The Bluegrass Portfolio Investment Approach
One thing the market’s not short of is investing philosophies. Of course, most of them are incomplete at best, and downright destructive at worst - but that doesn’t mean they’re not out there though, guiding investors down the wrong path. That’s not even the ironic aspect of investment theories though.
No, as if an abundance of unhelpful strategies wasn’t bad enough for the average investor, the theories that are actually helpful - and profitable - are largely underfollowed (if followed at all).
BluegrassPortfolio.com was founded on the idea of employing investment strategies that have proven themselves as effective and manageable… and that ‘proven’ is the part of the equation that sets our approach apart from 99% of the investment advice industry.
Bluntly, the average so-called ‘pundit’ spewing advice on the web or on TV assumes everything, and verifies nothing. The problem is, many of the generally accepted assumptions about the way the market works are stunningly misleading if not completely wrong, even though the experts talk as if they’re infallible. Conversely, Bluegrass Portfolio Management assumes nothing, and verifies everything. The result is a core set of powerful strategies based on decades’ worth of economic and market data. And, it works.
While we time the market and pick stocks with several criteria in mind, there are only three core themes at the heart of the way we navigate the market. You’ll easily see these three themes over and over again in our commentary, as we believe firmly in transparency and education. Moreover, we firmly believe in a disciplined approach that (1) makes sense to our readers, and (2) is founded on tactics that actually work…. As opposed to the dozens that don’t.
With that in mind, here are detailed explanations of our three core approaches.
When the average investor is asked how differently the average top sector and the bottom sector perform in any given year, the typical; answer is 10%. That’s not even close though. On average, the best-performing sector outperforms the worst-performing sector by an average of 30% to 40% for any given twelve-month period.
Translation? It pays to focus on the strong areas, and avoid the weak ones.
The follow-up is “But you can’t know which sectors are going to lead or lag, so choosing a leader or laggard is a pointless effort.” Guess what….. it’s far more possible to spot emerging sector leaders than most investors would ever believe.
While fundamentals play a key role in our stock and sector picks, a technical approach allows us to effectively spot budding sectors - and waning ones - at the early stages of these new trends. Our percent-change charts make these trend visually clear, while our multi-time-frame sector and industry performance ranks quantify how these groups are starting to fall in our out of favor. And, it’s not a complicated process.
2. Use data in the appropriate timeframe
Data can be powerful when used correctly, or it can be dangerous when used incorrectly. Unfortunately, most investors use it incorrectly…. in the wrong timeframe.
Be honest - have you ever decided to make buy or sell a stock based on the initial reaction to a monthly piece of economic data, only to see that initial trend completely reverse a few days later? Folks, monthly data is for multi-month decisions; daily data is for daily decisions (and there’s actually very little daily data).
The fact is, in the long run, the market does reflect long-term economic and market data. In the short run though, reacting and over-reacting to long-term data can whittle away at a portfolio’s value.
If that hits a little too close to home, it’s not your fault…. the media puts a “right here, right now, act today” spin on everything, even when it shouldn’t. Worse, the media never looks at the long-term trend of economic data. Why? Though it would be of great use to investors to do so, it makes for terrible television.
In response to the media’s misuse of information, Bluegrass Portfolio makes long-term bull/bear decisions using months’ worth of economic and market data, rather than just days’ worth.
To put it in more scientific terms, we don’t use primary trend data to make secondary or tertiary trend decisions (and vice versa)….. even though the media suggests you should.
The benefit is simple - we aren’t shaken out of trends we want to be in, or lured into trends we don’t want to be in. That short-term volatility can wreck a portfolio, and in the end (ironically) effects little net change. Rather than be tricked or trapped, our long-term monthly charts automatically impose the long-term discipline we need to make the right long-term decision…. leaving the short-term whiplash for the amateurs.
3. Acknowledge and utilize, rather than deny or ignore, the market’s short-term movement
While our long-term approach guided by long-term data is one of our cornerstones, it would be foolish to not take advantage of short-term highs or lows when they occur, if it’s to our advantage to do so. Indeed, though the market only gains an average of abut 10% per year, the total net ‘travel’ (total up and down movement) for any given twelve month period is generally on the order of 30% - that’s a lot of opportunity to entirely let go, even if it means just ‘lightening up’ at highs, and ‘buying in’ at lows.
Like the counter-argument against sector rotation, the counter-argument against market timing is simply that it can’t be done successfully and consistently.
Our response? Respectfully, it can be done…. not with perfection, but well enough to significantly enhance your total returns.
The key isn’t a complicated ‘black box’ approach though. The key is a timing system that is proven over time (our techniques are built on years’ worth of data), and - and this is the important aspect - can actually be replicated in the future.
See, lots of black-box timing systems are out there. While the back-tests look good, that ‘replication in the future’ is the stumbling block. Our timing approach is transparently based on breadth and depth…. two of the market’s data sets that will behave and react the same in the future just as they have for decades now. As such, we’re comfortable using and sharing our tactics with our followers.
Bottom line - while we’re long-termers at heart, it would be foolish to not take advantage of short-term (secondary and tertiary) trends when they present themselves if they will enhance our long-term results.
New ideas? Probably. It’s certainly not the kind of thing you’ll hear on TV or read in a financial magazine. It’s likely not even the kind of ideas you’ll read about in a comprehensive investing book. Indeed, these core strategies somewhat fly in the face of conventional strategies. That’s too bad, too, as these three approaches are founded on proven and verifiable strategies, where most aren’t.
On the flipside, the fewer the number of investors that use these tactics, the more effective they will be for you.
In any case, you’re invited to follow our ongoing research and commentary to see how we apply these core principles to real stock picks and portfolios. The site offers most of the appropriate data and research (some on a delayed basis), but the e-mail newsletter serves up all the information you need to follow our approach, and hopefully, incorporate it into your own.
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