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Discover The Amazing Power Of Point & Figure Charting
The Secret To Really Good Investment Performance
The secret to really good investment performance is extremely simple yet it escapes most investors, professional as well as individual. The secret, do not hold poorly performing stocks. It is an inescapable fact that poor investment performance is the result of holding bad stocks, stocks that perform poorly.
This explanation for poor investment results has completely escaped the academic community and most investors. This explanation does not require higher math or advanced statistical arguments to verify its truth. This is not a theoretical proposition because it proceeds from a simple logical argument. How can it be otherwise?
How does the long-term investor determine if a stock is performing poorly or not? The performance of the stock should be measured and compared to some benchmark that defines acceptable performance. This benchmark should be objective and readily defined. It should be based on long-term investment performance, not short-term market noise.
The most effective and easy way to record and evaluate investment performance is with a long-term point and figure chart of relative strength (LTPFRS). The P&F methodology incorporates a filter on the performance data that removes the short-term noise and lets the long-term trend of performance show through. The ratios that are plotted on the P&F chart show the performance of the stock relative to a major market index, usually the S&P 500.
The P&F methodology is focused on straight forward decision rules that define unacceptable investment performance. The most common rule is that acceptable performance requires that the LTPFRS chart remain above a 45-degree line that slopes upward to the right. This meets the requirement that the decision rule be simple and objective.
Many, if not most investors buy stocks that they believe are too cheap and under-priced. In other words, they tend to buy stocks that are going down, i.e. performing poorly. They buy without regard to the performance of the stock and just hope for the best. Many times the poor performance exhibited by the stock continues and the investment suffers. Hope does not appear to be a very effective portfolio management strategy.
Investors should measure and evaluate the performance of their stocks on a continuous basis. The decision to buy the stock is usually based on expectations that it will outperform the market. The simple process of recording and evaluating the performance of every stock will quickly show those stocks whose poor performance invalidates the expectations that led to the purchase. It should not matter how those expectations of excess returns were arrived at. The stock either performs or it doesn’t, and that is the true test that investors should apply.
Experience shows that poor performance by a stock is hardly ever accidental. Persistently poor performance in the market can be traced back to some problem within the company. A belief that the long-term relative performance of a stock price does not truly reflect the fundamentals of the company is highly questionable. Good investment performance by a stock is not accidental, poor performance isn’t accidental either.
Once the investor becomes accustomed to the performance measurement methodology, the good stocks will stand out clearly from the bad stocks. This ability to recognize bad stocks for what they really are, allows the portfolio manager to keep the portfolio positioned in the stocks with good performance. This produces a continuous and almost automatic process of adaptation to fundamental changes that are affecting the performance of companies. Avoiding the bad stocks and sticking with the good stocks cannot fail to produce good performance.
Ben Graham called the stock market a
“voting machine.”
To be a successful investor, you need to measure how the votes are being cast.
A long-term point and figure chart of relative performance is a very effective way to evaluate the voting.