June 13, 2012 – The Horse Race Investment Methodology

This article was prepared solely by Larry Short who is a registered representative of HollisWealth®, a division of Industrial Alliance Securities Inc. (iA Securities), a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC).The views and opinions, including any recommendations, expressed in this article are those of Larry Short alone and not those of HollisWealth®

Most investors (and their advisors) follow the Horse Race Methodology (HRM) in investment selection and it is incredibly difficult not to. HRM is so natural and seemingly logical that many people are not aware that they are doing it.

HRM arises when investors select to buy and sell investments based on their most recent history. So, when bonds go up, they buy bonds and when bonds fall they sell them. The same with stocks, commodities, etc. This is like betting your future on the horse that won the last race.

HRM is also reinforced by the fact that it often works in the short run. That is, a short or even intermediate term trend will continue along the same line until an event occurs to change the trend. In horse race parlance, some horses are better running in mud than others. So you have to ask: has the last horse won on a dry track and has it now rained?

The key is to spot when there is a change in conditions of the stock market. This is incredibly difficult to do because the stock market itself is a leading indicator of change. Remember, change in direction often occurs during extreme events such as a market surge or a market plunge.

Some other clues include the length of a trend, interest rate changes by various countries, investors’ consensus, and the amount of cash held on the sidelines by individuals and institutions.

Currently, HRM suggests that bonds and real estate may continue to be the best investments. In the meantime, investors are pulling money out of stocks (consensus against stocks), stock markets have been down for some time (a long trend), China, India, and Brazil have cut interest rates, the amount of cash investors are holding in short term accounts on the side lines is huge, and corporate America is holding a record $1.73 trillion in their bank accounts.

HRM can continue for some time but the longer that bonds go higher and stocks go lower, the larger and faster the subsequent change may be.

See my book for more indicators, particularly newspaper headlines at key turning points.


This article was prepared solely by Larry Short who is a registered representative of HollisWealth™ (a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada). The views and opinions, including any recommendations, expressed in this article are those of Larry Short alone and not those of HollisWealth™ Trademark of The Bank of Nova Scotia, used under license.