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A Disciplined Approach to Portfoilo Management
1. PORTFOLIO MANAGEMENT
A DISCIPLINED APPROACH TO PORTFOLIO MANAGEMENT
Christopher Financial Group LLC /161 Washington Street, Suite 225/Conshohocken PA 19428 (610)897-2698
2. Introduction
Are you disenchanted with more traditional investment methods, like
“buy and hold?” We have called this methodology “buy and hope” for
years. Even as creative as our society has become, it is still impossible to
pay our bills or live the kind of retirement you have dreamed about with
“piles of hope” as the steep bear markets of 2000 - 2002 and 2007 - 2008
have clearly demonstrated.
We believe there is a better way to invest over the long-term.
Technical Analysis has been around for over 100 years. One of the first
proponents of the methodology was Charles Dow, a founder and the first
editor of the Wall Street Journal. It has been well documented that
Charles Dow was a fundamentalist at heart, yet he appreciated
understanding the supply and demand relationship of a stock. Trend
Following Technical Analysis is an organized and logical way of
recording the supply and demand relationship of a stock.
Many people understand basic supply and demand; it is Economics 101.
We know why tomatoes are more expensive in the winter than in the
summer (let alone they don’t taste very good or have a very long shelf
life). The same forces that govern prices in the supermarket govern the
stock market. Ultimately, if there are more buyers than sellers the price
will move higher. If there are more sellers than buyers the price will
move lower. If buying and selling are equal the price will remain
unchanged. By charting this price action we can ascertain which market
force is stronger at the that point in time, supply or demand, and evaluate
it in regards to concurrent changes in market psychology.
Christopher Financial Group LLC /161 Washington Street, Suite 225/Conshohocken PA 19428 (610)897-2698
3. Basically, there are two types of securities’ analysis – fundamental and
technical. Fundamental analysis is that which most of us are familiar.
Normally, when you view an analyst on television or read comments
from an analyst in the media it is, more often than not, solely from the
viewpoint of fundamental analysis.
Fundamental analysis aims to answer the question of what to buy. It
studies the company’s balance sheet, evaluate the management team and
try to understand the quality of the company’s earnings.
Technical analysis aims to answer the question of when to buy and, just
as importantly, when to sell. Technical analysis focuses on finding the
trend of a chart and answers the following questions: Is it trending up or
trending down? Is the stock outperforming the broad market? How high
or low can the stock go?
Unfortunately, there are very few groups on Wall Street that can
effectively combine fundamental and technical analysis. In a sense,
they’re playing the piano with only one hand.
While that may be a way to play a simple melody, you can produce
much more harmonious music if you play the piano with both hands. In
fact, our game plan is grounded in this philosophy of combining
fundamental and technical analysis, or playing the piano with both
hands.
Knowing when to play offense and when to play defense can make all
the difference in meeting your goals, whatever they might be. History
continues to repeat itself with steep declines in both the market and
individual stocks.
The key is when you get on the investment train. If you got on the
investment train in 1929, it took you 25 years to get back to even. If you
Christopher Financial Group LLC /161 Washington Street, Suite 225/Conshohocken PA 19428 (610)897-2698
4. got on the investment train in 1973 it took you 7.6 years to get back to
even.
It is the same case for individual stocks. If you bought IBM in 1987 and
rode it down, it took you 10 years to recover those losses. If you bought
Cisco Systems (CSCO) at its high of 82, you have yet to regain the lost
value, even after many years. Maybe you started investing in 1998 and
find yourself right where you started after riding one heck of a roller
coaster ride. After the market causality of 2008, how long will it take
you to get back to even? 7.6 years? 13 years? 25 years? Can you afford
to go through another bear market?
Buy and Hold vs. Trend Following
Despite failing investors during the past decade, Buy and Hold is the
most popular investment strategy today. Why? Because it takes little or
no work for the investor that uses outside managers, except to set an
allocation and forget it. The underlying managers that a “buy and hold”
investor might allocate to generally come in two styles: value and
growth.
The Value Investor seeks to gain by buying securities whose shares
appear underpriced by some form of fundamental analysis during times
of stress or by buying companies that have experienced problems with
the hope that these low valuations at which they purchased these
securities will rise to a more reasonable, higher valuation level. To be a
successful value investor, one must be able to block out market
movements and concentrate purely on the valuation of the securities or
markets on which that investor is focused. It’s hard work and requires
significant analytical abilities. It also requires an ability to buy when
others are not and then to wait, often significant periods of time, for the
value you see to get unlocked. During Bear Markets, this strategy tends
to generate negative returns and may outperform late in market phases.
Christopher Financial Group LLC /161 Washington Street, Suite 225/Conshohocken PA 19428 (610)897-2698
5. The Growth Investor, by contrast, attempts to ride a wave of improving
fundamentals and strength in a stock or markets to profits. They are all
about profits, new products and innovation. It is hard work to be a
growth investor as it requires constant monitoring of positions and the
discipline to follow strict buy and sell rules. During Bear Markets,
growth investors tend to lose more than value investors. They are often
some of the better performing managers during early phases of a new
Bull Market.
