What is the Best Investment Strategy in a Sideways Market?

I was recently asked this question, “What is the best investment strategy in a sideways market?”. And it took me a couple of minutes before I respond. Not because it was hard to answer, but because I was simply confused of the question. Why should it be any different in an up or down or sideways market?

To ask the question means you don’t really have a strategy. Shouldn’t a strategy be useful in any market condition? If you’re going to change strategy when the market goes from up to down to sideways, where’s the long term benefit in that? You’re changing strategy just before your strategy bears fruit. And how confident are you to predict that the market is going to change course? To not get whipsawed just as the market is changing direction and you using the other strategy that only works for the old market direction.

That’s hard.

But to answer the question (without hurting the other person’s feelings), is just to ignore the market. Value investing has been known to underperform during bull markets. But should you abandon the strategy when it doesn’t work anymore? I don’t think so. Just like my portfolio has been underperforming lately is not proof that the strategy does not work. I just know it for a fact that since I am using a value investing strategy, I know, that it will underperform in some areas. Because I understand how it works.

If you’re into a strategy that looks for cheap companies (or investments) to buy, there will come a time where you won’t be finding cheap investments. Same is true in life. When discounted products will soon be gone. And everything will be priced fairly. And sometimes, even higher than the fair price. This is where a value investor underperforms. He can’t find cheap things to buy so he get’s left behind by the people who rush to things and buy at a premium, hoping that other excited investors pay more.

Its not our game. And its not the game of an intelligent investor. The best strategy in a sideways market is the same as in any market. Ignore it. To ignore the market is the same as to ignore Mr. Market’s whims. But do not ignore him entirely. Pay attention to him when he’s at the both extremes. When he’s too optimistic, and when he’s too pessimistic. The in-betweens you should ignore and just focus on searching for other opportunities or just plain waiting.

If you’re going to change strategies when the market moves in a different direction, that’s like saying its the market that dictates what you do. Its just like saying it is Mr. Market that tells you how to invest. In fact, it should not be. An intelligent investor should not make Mr. Market his guide, but his servant. Do not let Mr. Market tell you what to do, nor let him influence you what to feel and do.

8 comments

  1. It’s phenomenal that you were sort of channeling Ben Graham at the end with the “Mr. Market” analogy. I think it takes a lot of courage to stick to your guns when everyone tells you to jump ship. I can confidently say that this is one of the best articles on your blog so far!

  2. This is my first time encountering a fellow Filipino who also lives in Graham-Buffettville neighborhood! Hello neighbor!
    The way you speak and use the term “Mr. Market” I can really sense we’re indeed neighbors.
    I hope to meet you in person soon.

  3. I can’t believe ngayon ko lang nakita ‘tong ‘journal’ mo. I am a value-based investor as well and I really want to network with fellow value investors dito sa Pinas. Pero ang hirap makahanap. Kapag tumitingin ako sa mga stock investing groups sa FB, puro speculators ang nakikita mo (unfortunately).

    If you have a circle of value investors, I want in. Kung wala, let us build one. 🙂

  4. Naalala ko na naiinis sakin mga kaibigan ko kasi ako lang daw ang masaya pag pababa ang market. Mga ganitong panahon, silently waiting and accumulating cash ang drama ko. Pero pag may sudden dips ang mga babies ko, siempre bibili ako. 🙂 Then lurking din sa mga bagong prospects na for further analysis. Then check na rin ng ibang alternatives para mas maging diversified ang portfolio.

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