Our Three Building Blocks of Investment Decision Making
- Value Recognition
- Trend Analysis
- Leadership Expectation
Value Recognition - The most important factor from a long-term investment standpoint is the recognition of value, including the recognition of overvaluation and undervaluation. Valuation measurement tools, including P/E multiples, dividends, asset factors, and growth rates are, of course, important in individual stock analysis. They are also equally important in group and sector analysis, and in the analysis of the overall markets.
Eventually, the market adjusts prices downward for overvaluation and upward for undervaluation. But in the real world, the market is often not efficient and these adjustments can take considerable time.
Trend Analysis - The market is typically inefficient and often irrational. That is why technical analysis should be another arrow in the quiver of investment professionals. How many times have you sold a "fully priced" stock only to see it go on, doubling and doubling again in a spasm of irrationality? How many times have you bought a "cheap" stock only to see it get 30% cheaper?
Stock groups, market sectors and the securities markets themselves demonstrate the same tendencies toward the extremes. While technical analysis has its limits, at times it can greatly enhance investment results.
Leadership Expectation - Since the beginning of market time, there have usually been clearly defined areas of market leadership: technology in the '90s, healthcare-related stocks in the late '80s, consumer stocks and bonds in the early and mid '80s, energy stocks in the late '70s, the "nifty fifty" in the early '70s, and electronics in the early '60s. Portfolio concentration in these broad areas can be rewarding if developed early but a horror if established too late in the game.
Projecting future areas of investment leadership is an art. It requires imagination, experience, and a sense of what might attract investors in existing or developing market and economic environments. However, risk exposure can be reduced if fundamental value recognition tools are added to the process. Trend analysis, using traditional and newly developed measures, further reduces the twin risks: the risk of being "too early" or the risk of climbing aboard near the end of a leadership phase.
