V.9:5 (190-193): Relative Strength Investing by Robert L. Hand Jr.

Relative Strength Investing by Robert L. Hand Jr.

Many believe that the stock market is rigged and the average small investor has no chance against the institutional investors. In reality, the stock market gives the individual investor more opportunity to profit, because they can be investors, not traders. Traders look to invest with a short time horizon, with their objective being to outperform the market average by catching stocks at their maximum momentum rise in price. Investors, on the other hand, have a long time horizon, which allows them to look for companies whose business they simply want to participate in, with the expectation that owning these stocks will create wealth. It's a far different strategy to trade stocks that are hot, compared with owning stocks that you can bequeath to your heirs. Many individuals do not have the discipline required to be traders and cannot keep their ego out of the decision-making process. Sometimes you have to go against what seems right. If you can't stand to buy in at a higher price than when you sold, you should never sell a stock — because sometimes, invariably, you'll be wrong to sell. Such confusion of ego with investment strategy keeps individuals from creating wealth. However, if your goal is to create wealth and you can be patient, then I'd like to introduce you to relative strength investing.

OWN FOR THE YEARS, NOT MINUTES

To measure relative strength, divide the percentage change in stock price by the percentage change in the index, which represents the market as a whole. Relative strength shows you the strongest performers in price among your specific population of stocks. These are the stocks you should own, until they no longer have the best relative strength. Sometimes you can end up owning the stock for a long time. For example, this has been the situation for Coca Cola for more than two years; if you 'd bought back then, you'd have bought it at $15. Now it's at $48.