At first, you might not think that relative strength and philosophy are related in any way. But they are, because every strategy is based on some philosophy of the market. Different philosophies lead to different strategies. We like relative strength because it is simple and straightforward.
Of course, there are other strategies, including some that are quite complementary to relative strength. A nice encapsulation of philosophy leading to strategy appeared on The Bloodhound System blog. A couple of excerpts from the article are instructive. The first is a quote from Forbes columnist Rick Ferri in a Morningstar interview:
Strategy comes from philosophy. If you don’t have a philosophy, you can develop a strategy, but it’s only going to blow apart the next time it doesn’t work for a month or two. And you are going to go onto another strategy, and that’s the worst thing you can do.
This is very true. Over my career, we’ve seen many investors careen from strategy to strategy, never sticking long enough with any of them to pursue success. The author of the blog piece, Bill Moore, we think really cuts to the core of why a deeply held philosophy is so important to help achieve success. Having some kind of belief system is necessary to have conviction. With conviction comes discipline—and we believe discipline is the key to everything.
…what’s really important is that you have a philosophy that makes sense to you and that you believe in and that you then create a strategy which you would execute with discipline. As much as pundits might dogmatically espouse one investing philosophy or another making it seem like it’s their way or the highway there are thousands of investment philosophies and in turn strategies. The reason multiple philosophies can work out well is that inherent in having a philosophy, or belief system, is that you have conviction in it. We believe that kind of discipline, not so much the philosophy itself, is the key to an investment plan.
This article was written by Dorsey, Wright and Associates, Inc., and provided to you by Wells Fargo Advisors and Arthur Levin, Financial Advisor in Beaufort, SC, 211 Scott Street, (843) 524-1114. You cannot directly invest in an index. Wells Fargo Advisors did not assist in the preparation of this article, and its accuracy and completeness are not guaranteed. Relative Strength is a measure of price trends that indicates how a stock is performing relative to other stocks in its industry. The opinions expressed in this report are those of Dorsey Wright and are not necessarily those of Wells Fargo Advisors or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE. Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. CAR 0415-00747.