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Outperform Billionaires, Mitigate Risk, and Achieve Long-Term Investment Success

The following is adapted from Invest Like the Best by Chris Belchamber.

If you learn to think like the very best investors, you will be shocked at how successful you are at meeting your long-term investment goals. You will probably see where your investment strategies fall short, and you will understand why top investors use the strategies they do.

Adopt those strategies, and you will be able to outperform billionaires while lowering your investment risk. And as an investor, what could be better than that?

Intelligent Portfolio Money Management is Key to Success

There are two very different elements to investing or trading a portfolio: the first is asset and security selection, and the second is money management — how much you buy or sell and when you execute a trade. Of the two, money management may be more important. In fact, you can do very well without even any of your own asset or security selection.

To demonstrate this, the only security selection we’ll use in our discussion is the publicly available positions taken by billionaires. With this, we’ll be able to see how much performance improvement the billionaires could have made just by using the right money-management rules.

If we are going to “invest like the best,” let’s be clear. Every tool or technique adopted is designed to either lower risk or increase return/risk (alpha). Both would be even better. There are many approaches to this, and investors should choose what serves them best. For the purpose of this example, I will adopt the TradeStops system.

Trend, Volatility, and Trailing Stops

TradeStops is a Software as a Service (SaaS) program that helps individual investors mitigate risk and monitor their investments. TradeStops offers a series of money management tools that can transform portfolio performance. Everything is designed with the objectives of containing risk while increasing alpha, and, of course, the returns flow from there.

You can use it to form a complete rules-based trading system. This allows you to place any security into a certain state. There is a clear buy and sell signal, and there is clarity on whether the asset should either be held or avoided. So, it introduces a Security State Indicator (SSI). Then investors can hold the investment in the buy state or go to cash when it goes below the trend line and is therefore in the sell state. In other words, the whole process of investing can become systematized.

Immediately, it is possible to see the benefit. Backtesting is never perfectly definitive; however, when used appropriately, it does provide significant evidence about whether a system may or may not have merit. In fact, compared to just staying invested in the S&P 500 from 1999 through 2017, this simple SSI system would have minimized losses and drawdown by reducing risk and increasing return. Immediately, we are shown that this simple system reduces risk and increases return to risk to such an extent that the long-term return is far higher.

Portfolio Money Management

These simple concepts can be applied to portfolios as well. The history of billionaires’ positions is publicly disclosed and therefore readily available for examination and testing. An analysis shows the billionaires did much better than the S&P 500 over the eighteen-year period, almost doubling the long-term return. That being said, using the “Quant Tool” on all the billionaire portfolios more than triples the long-term return.

The quant tool simply buys and sells the same positions on the same day as the billionaires. The main difference is that position sizing is applied, weighting positions in favor of low-risk securities and adding in trailing stops, plus a few other low-risk additional measures. So, once again, every step reduces risk, with the great benefit of increasing the long-term return.

Finally, the “4 Billionaire PQ (Pure Quant)” portfolio even manages to almost triple the quant tool approach. This is achieved by optimizing the selection of which billionaire portfolios are included in the mix (this chart is available at TradeStops Research Team).

These results show the significant efficiency of using a money management system for your portfolio investments. Additionally, some further measures were also used to minimize risk and improve return, including only buying stocks newly in an uptrend and eliminating laggards that are not higher from their entry point when rebalancing is done.

The example shows the kind of multiple steps that can be employed to improve portfolio returns just with money management rules. It also shows the value of emphasizing low-risk strategies, not just in trailing stops, but also in a range of portfolio criteria to improve long-term returns.

Long-Term Success is Possible

It may seem like a bold claim that you can outperform billionaires while lowering your investment risk. However, as you can see, it is possible — and if you put these concepts and strategies into practice, you will be able to achieve long-term investment success.

For more advice on how to achieve long-term investment success, you can find Invest Like the Best on Amazon.

Chris Belchamber holds a Math MA from Oxford University. He has been an investment professional since 1984. His first investment book was published by Credit Suisse First Boston in 1988. He was recruited by JPMorgan in 1989 to run their UK Sterling Bond Sales and Trading and then focused on Proprietary Trading, where he was promoted to Managing Director. He presented JPMorgan’s UK Bond Market’s development paper, endorsed by Margeret Thatcher, to the Bank of England in 1989. In 2003, he started his RIA in the US. He enjoys music, reading, writing, and almost any sport, and is currently an active golfer.

Disclaimer: The opinions expressed in this commentary are those of the author. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual and nothing contained herein should be construed as legal or tax advice. Before implementing any strategies, you need to seek proper financial, legal and accounting counsel.

This book may contain forward-looking statements based on hypothetical assumptions, estimates, outlook, and other judgments made in light of information available at the time this book was written and involve both known and unknown risks and uncertainties. Accordingly, plans, goals, and other statements may not be realized as described and actual financial results, success/failure or may differ materially from those presented herein.

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