IS THIS THE EASIEST INVESTMENT STRATEGY EVER?

Everybody is in search of the holy grail of investing, right? We are all out there looking for this one silver bullet that will solve all of our financial woes and of course along the way there are plenty of mistakes that are being made by investors. However, one of the biggest mistakes that are being made in my opinion is that people are over-complicating things in search of making money. It is as if our human defensive mechanism nature kicks in and we automatically assume that in order to make money or to make our investments grow, that it has to be complicated. For example, one of the most common things that I hear from people who are sceptical about how easy it is to make money is that “it’s too good to be true” or “if that’s easy why isn’t everybody doing it?”.  I still can never understand that position. Why should investing be difficult? Why should anything be difficult? Even brain surgery is a skill that can be learned, isn’t it, or did I miss something? Unless you were way at the back of the queue when God was dishing out brains (sorry to those who were by the way) the chances are that you can learn this. In fact, anybody of average or even below average intelligence can make money in investing. What actually stops people making money are their own inhibitions and prejudices. If you go into a trade with the mindset that you can’t make any money or ‘that it’s too easy’ or ‘it’s too good to be true’, well then guess what – it probably is. It’s like running in a race, you have to believe that you can win or you won’t. You could be the fastest person running but unless you believe that you are the fastest your body won’t allow you to reach your full potential. There is an automatic safety mechanism which kicks in and your mind tells you to stop or slow down because it believes that the pay off is not there. This is a form of self-preservation that you cannot fight. It makes sense because your body is there to protect you, save you, preserve you and so why would it allow you to engage in an activity with full power unless it believed that it would result in a successful outcome. If I had not gone into trading and investing, I think that I would have been interested in learning more about psychology. I am no trained psychologist but over the years as an investor I have had to learn about psychology because it is intrinsic to investing. You learn about yourself because it’s impossible to detach emotion from trading. Money is involved and that affects everybody. Lose £100 on the street from your purse or wallet and tell me if you can control how you feel about that. It’s not easy. Human psychology and trading are linked, make no doubt about it. And the best investors are often those not with the best ‘stock tips’ or even ‘best research’ but rather those who can manage their positions best and that means looking at investment situations clinically and objectively. So, back to the investment strategy. Let me show you one, super simple strategy. It’s called the momentum strategy and it works like this in 5 simple steps. Choose the benchmark market that you want to invest in. For me that is usually the UK market and so the benchmark index for me would be the FTSE 100. Invest in the top 25% performers from the last 12 months. That’s it. No seriously, that’s it. You’re not listening. That really is it, that’s the entire strategy. How crazy is that, right? Now if you want to know more about why this strategy works so well, then I really think that you need to take five minutes and watch today’s short video. I can obviously talk a lot quicker than I can type and so I cover more material in the video than in this article. You may need to pause and make notes to really take it all in or just watch it a couple of times because it really is effective and I use it all the time. This article is therefore a shortened summary of what the video covers. However, in basic terms it works for two reasons: Firstly, it works because as investors we all hate to miss opportunities. It’s the built-in greed factor that exists in all of us. That’s human nature again. It’s not nice to be greedy but it is our survival instinct. So, when we see the price moving up, people are fearful that they miss out and so they start buying which pushes up the price even further. There is the risk of course that this can send prices into over-extended territory or what ex-US Fed chairman Alan Greenspan might have described as ‘over-exuberance’ which takes me nicely to my second point. The second reason that it works is because of market cycles. Every company has a cycle of growth, stagnation and retraction. It is just the way the market and business works. And it is not restricted just to companies, it happens in the property market, the stock market, it happens in your own personal life in terms of your health. It’s basically a form of ‘wave theory’ which means that once things get going and are positive the chances are that they will continue to be positive for at least a period of time. It’s possible that a company can just have one good year and then fail miserably afterwards but the chances of that happening are pretty slim. Generally speaking it will have built up enough momentum to keep going and that’s why shares keep going up, at least for a while. To illustrate this point I really like the analogy of ‘the train’. In order for a train to change direction it has to slow down and come to a complete stop before reversing. And before it stops of course the momentum will still carry it some way down the track. The same is for investments. Of course, you need to be careful not to be at the tail end of the move which is why I suggest that you buy at the early stages of the momentum cycle so in the first 1-2 years, and not after say 5 years. That’s where the risk is lowest and the returns are greatest. There are in fact funds out there that do exactly this for you – just in case the 5-step strategy was too hard to implement(!). Take the US I-shares momentum fund for example. This year it has returned to investors an impressive 8% compared to the comparative benchmark index of just 2.4% and worse still fund managers made just 1.8% over the same period. I know it sounds crazy, and ‘too good to be true’ but just try it with paper money before you invest for real and see if it works. I would also always advise ‘back-testing’ so applying this strategy to the past 5 or 10 years on old data and see the results for yourself. I can’t guarantee that it will always work but then there are no guarantees that any strategy will work. However I do believe that it has a better chance of working than most and probably has as good a chance as anything else that you might be currently using yourself. I could talk about this for a long time because it’s a topic that expands into so many different areas of investment but instead I will leave you to watch today’s video and ask yourself the question ‘does it really have to be difficult to make money?’ I would say, absolutely not.