The following is adapted from “Invest Like the Best”.
Most people would agree that one of the best ways to get better at something is by learning from an expert. Investing is no exception. In fact, studying the mindsets and strategies of top investors can jump-start your own investment success and save you from expensive mistakes.
If you examine how the best investors think, you will see they do everything possible to take the guesswork out of their investment decisions. They rely on mathematical models—or investment systems—as opposed to “intuition” or “instinct.” That’s because investing involves multiple decisions over a period of years and decades. In practice, without using technology and systems, it is doubtful that optimal execution is even possible.
Don’t be put off if the idea of using mathematical models and technology sounds challenging. Once you learn the process, you will find that your investments yield more consistent results, and you will be able to measure your success and adapt your strategy for continual improvement.
Use Data to Increase Consistency and Measure Results
To truly succeed as an investor, you need a way to systematically gather and review data so you can determine what works and what doesn’t. This will help you avoid making irrational decisions about your investments that may lead to costly mistakes. So how can you do this? The best way—and the way that top investors use—is to use systems to review your data. Using a system provides clarity, transparency, and objectivity. Just as importantly, systems are also fully under your control.
Systems also save you from becoming a victim of someone else’s misguided opinion or recommendation. It may be a relief to pass the burden of research and choice on to someone else, but how will you do the required due diligence? You have no way of knowing how that person formed the opinion, so it needs at least as much analysis and scrutiny as you would bring to your own thinking. It might even need greater effort just to ensure any other party will act in your best interest.
There are two systems you can use that help you take the guesswork out of investing. Each one allows you to use your data to make informed and rational decisions about your investment strategies. Which one you choose is completely up to you; you can even use both of them together and make them more effective than they would be individually. Let’s look at each one in detail, so you can decide which system you might want to try.
Investment System #1: The Simple Trend System
The first system is called The Simple Trend System. It’s aptly named: it takes just one sentence to describe, and it involves no more than high school math, but it’s astonishingly effective.
Only three main asset classes are considered for this system. They are US Stocks, Treasury Bonds, and Gold. The system’s simple execution rule is “Invest equally in whatever is going up (defined as 3 months SMA > 10 months SMA). The SMA, or simple moving average, is just the average price over the period chosen. So, an uptrend is defined by whether the average three-month price is higher than the average ten-month price.
The Simple Trend System outperforms all the other individual asset classes, as well as the simple buy-and-hold allocation. Yet, it just takes around five minutes a month to calculate and execute. Not only that, but it’s been tested for 40 years, and it’s been shown that the return is higher relative to each of the asset classes alone, and average annualized returns are over 3 percent above an equal weight passive allocation to the three asset classes combined. Over time, 3 percent a year makes a big difference!
I do believe several improvements could be made to this system. Nevertheless, the data makes a clear case that even a simple one-line-of-math system can provide a credible allocation strategy with visible and consistent results.
Investment System #2: The Hedgeye Cycle System
The Hedgeye Cycle System is more involved than the Simple Trend System, and in fact, builds on the Simple Trend System in the three asset classes discussed. If you learn and understand a few concepts, it becomes an accessible and valuable investment aid. It is essentially an institutional level of work and service but is also available in some form to everyone.
The concepts are intuitively easy to understand, and all the data and reports are entirely rules-based. This makes the reports and information completely generated by facts and software, and judgment-free. This software is also exceptionally powerful: as an example, just by using Hedgeye’s software system applied to economic data, I was able to see a clear and important market opportunity months in advance.
Using a software system like the Hedgeye Cycle System can help you make sound investment decisions and increase your investing success in a myriad of ways. Remember, part of the power of these systems is they are free of human judgment and decision-making and can use far more valuable information than anyone could process on their own.
Additionally, they allow decisions to be back-tested over multi-decade periods. They can assist with execution signals and portfolio management and can calculate the best allocation for different economic environments. In short, they are one of the best ways to take the guesswork out of investing.
Take Advantage of a System to Succeed at the Game
Systems investing is so effective that some of the most successful investors use them for all their investment decisions. And as you can see, you have options when it comes to which system you use. The two systems presented here can help you use facts and data—not just “intuition”—to make sure the strategies you are using are effective.
You can also combine the two systems for even more powerful results. The choice is yours: what’s important is finding and using a system that will give you consistent results, just like the top investors do.
For more advice on how to take the guesswork out of investing, you can find Invest Like the Best on Amazon. https://geni.us/InvestLiketheBest
Chris Belchamber holds a Math MA from Oxford University. He has been an investment professional since 1984. His first investment book was published by Credit Suisse First Boston in 1988. He was recruited by JPMorgan in 1989 to run their UK Sterling Bond Sales and Trading and then focused on Proprietary Trading, where he was promoted to Managing Director. He presented JPMorgan’s UK Bond Market’s development paper, endorsed by Margeret Thatcher, to the Bank of England in 1989. In 2003, he started his RIA in the US. He enjoys music, reading, writing, and almost any sport, and is currently an active golfer.
Disclaimer: The opinions expressed in this commentary are those of the author. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual and nothing contained herein should be construed as legal or tax advice. Before implementing any strategies, you need to seek proper financial, legal and accounting counsel.