Investment strategies are like diets. People keep switching them, trying to find the Holy Grail. Often it is all about following the latest trend.
Yet, like with diets, applying advanced investing techniques includes 2 key factors: personalization and consistency. You have to discover what suits your style and commit to it.
This guide will give you an outlook on advanced investing techniques, but if you want to enrich your knowledge you can check our overview of the Best Investment Management Courses.
Making Investments Around Market Cycles
It is no secret that financial markets move in cycles. Like the 4 seasons of the year, markets emerge, grow, mature and whither.
Timing the market is attempting to take advantage of the perceived market moves. By applying fundamental and technical analysis it is possible to outperform simple indexing strategy.
The 4 stages of a market cycle are:
- Accumulation: Characterized by pessimistic sentiment, accumulation starts at or around the bottom of the bearish market. At this point, the retail market has capitulated and the smart money begins to buy and accumulate large positions. The media is overwhelmingly bearish, but the market is not making lower lows.
According to legendary fund manager Peter Lynch, this is the time when people are not talking about stocks.
- Markup: The market has broken out of the bottoming range. Institutions and informed investors (like you) are recognizing this and doubling down on their best ideas. Charts start showing clear higher highs and higher lows. Eventually, trends reach full market participation — even the minimum wage employees are talking about stocks.
According to Lynch, this phase starts when people start asking his advice on which stocks to buy. You might ask: “Should I invest in Advanced Micro Devices, American Airlines, Alibaba, Citigroup, or Qualcomm?”
- Distribution: This is the top of the market. You will notice that the sentiment is extremely bullish. Smart money recognizes this and starts selling to the greedy market participants. Supply overwhelms the demand and the market structure starts breaking — technically characterized as price pushes through key moving averages (50-day, 200-day) and reversal patterns like double tops or head & shoulders.
The volume will be very high. According to Lynch, at this point, common people will offer him advice on which stocks he should buy.
- Markdown: The market starts to turn down sharply. Investors who held for too long along with those who bought near the top are in panic mode. Their selling drives the market down while the smart money is waiting on the sidelines. This phase can occur on catalyst news, like the Lehman Brothers collapse in 2008.
Wyckoff Market Cycle Source: Stockcharts
Fundamental analysis means studying every aspect of the company to unearth the true value. In less appealing words, this means digging through the financial statements or even calling the investor relations department.
Although it might sound nerdy and academic, fundamental analysis is more widespread than you might expect. A favorite parallel is betting.
Few key concepts on the fundamental analysis:
- Financial statements: Analyzing the balance sheet or profit and loss statement is a good starting point. It will give you an overview of the company, addressing the growth, profitability and fiscal solidity. Using the method like discounted cash flow (DCF) you will come to a rough accounting value of the company.
- Intrinsic values: Who are the owners? Who are the executives? What is a company’s culture? These are questions that will help you understand the direction of the company.
- External environment: No company is an island — it operates in a network of businesses, consumers and public entities. You will check these factors, competitors, cultural trends, geo-political issues; it all contributes to understanding the future potential of the company.
By combining these concepts you’ll answer one of the most common questions in finance: “Is a stock, at its current price, cheap or expensive?”
You can expand your knowledge by signing up for a course on Advanced Value Investing at Columbia Business School.
Technical analysis (TA) is a methodology of price forecasting based on historical data — price and volume. The basic premise of TA is that there are identifiable chart patterns that tend to repeat over time.
Fundamental analysts often criticize TA and label it as pseudoscience, however, some patterns work well enough to generate actionable ideas.
Since its modest beginnings in the late 1800s, TA grew into an impressive collection of concepts, yet, the 3 fundamental ones that you should know are
- Support and resistance (S&R): Levels on the chart where price struggles to breakthrough. When a price falls to a certain level but cannot proceed further, traders might say that it has found the support. [Insert a line.]
These levels are pivotal points where there are large pending orders. For example, when an institutional investor decides to buy at a certain level, that position might be large enough to absorb and completely halt the selling pressure.
