Navigation vs Prognostication
In light of the continuing turbulence in the stock market investors are naturally looking for answers on how to stay afloat. Where then might money managers find safety especially, considering the likelihood that many investors have significant equity exposure? There are many prominent investors with opposing views on the stock market with some claiming that cash is trash while others are sitting on a mountain of cash waiting for the right opportunity to deploy these assets back in the market. With short term Treasury Bills paying out yields of close to nothing, it might appear that holding hordes of cash could be a bad idea.
As an investor, how do you navigate these extremely choppy investment waters? That, of course, depends on your investment strategy. Top-down investors will rely on their ability to accurately make predictions about where their investment dollars should and should not be based on their ability to predict the right investment style/sector/industry necessary to keep their money safe in the current environment. If their predictions are right, then all is well, and their investment dollars remain as safe as possible with a possibility of outperforming the broader market. Unfortunately, market prognosticators are never consistently accurate with their forecasts and seldom are able to keep pace with market indices, let alone outperform them. Top-down strategies, in our opinion, are largely ineffective mainly because they rely too heavily on being right about future events. Ultimately, successful investing has to rely heavily on a manager’s ability to find stocks that can be purchased for less than they are worth.
Bottom-up investment approaches ignore economic forecasts or predictions about future events. Rather, bottom-up investing relies on an investor’s skill at picking stocks that are likely to rise in value because the market has overlooked something about those stocks selected for investment. While stock picks can vary wildly depending on who is doing the analysis ultimately, the investor believes that their selections are, for some reason, undervalued by the market. This approach favors a navigator’s mentality rather than that of a prognosticator. Navigators attempt to manage choppy waters by making decisions completely controlled by the stock picker. If something goes wrong, the blame lies with your inability to consistently find value in the market. No investor will be right about every investment made but they should be right enough to outpace market averages over time. Like the prognosticator, the navigator also faces a difficult challenge and is likely to underperform the market if they cannot identify undervalued stocks.
So, which approach is best? From our perspective, the clear winner is the navigator’s approach using a bottom-up investment style with a focus on finding undervalued stocks. Our approach here at Investoristics is simple, but not easy as it calls for a great deal of research to identify undervalued stocks. Put simply, opportunities can be consistently found in a select group of stocks whose prices lag fundamental strength and earnings in the underlying securities. Ultimately, the stock’s price will follow earnings and fundamental strength for this highly focused portfolio. These stocks have characteristics indicative of future outperformance versus any index with a lower risk profile and this strategy should continue to perform well. To get more details on our portfolio management approach feel free to contact us through our website at your convenience.
