February 14, 2014
By Steve Blumenthal
“The investor’s chief problem – and even his worst enemy – is likely to be himself.”
– Benjamin Graham
Just what are tactical investment strategies and where might they fit into your clients’ portfolios?
A few months ago, I was on Bloomberg Radio with Pimm Fox and Carol Massar. Their program is called Taking Stock. It is a fun and diverse show and both Pimm and Carol have a friendly and inquisitive way of interviewing their guests.
Pimm’s notes tell him I’m a tactical investment specialist. The show begins and with a curious look on his face, he asks, “Tactical? Steve, what in the world is that?”
If you google tactical, you find opaque answers and likely remain confused; yet to a quant geek like me, living in the space for more than 30 years, it is a second language. With Pimm’s question on my mind and knowing he is not alone in the land of tactical confusion, I sought out to create a white paper that defines exactly what Tactical Investment Strategies are and further explain the role they might play within your clients’ total investment portfolios.
In short: Tactical Investment Strategies are investment strategies that seek to identify and profit from price momentum. Some combine price momentum with broad economic factors such as interest rates and yield spreads. Others combine price momentum with fundamental factors such as P/E and price-to-book and earnings growth.
They respond proactively to market movements, seeking to take advantage of rising asset classes and avoiding falling ones. Tactical Investment Strategies analyze data over shorter time horizons. While the goal, of course, is to generate return, they may also work within a strategic framework to stabilize a client’s overall portfolio.
It is important to know that price momentum has excellent long-term reliability. It is well studied and supported by hundreds of academic papers. I cite a number of studies in the white paper.
Price momentum-based Tactical Investment Strategies attempt to lock onto major leadership trends, allowing profits to run, and losses to be cut short – it is the losses to be cut short part that adds a diversifying element within your longer-term strategic investment plan.
Also, it is important to note that price momentum is rooted deep in the psychology of investors. It comes from investor behaviors like herding, anchoring, loss aversion, overconfidence, fear, and greed. It is these human behavior tendencies that create price momentum. The very best tactical managers are able to stick to their investment processes in a disciplined and systematic way. That in itself is a major contributor to a strategy’s success. As Ben Graham identified many years ago, “The investor’s chief problem – and even his worst enemy – is likely to be himself.”
So why tactical and why now?
- The markets are richly priced (priced about 20% higher than 50 year PE averages as measured by median PE).
- At the core, I believe we remain in an aged, overbought and overvalued cyclical bull market.
- The backdrop of too much debt, unmanageable entitlements, an unfavorable tax environment and increased regulation are simply not good drivers of forward returns. Especially at a point in time when the median PE (Ned Davis Research calculation based on trailing 12-month earnings) is at 20.9 vs. a 50 year average of 16.
- Risk is high and the market is dependent on the Fed’s currency creation machine and a heroic, yet unnatural, market participation (manipulation). A powerful force – for now.
- Bear markets happen and we are due for another within the next few years.
- The average bear market correction is approximately -40%.
- Tactical Investment Strategies can add valuable risk diversification to your clients’ portfolios.
Here is the link to Advisor Central, our newly created leading source for news and views on the markets, investing, and building diversified, tactical portfolios. This is where you can gain access to the white paper: Understanding Tactical Investment Strategies. I believe you will find it a quick and easy read and I hope you find it an important tool for you to use with your clients.
For further discussion on market valuations and risk, click here for recent commentary on:
- Present Valuations and Overvalued and Undervalued Market Price Targets
- Peak Profit Margins – Profits Do Mean Revert
- Tight Policy = Economic Contraction
- Bears and Bulls Within Economic Cycles
- Cyclical Bull Market Remains – Watch These Two Charts for a Change in Trend
- Market Cycle Composite Chart – Interesting Look at the Four Year Presidential Cycle
- My Two Cents: Get Ready to Sell in 2014 (Then Buy the Dip)
- Strategic Investment Plan – Stick to Your Plan
Wishing you a very Happy Valentine’s Day
I was in Denver this week on business and now up in Beaver Creek for the long weekend. Susan is with me as are our combined five boys. Oh, the loads of ski equipment. Thankfully, they are strong enough to pull all their stuff! Tomorrow is a ski day with David Barry from Trust Company of America followed by dinner with Joe Sacchetti and his partners at Wolverine. Trading technology is advancing quickly in our business and these are two very bright individuals. I’m really looking forward to our discussions.
Here is a toast to you and the ones you love most on this Valentine’s Day. Seize the day! Even if this note finds you challenged by yet another northeast snowstorm, spring can’t come soon enough.
With kind regards,
Steve
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
Suburban Philadelphia
1000 Continental Drive, Suite 570
King of Prussia, PA 19406
steve@cmgwealth.net
610-989-9090 Phone
610-989-9092 Fax
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