If you’re a regular visitor to our site, you’ve probably heard us mention Tom Dorsey and his team over at Dorsey Wright and Associates before.
Today the Wall Street Journal featured a great article profiling Tom and the team. They discussed, among other things, their strategy.
He says picking stocks viewed as undervalued can pay off big once in a while, but most of the time, he argues, the favorites win tournaments. And he is willing to bet everything on those favorites, buying only investments that, according to his formula, have shown the best performance within their sector or asset class.
Discipline is critical, though: Once a favored investment starts falling behind the pack, he swaps it for the one that took its place, no questions asked.
We recently drew a comparison between investing using relative strength and finding a new fantasy football player (https://mullooly.net/relative-strength-and-fantasy-football/7658). Our message from that podcast can be summarized in the following quote from today’s article, “most of the time the favorites win tournaments”. Picking investments with superior peer relative strength tends to work out favorably. When the relative strength of an investment changes to show relative weakness, we move on. As Tom put it in the article, “It is what it is, until it isn’t”. We’ve found these methods to be quite useful in managing investments for our clients. They keep emotion out of the equation, and let us focus on what’s important: supply and demand.
Check out the Wall Street Journal’s feature on Tom Dorsey here: http://online.wsj.com/articles/fund-managers-formula-for-finding-a-winner-look-for-a-winner-1412636338