odds of outperformance.

Since the classic law of supply and demand affects the stock market, the price of any given stock reflects the current supply-demand dynamics and technical analysis can help paint a clearer picture. Relative Strength Indicators (RSI), Moving Averages, Support and Resistance levels, Moving Average Convergence Divergence (MACD) and various price patterns (such as head and shoulders, double bottom/top formations) are some of the approaches we can use but it’s important to use at least a couple of these approaches simultaneously to increase the likelihood that the buy/sell signal is correct.

  1. The Hedge

2016 has been a year of political shakeouts (e.g. Brexit), nervous lead ups to elections (US) and central bank uncertainty (BOJ and to some extent US). The common theme has been uncertainty and fear. The gold trade has been widely implemented in the Hedge fund world and we see its merits as a trade on fear. Usually in instances of political unrest such as the weeks leading up to the US presidential election, the fear radar and VIX Index rises, accompanied with Gold prices. So to the investor/trader that see gold as a fear trade, it serves an important purpose in the portfolio, if implemented at the right time.

  1. Moving to the sidelines

In a multi-month/year bear market or a multi-week correction, moving the portfolio to hold more cash is a strategy which can greatly increase the odds of outperforming the market. Most of these broad market declines are often triggered by negative macro-economic/political developments such as recessions and elections/referendums, which typically take months to unfold and are thus usually telegraphed in advance. By being aware of these developments and taking into account the warning signs (VIX Index), an investor/trader can take on board these indicators to tactically increase cash exposure within portfolios.

  1. Let’s keep the emotions out of it

Investing in stocks is an exercise in calculated prediction of the future, with many moving variables that could affect the price such as earnings, unforseen company developments and general shifts in market sentiment. In such an inherently risky game, disciplined and logical reasoning is of the utmost importance. Judgement that’s clouded by emotion can lead to chasing a stock from fear of missing out and this can detract from outperformance in the long run.

 

This content has been prepared without taking into consideration any individual’s particular objectives, financial situation and needs. The content represents the author’s views and does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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