Ken Kam's Best Ideas Blog

The toughest stock market to invest in is what I call a "choppy market" when there is no clear market direction. That's the kind of market we've been in since the beginning of 2004 with the market changing direction several times. Making money was a major challenge.

Fortunately, I have access to an extensive database of the best investors in the world to tap into. I found there were lots of investors at Marketocracy that did well in a choppy market and in fact, they were knocking it out of the park. After pouring through reams of data we developed an approach that is more responsive to market changes and can navigate through choppy waters. At the end of April of this year, we made adjustments to our investment process and the results have been dramatic. Since April we returned 21% vs. 7% for the S&P 500.

Here are the key lessons I learned that can help you invest in a choppy market.

Respond quickly to market changes: Since no investment strategy works all the time, to consistently beat the market, an investor needs to adjust strategies as the market changes. That's a given and in up markets and down markets we have enough time to identify trends and make adjustments. Over the last two years we have all found that choppy markets don't give us long enough trends and we have to respond quicker to changes but not too quick, otherwise you'll be zigging while the market is zagging.

I have found that very few investors can respond quickly and successfully to market changes. One of the best measures of your ability to respond to market changes is our Batting Average calculation. It measures how consistently you beat the market. We have found that beating the market around 70% of the time within 30 days is a good target.

Become a generalist investor: Responding quickly to market changes makes sense if you have the flexibility to change to an area of the market where you are a skilled at picking stocks. The more areas you are skilled in the higher likelihood that at least one of your areas will be a good place to invest.

Generalists are skilled at investing in several areas of the market. They are rare. Most investors are specialists - expert at investing in a specific industry/sector or implementing a particular investing technique. When the market changes, specialists can't change and shouldn't change. If you're good at picking networking technology stocks it doesn't mean you're going to be good at picking oil stocks just because oil stocks are running.
We developed a way of measuring performance zones areas of the market where a portfolio manager has demonstrated investment skill. We look for managers that have multiple performance zones and therefore, the ability to change zones as the market changes.

You need a team: No single person has enough expertise to invest well across all industries. This is why you need a team. And the expertise of the team members needs to match the opportunities available in the market. The more pockets of opportunity we can go after the better.

By picking a diversified team you can reduce your risk and volatility. We assemble our team of generalists based on diversification by sector, by style, and several other criteria - to reduce their correlation and increase our responsiveness.

The key to my investment process at Marketocracy is finding the best investors for the current market. In a choppy market I discovered it is best to have a team of generalists flexible investors that can find pockets of opportunity in several areas of the market and can change as the market changes. At Marketocracy, we've discovered that generalists are rare but we have lots of them and we've assembled a team that can help you steer your portfolio through the choppy waters of today's market.