It’s not about the price

Imagine you work for a fund, as a portfolio manager. You might think you have full freedom to go ahead and do as you want, but instead you’re limited to that of a mandate.

The mandate demands a lot of things from you, including limiting your investment universe to US equity only, for example. And it also doesn’t let you do short positions. You have $10 million you now need to allocate in long only positions, what do you do?

Obviously you want to maximize returns, within some risk profile, likely also outlined by the mandate. No small cap maybe? 5 year time horizon? Who knows, but the point is that you’re bound to try to find strong performers in which to invest.

Heading down a path of value investing might be obvious with such constraints, trying to find the most undervalued stock compared to the assumed intrinsic value. Your standard technical analysis surely is off the table as it only tells you about patterns in individual stocks. TA doesn’t tell you anything about what company could outperform another, as it’s more an individual asset timing tool, if anything.

Our AOI is a take on value investing presented as TA. While price plays a part, it only does so indirectly. Instead of focusing on if the price goes up or down, you want to shift the focus towards those that present the best value opportunity. Start picking winners irrespective of price direction.

As an example, take a look at the two charts below. In both of these “asset 1” is the stronger performer, compared to “asset 2”.

When the price of both assets go up, asset 1 is performing better than asset 2 because its value is increasing faster.

When the price of both assets go down, asset 1 is still the better performing asset, because its value is decreasing slower.

Keep the above in mind when you study our indicator. Even if often there seems to be a correlation between what the indicator is doing and what the price of the asset is doing, primary focus should be on using it do identify strong performance potential.

When for example the price continues up, but the indicator starts heading down, you should ask: Is there a stronger value potential in some other asset? As it’s a relative measure, it going down for one asset does mean it is going up for some other.


This blog post was written by Christian, the main portfolio curator here at AgoraOpus. With a background from FinTech, he holds a MSc in Quantitative Finance and a BSc in Computer Science and Industrial Automation.

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