There are two main methods used to select securities for a portfolio: fundamental analysis and technical analysis. Although fundamental analysis was – and still is – the method that is most utilized by institutional investors, a series of events and a growing body of academic research have shown that this method has serious deficiencies.
In addition to fundamental analysis, Rivemont Investments also uses technical analysis and trend monitoring. Although this type of analysis has been known since the 17th century in Holland, it is only since the 1970’s that it has won acclaim when professors Kahneman (recipient of the Nobel Prize in Economics) and Tversky created what is now referred to as Behavioural Economics.
According to these two renowned professors, and to many researchers thereafter, the price of a share is not always equal to its intrinsic value, since this price is influenced by a number of factors, including several cognitive biases on the part of investors. And since these biases are known, and they repeat themselves over time – whether we think of speculative bubbles or stock market crashes – it is possible to make investment decisions based on these recurring stock market behaviours and ensure that the returns on these investments are superior to the performance of the market as a whole.
In order to select securities with a superior return, we use a top-down approach:
- What is the general trend observed in the market? Are we witnessing a bull or a bear market, and since when?
- Which sectors have the highest growth potential?
- Within these specific sectors, which securities are most likely to offer a superior return?
This approach is particularly effective with long-term market trends, and less so when markets are flat. One of the great advantages of this technique is that it can be heavily underweighted in equities and bonds, which can prevent significant losses on the part of investors when markets drop or crash.