- Fibonacci retracement (Fib): Based on the Fibonacci sequence, the levels used in finance are 0, 23.6, 38.2, 50, 61.7 and 100. Fibonacci retracement is drawn between 2 extremes and it will identify the potential levels of support and resistance in the range. Although 50 is not a part of the sequence, it is a dividing point between having a bullish or bearish bias.
- Moving averages (MA): Price derivation that is used to indicate the overall trend. The most common periods used are 50-day and 200-day. For example, the price above 50-day MA but below 200-day MA would show a pullback in a bearish trend.
SPY chart with moving averages and Fibonacci levels, Screenshot from Benzinga Pro 3/1/2021
Tactical Asset Allocation
Tactical asset allocation (TAA) is an advanced investing strategy that focuses on portfolio shifting to maximize portfolio returns. TAA is focusing on the balance between the 3 primary asset classes (stocks, bonds, cash) while keeping the investment selection in the 2nd place.
Depending on your risk aversion, your initial plan can be 60% stocks, 35% bonds and 5% cash. Yet, as you start recognizing the market maturity (late Markup phase) you might reduce the exposure to stocks and end up with 45% stocks, 45% bonds and 10% cash. At the very end of the market cycle, you might be completely in bonds and cash. Now the cycle restarts, and you can get overweight in stocks at cheap valuations.
Although on the institutional level TAA might involve complicated quantitative strategies, as a retail investor you can keep it simple. Keeping an eye on the market cycles and doing a simple TAA can have a positive outcome on your absolute returns.
Investments into any asset class excluding stocks, bonds or cash are alternative investments. They are gaining in popularity in the low-interest-rate environment.
- Real estate: This is the most obvious choice for an individual. Operating real estate is a lot of work but you can mitigate this by investing in a real estate investment trust (REIT).
- Commodities: These are the oldest way of storing wealth. Commodities are a natural hedge against inflation and offer a high potential return. Yet, the main drawback is that commodities do not carry any yield.
- Private equity: Investments into companies that are not publicly traded. You will often invest in that type of business if you have expertise that can be used to enhance the company’s operations.
- Hedge funds: Hard to invest into (unless you’re an accredited investor), but you can invest in publicly traded companies that run hedge funds like Blackstone Group or BlackRock.
However, in recent times you could see innovative alternative investments:
Collective items: As a modern variant you might see Nike sneakers, Lego sets or Pokémon cards. These offer potentially high returns but have drawdowns like storage costs, liquidity and the prerequired expertise.
Online businesses: Although they offer potentially high ROI, they need significant expertise to run properly. Nonetheless, projects like EF Capital are solving this problem by turning online businesses into high-yield passive income. As online businesses mature you might see them become the next hot asset class.
When to Analyze Existing Investments
After expanding your knowledge, you might start to overthink your investments. If finance is not your main career, be ready to resist this urge. Overthinking may lead you down the rabbit hole of diminishing returns, where you will spend countless hours to squeeze a few more points out of the market.
A good rule of the thumb would be to check on your investments quarterly. By then you will have data on earnings reports, central bank rates and plenty of other news events. If a certain investment is not performing as expected, be ready to scale out and allocate your money to better opportunities.
Alternatively, you can use the services of companies like HashCash that bring you advanced investment and wealth management solutions.
Synthesizing an Investment Model
Advanced Investing Techniques Model Source (author’s work)
Advanced investing techniques offer you an opportunity to create strong alpha returns.
No matter what your profession is, your particular set of skills might give you a big advantage over a finance professional since the latest developments in your industry will reach you much faster.
If you want to learn more, sign up for the Advanced Investing Topics webinar, premiering on April 21.
By understanding the cyclical nature of the market, fundamental analysis, technical analysis, tactical asset allocation and alternative investments, you can develop a framework that will work in any market condition. That time might be one of the best investments you will make.
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