Sustainable competitive advantages might include being the low cost provider, powerful brands, strategic assets, having barriers to entry, product differentiation, etc.
Investment Analysis for Asset Allocation
Market timing for value investors is valuation timing. Valuation timing involves purchasing more of asset classes that are bargains and less of asset classes that are over-valued.
The upside of valuation timing is that it greatly increases your odds of above average rates of return in the long run. The downside is that it sometimes requires patience. It is time that makes valuation timing successful.
Probable Maximum Loss
Calculating a probable maximum loss can be one of the most effective means of controlling investment portfolio losses. Most investors are too aggressive, particularly when valuations are not favorable for above average returns. A risk management plan that avoids large portfolio drawdowns is the most underrated concept in investing.
Portfolio Rebalancing
Portfolio rebalancing and weighting are a critical part of valuation timing and minimizing portfolio drawdowns. Instead of rebalancing to a fixed asset allocation the astute value investor will make valuation the primary determinant of asset allocation decisions.
Sell those assets that are no longer bargains. Don’t fall in love with assets that have appreciated to the point they no longer offer a sufficient margin of safety. At the same time, don’t allow risk aversion to keep you from taking losses if you made a mistake.
Investment Analysis & Patience
All of these strategies require patience and thoughtful investment analysis. We can’t do what everyone else is doing because that causes us to overpay on the buy side and accept too little on the sell side (i.e. panic selling). These types of behavior doom investors to below average rates of return.
Yes, it may take patience to wait for the market to realize the true value of your investment. Yes, it may take patience to wait for favorable prices before taking aggressive positions; but it is the difference between below and above average rates of return.
Your investment analysis should include these high probability value strategies because they improve returns and lower portfolio volatility.
The following post was republished with permission from Arbor Investment Planner.