Follow the Fed to Investment Success
10/01/2008 12:01 am EST
In his new book, Douglas Roberts, founder and chief investment strategist of the Channel Capital Research Institute, challenges traditional Wall Street investing strategies by proposing that real investing success can actually be achieved without devoting every waking hour to research or following the big money.
Instead, his system is based on the premise that real wealth can be created with minimal risk of losing your capital by doing the least amount of work.
A novel approach, certainly, and vastly opposed to current Wall Street thinking. It’s what he calls ‘thinking outside the box’.
Roberts supports his system by confiding 22 investment lessons, including:
- What makes Wall Street rich doesn’t necessarily make its customers wealthy
- It’s better to be smart then lucky
- Think about both return and risk
- A successful strategy may be unconventional, controversial and unpopular
- The power of compounding is important
- Understand yourself and your risk tolerance
He then builds upon those lessons by offering his research into unconventional investment thinking, in which he analyzes the failures and successes of the approaches of famous investors, including value investor Warren Buffett and various hedge fund and private equity managers.
While no one can argue with the profits of many of these gurus, Roberts found that their systems—no matter how successful—are not always profitable. Roberts then addressed various strategies—buy and hold, daytrading, and get-rich-quick schemes. Again, no one system paid off consistently.
Next, he tackled the known strategy that investing in small caps vs. larger companies—over the long haul—ultimately pays off in greater returns. But, unfortunately, there are many years and cycles when small caps radically underperform. Yet, Roberts knew that there must be a way to capture the best years of the overperformance of these small caps.
Finally, additional research led him to discover that it was the actions of the central bank—the Federal Reserve—that actually determined the cycles when small cap stocks did well and those in which they collapsed. The secret is actually pretty simple: Charting real rates of interest against the rate of inflation. Roberts states that his findings demonstrate that small cap stocks outperform when money and credit are easily obtained—that is, when real interest rates are negative. In other words, when you can borrow money for free.
Roberts devotes a couple of chapters to the mechanics of his system, demonstrating how to create a worksheet for all types of investments, and then closes the book with a couple of advanced strategies for ‘following the Fed’.
It’s an interesting concept and one that is worth additional study. At any rate, Robert’s premise—don’t bet against the house—is an old adage that makes a lot of sense, whether you are following the Fed, timing the market, or selecting individual investments.