This newsletter was written on June 8, 2015. By the time you are reading this newsletter, I can confidently predict that the date of writing will be in the past and you will have travelled forward in time at the same rate as everyone else on earth. If, however, you were hurtling through space faster than earth, time would apparently slow down.
Why would I start an investment newsletter discussing physics and relativity? The reason is that some of this science can be used when creating an investment portfolio. According to Einstein, relativity was relatively easy. There are three components but for this article we’ll focus on the first step which states that "there is no "absolute" frame of reference. Every time you measure an object's velocity, or its momentum, or how it experiences time, it's always in relation to something else".
In order for a stock to be added into our equity strategies, it needs to be going up faster than most other stocks in the stock market. There are other factors that we consider as well but we always want to buy stocks that are going up faster than their peers. We do this because, in physics, a body in motion will remain in motion unless acted upon by an external and opposite force. As long as we continue to buy the stocks that are accelerating on a relative basis, we can increase the likelihood that we are positioning into companies whose shares are currently moving higher. If that changes, we sell and re-position into companies that are going up faster than most other stocks.
Would it make sense to buy stocks if you believed that they were going to drop in price? No, I didn’t think so either. When deciding whether or not to buy a stock, we also look at the historical performance relative to other investment vehicles such as cash. If you held a large amount of cash in 2008 and early 2009 while the market declined approximately 50%, would you be happy or sad? Sometimes holding cash and protecting the value of your investments is better than investing and watching it drop. On a relative basis, sometimes cash looks better than stocks. This approach also helps to protect the value of portfolios while ensuring that we will have cash on hand to step in and buy some bargains when the market becomes cheap.
Using a relative approach to investing is quite unique in that we are measuring against every other stock in the market and measuring against other asset classes. As of the close of business today, the Canadian stock market (S&P/TSX) has closed lower than where it was at this point last year. We have been building cash recently and, for the reasons given above, that feels like a pretty good decision.
To find out how we are positioning our client portfolios for the current economic conditions or to continue receiving our newsletter, check out www.phillipsfortress.com