We believe in a different philosophy. In contrast to these two primarily
“buy and hold” investment strategies, we utilize a system known as
Trend Following and Technical analysis which is the core of all of our
investment strategies. Trend following strategies don’t try to predict
market or stock movements, instead they are designed to capitalize
on the market’s movements wherever or whenever they occur. Trend
followers respond to what is happening rather than anticipating what
might happen.
Trend followers are pro-active and take responsibility for their decisions.
They implement a strategy designed to let their winners ride as long as
the trend continues. They are quick to cut their losses and move on to the
next investment opportunity.
Christopher Financial Group LLC /161 Washington Street, Suite 225/Conshohocken PA 19428 (610)897-2698
6. So what is a trend?
A trend is a strong, sustained move that can last from several days to a
number of years. Typically a trend is something we see every day that
translates to continuing price move in the stock markets. An example
would be the rising dominance of a country or region of the world that
translates into a long and sustained upward move in stocks from that
country.
In the above diagram, you can see that the goal of the trend follower is
to let a new trend develop and then invest with that trend. The trend
follower then holds that position until there is a reversal. Trend
following is based on the premise that there is always a trend taking
shape somewhere in the market. The trend can lead to a strong move
higher (or lower) in price. If the investor can identify the trend and jump
on board, they potentially capitalize on the opportunity.
Christopher Financial Group LLC /161 Washington Street, Suite 225/Conshohocken PA 19428 (610)897-2698
7. The key is being able to identify the trend.
The smart trend follower does not invest at the exact bottom because
he/she wants confirmation that a turn (reversal) has occurred. Likewise
the trend follower will generally not sell at the exact top (which is more
easily identified after the fact). They sell after a clearly identified change
in trend (reversal). Therefore, the trend follower is usually able to
capture the “meat” of the trend.
How do you recognize a trend?
The trend follower utilizes a myriad of indicators to determine a new
trend has begun or that a trend has ended. The indicators that we use are
propriety, but the most commonly used example of a trend following
indicator is the simple moving average cross. With this indicator, when
price either crosses up (or down) through the simple moving average of
past stock price data, a buy (or sell) signal is generated.
How should risk be managed?
In today’s world managing portfolio risk is equally as important as
determining the market trend. However, risk management tends to be
one of the most neglected aspects of sound portfolio management.
Many investment managers assume (e.g., buy and hold) that if they are
fully diversified in the number of positions and not too concentrated in
any one sector that this is appropriate risk management.
However, it is not!
As we have seen in recent bear market declines, when the market starts
to go down all asset classes can correlate and this can lead to and
everything going down together. At this point, proper diversification
means nothing and preservation of capital becomes paramount.
Christopher Financial Group LLC /161 Washington Street, Suite 225/Conshohocken PA 19428 (610)897-2698
8. This is why we utilize stop losses on every portfolio holding without an
offsetting position. An offsetting position is a long or short position that
total zeros another position’s market risk.
The Technical process
Christopher Financial Group LLC /161 Washington Street, Suite 225/Conshohocken PA 19428 (610)897-2698
9. Conclusion
I hope we have made a strong case why Trend Following and Technical
Analysis is an appropriate strategy to implement in today’s markets.
Trend following is nothing more than a discipline that allows the
investor to take a great deal of the discretion out of investment process.
Tom formed Christopher Financial Group in 2009 out of the need to
provide clients more efficient management of their portfolio and an
exceptional service and support experience.
Thomas V Christopher is Founder and President of Christopher
Financial Group, Founder/CEO Independent Financial Network,
Investment Executive/Branch Manager with RJFS and has been
designing and running portfolios for over twelve years. Thomas is a
Certified Estate Planner (CEP®), Accredited Wealth Management
Advisor (AWMA®) as well as a Chartered Retirement Planning
Counselor (CRPC®).
If you would like to set up a meeting or to talk to Tom,
Please Call (610)897-2698
There is no assurance that technical analysis or any strategy will ultimately be successful or protect against loss.
Technical analysis is based on the study of the historical price movements and past trend patterns. There are also no
assurances that movements or trends can or will be duplicated in the future. Past performance may not be indicative
of future results. Every investor’s situation is unique and you should consider your investment goals, risk tolerance
and time horizon before making any investment. The information contained in this report does not purport to be a
complete description of the securities, markets, or developments referred to in this material. The information has
been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate
or complete. Any information is not a complete summary or statement of all available date necessary for market an
investment decision and does not constitute a recommendation. Any opinions are those of Thomas V Christopher
and not necessarily those of RJFS or Raymond James. Raymond James is not affiliated with Christopher Financial
Group or Tower Financial. Securities offered through Raymond James Financial Services, Inc., Member
FINRA/SIPC.
Christopher Financial Group LLC /161 Washington Street, Suite 225/Conshohocken PA 19428 (610)897-2698