There are plenty of misconceptions about investment systems. Those on the outside tend to think of systems as mysterious, robot-driven, “black box” investment advisors.
Those on the inside, however… realize it’s not that complicated (or mysterious).
A systematic investment strategy starts with an idea… which turnrns into a hypothesis… which is then proven or disproven.
The idea can be as simple as: “I think cheap stocks beat expensive stocks in the long run.” (That’s the basis of value investing, and countless studies have proven it worthwhile.)
Of course, a keen observation about the markets can also be applied on a one-off basis. Take Kyle Bass – founder of Hayman Capital in Dallas – who, in 2006, created a hedge fund to exploit a single hypothesis: that the U.S. subprime mortgage market would implode.
That market did implode. And Kyle Bass was spot on and made a ton of money. But he’ll need to come up with a new great idea for his next fund, or “trade of a lifetime.”
That’s where a systematic investment strategy differs. Unlike Mr. Bass’ exploitation of a rare event, systematic strategies aim to exploit events that occur again and again, with a good deal of regularity.
Cliff Asness of AQR Capital Management (a quantitative/systematic hedge fund) explained the concept quite well when he was interviewed by Steve Forbes. He said (paraphrased):
With systems, you’re leveraging an idea… that cheap always beats expensive, or that low-volatility always beats high-volatility. And you’re applying that idea across hundreds of symbols… so that, in the long run, you’re exploiting the mathematical edge that’s contained in your idea.
To me, that’s the essence of a system. And that’s what I aim to do with Cycle 9 Alert.
The idea behind Cycle 9 Alert is simple: everything cycles through periods of underperformance and outperformance.
That idea applies to sectors within the stock market… to individual stocks within sectors… and also to asset classes outside equity markets, like commodities, currencies and bonds.
The stock market’s not the “be-all and end-all.” Sure, it’s had a great run since early 2009. But the bull market won’t last forever, and may have already ended.
At best, the risk-adjusted returnrns the U.S. equity markets could produce over the next five years are likely to pale in comparison to the last five years. At worst, any number of global risks could trigger a repeat of the 2008 stock market crash.
That’s why, when stocks turnrn south, Cycle 9 Alert will look to other areas to turnrn a profit. And we’ll have the system in place to do it.
Chief Investment Strategist, Dent Research