We discussed about passive investing or index investing in our previous posting. The idea is to stay invested with the index. Why? Many people have tried to beat the index, such as S&P 500, but they couldn’t.
How can we beat the index? Some people use market timing to buy low and sell high. Many end-up by buying high and selling low. Some other people use stock picks, just like us, to buy the best stocks and hope that it will beat the index.
There is a strategy called Relative Strength Investing. We read about this strategy in Gerald Appel’s book, Technical Analysis: Power Tools for Active Investors. For those who don’t know, Gerald Appel is the creator of technical indicator MACD (Moving Average Convergence Divergence). We are using MACD extensively in our trading activities.
How does Relative Strength Investing work? It works like betting in a race track. First, we start betting on any horses. After first turn, we change our bet to the horse leading that time. If our horse is still leading, then we hold our bet. After second turn, we change our bet again to the leading horse. The idea is that we always stay with the leader. Gerald suggested that we use no-load mutual funds to apply this strategy. The basic principles are:
- Identify the leaders
- Buy the leaders
- Hold the leaders as long as they lead.
- When the leaders slow down, sell them and buy new leaders.
You can read the detail of this strategy in his book. He also shows how the performance of the strategy compared to S&P 500.
