The Attraction of HGS Investing

by Ian Woodward

The natural follow-up question to the introduction to HGS investing is "Why would one be attracted to a system that potentially has high risk, and what are the underlying principles and traits of such investors?" The process is relatively easy for the novice to learn. The balanced approach selectively uses the best of both Fundamental and Technical Analysis.

It does not require the exhaustive Balance Sheet Analysis of profit and loss by the fundamentalist; nor the "Super Flyspecking" with several technical indicators used by the technician. It provides a balance of important fundamental and technical factors in quantitative terms for easy stock comparison.

Modern definitions of stock strengths and weaknesses are expressed as EPS Rank, Relative Strength (Price Rank), and Group Strength, which have become accepted practice in recent years. However, it does demand that one is current with the vagaries of the market and the performance of the stocks one owns. Those who master its principles usually make above average profit and therefore have fun.

The analogy is the performance of Aggressive Growth Mutual Funds as compared to Income Funds. Both are appropriate approaches, but their risk-reward profiles are very different. The advantage of the former for the investor is that if he has the stomach to accept the higher risk, AND the ability to be more nimble in managing it, the rewards can be very high.

 

Discipline and risk reduction are attractions of HGS Investing.

The disciplined approach applying consistent screening criteria is a key value of the process, and becomes second nature with practice. It is easy to communicate, and although some interpretations vary, the majority can distinguish between criteria that make up a solid leader versus a potential laggard. Likewise, the risk is reduced by selecting stocks with properly based chart patterns prior to purchase.

Recall that the underlying principle of the process is that Wall Street strongly rewards high earnings per share growth rates and punishes poor performance. Most high growth stocks invariably are recognized as leaders as they achieve high percentage price growth through strong earnings growth in a relatively short time. The strength or weakness of the Market is a major factor in establishing when to partiscipate. Just as location, location, location is the key requirement when buying a house, so is Market, Market, Market (MMM) the slogan for profitable HGS Investing. As long as one grasps that fact, one can make major profits in strong markets in short bursts of time (usually three to six months).

January to September 1995 is an example of a strong market, where the Nasdaq Index rose steadily by 40% in 8-1/2 months. It is not unusual to chalk up 50 to 100% gains on such occasions. Likewise, when the market is very weak (-MMM), not even the best of stocks can swim against the tide. The July-August correction in 1996 of 16%, the 14% drop in March and April of 1997, the 16% drop from October 1997 to January 1998, and more recently the 32% drop from July to October 1998, would all be classed as weak markets.