There was a time when many investors stopped paying attention to the market, choosing to ignore everything. This period was from 1966 to 1982, when the market's return was zero (not including dividends). By the mid-70s, less than 50% of Americans thought stocks were a good investment. Over the next three decades, this all changed.
Focused Investing is a way of investing where you don't try to own the whole market, like the S&P500. Instead, the goal is to match a benchmark with less risk or outperform the benchmark by holding companies that have better than average earnings growth and reasonable prices.
The average mutual fund has over 100 holdings. Depending on your goals, an asset allocation strategy may be right for you or at least a portion of your portfolio. Key differences are highlighted below:
To deliver better than average returns (or alpha).
The goal is to deliver better than average returns using fundamental and technical analysis with active management. I know this was an overly complicated statement, but I promise to make this simple and easy to understand as we proceed.
We believe that by applying a disciplined investment process and investing in companies that meet our strict criteria, we can deliver alpha-generating performance over the long term.
Alpha is the difference between what an investor expects from an investment and what they actually receive. Put another way, it is value-added above and beyond the market return. We aim to achieve this by identifying undervalued companies based on their fundamentals, then buying them when their stock price falls below their intrinsic value.
When we find an undervalued stock, we dig deeper into the company's financials using fundamental analysis and quantitative techniques such as peer comparison and historical price trend analysis (technical analysis). This helps us understand if there are any issues with the company or if the market has mispriced it due to short-term factors like bad reporting, news, or short-term trends affecting its industry sector.
This approach has been created by academic research showing that identifying undervalued stocks can lead to higher returns than buying high-performing ones at their peak price point.
Active investing is a style of management that seeks to generate returns by selecting stocks that are believed to be undervalued and selling those that are overvalued.
We believe an active approach works best for focused investing because markets can shift quickly.
We employ three steps to determine what we hold:
Sector rotation is the movement of money invested in stocks from one industry to another as investors and traders anticipate the next stage of the economic cycle.
Sector rotation is a strategy employed by investors who believe that different industries will perform differently during various stages of an economy's business cycle.
The main idea behind sector rotation is that some market sectors tend to rise and fall together, while others tend to rise and fall independently. When one sector peaks, it may be time to move your money into another industry that has not yet peaked.
There are several reasons why we may choose to rotate among sectors:
A desire to capitalize on a specific growth trend (for example, healthcare stocks)
An expectation that a particular sector will falter (for example, retail stocks)
Fundamental analysis measures a security's intrinsic value by examining related economic and financial factors. Fundamental analysts study anything that can affect the security's value, from macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors like the effectiveness of the company's management, earnings, debt, margins, etc. The goal is to determine if the stock or bond price is currently undervalued or overvalued relative to its actual worth.
In other words, fundamental analysis focuses on analyzing a company's financial statements to determine whether an investment is worth making based on its future growth potential.
By contrast, technical analysis looks at past trends to predict future price movements.
This is where the hard work begins.
There is little doubt that combining the strengths of both strategies can help investors better understand the markets and gauge the direction in which their investments might be headed.
The problem with blending fundamental and technical analysis is that it's challenging to do well. Plenty of investors try to incorporate two strategies but end up using one or the other exclusively. There are some reasons why this happens:
They're not used to utilizing both methods, so they don't know how to blend them properly; or
They have a hard time reconciling what they see on each side of the market; or
They're not sure which side of the market is telling them what information about prices and trends; or
They don't trust one side more than another, so they don't know how much weight to give each side when making decisions about trades; or
They don't know how to weigh each side against the other to make an informed decision on whether or not a trade should be made based on historical data from either method alone.
You can be diversified by holding as little as 5 to 8 stocks. In our experience and academic research, you see a diminishing effect when you begin to go over twenty-two holdings.
Understanding what percentage to allocate to each depends on the holdings themselves and several other factors such as risk tolerance, your required rate of return, time horizon, and goals.
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The idea behind focused investing is that everyone has something they're good at and know well. If you have unique knowledge in an area — real estate or stocks — then why not use that knowledge to build wealth? If you own a business that operates like a fixed income source, you may want to be more aggressive with your investments. If your business operates more like a volatile stock, you will need a more conservative approach to investing (ideally).
You may want to consider focused investing if you value financial success in retirement and aren't getting the desired results. If you have a defined time horizon — say five years or less — it makes sense to take a more diversified approach. However, focused investing becomes more prudent if your time horizon is longer (10+ years).
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