A search strategy is paramount to the active money manager, trader and investor. The financial markets have expanded much since the great secular bull market started in the US in the 1980s, and as the industry has grown phenomenally, so has the number of participants who are getting involved with it. Devising and implementing a search strategy that is coherent with one’s investment system is critical for successful investing, portfolio management and naturally, money making.
But what exactly is a Search Strategy? To put it simply, it is the process of finding potentially successful investments.
Anybody who manages money actively actually subconsciously and constantly employs their own search strategy to seek out ventures and places to put money in. However, there are no secret formulas for effective search strategies, because it is subjective and highly linked to one’s own investment system.
For example, quantitative portfolio managers and algorithmic traders employ sophisticated technologies to formulate and program their screening systems – to effectively optimize and automate their search strategies. Below are three key suggestions that could help in formulating and implementing a coherent search strategy.
(I) Consistent With Investment System
Search strategies have to be coherent and consistent with the methodology and philosophy of an investment system. An algorithmic trader has to rely on sophisticated computer technology for his search strategy as his methodology of making money in the markets essentially rely on those instruments and the technology that he employs. A long term, value investor might not necessarily need the devices that a high-frequency trader employs, and perhaps uses a different search strategy. Remember, a search strategy is subjective (no two successful investors have identical search strategies) and is an extension of an investor’s investment system and methodologies.
(II) Based On Strengths & Interests
The second point offered is essentially an extension of the investment system and methodology that an active investor employs. A person who enjoys looking at ratios, numbers and is competent in analyzing financial statements would make a great value investor, and in fact might have a search strategy that is based entirely on reading, absorbing and analyzing hundreds or even thousands of reports. Berkshire Hathaway’s Warren Buffett is a famous example of such a person. Operating in one’s area of competency and devising a search strategy from there that is coherent with one’s own investment system can go a long way for improving active investing performance.
(III) Uniquely Tailored To Produce An Edge
As mentioned earlier, no two successful traders or investors have identical search strategies, as it is an extension of an investor’s unique investment system. Star Manager of Fidelity Investments, Peter Lynch, is famous for his ‘hitting the streets’ approach when he was the portfolio manager of Fidelity’s Magellan fund back in the 1980s and 1990s. He likes to talk about the best stock investments being the ones that you can observe everyday on the streets. Lynch uses that as one of his search strategies – to find potentially good companies that are out of Wall Street’s radar. He constantly observes his surroundings and looks out for potential candidates that might fulfil his criteria and then decides whether to do more research and homework on them.
Famed US investor and globetrotter Jim Rogers, is known for his two round-the-world travels first in a motorcycle and then in a car that landed him in the Guinness Book of Records. He always writes that studying history, reading philosophy and occasional travelling will help further insights and broaden perspectives when investing. True to his own investment philosophy and system, Rogers looks at long term historical trends, top down financial markets research and analyses and observations from his frequent travels to seek out potential investments. From his global travels he evaluates emerging and frontier markets from the ground up and over the years he has sharpened this habit into his own unique search strategy.
The above points suggested for devising and implementing search strategies are not exhaustive. In fact they are not entirely mutually exclusive either. Additionally, search strategies also adapt and change from time to time depending on the philosophy of an investor. All successful active investors and traders have a coherent and unique search strategy – and that goes a long way on one’s quest for alpha as it helps one to navigate the complex maze of our financial markets.