What’s the best strategy for investing in stocks? James O’Shaughnessy was determined to find out…

O’Shaughnessy tested literally hundreds of stock investing strategies in the updated version of his book, What Works on Wall Street.

The most successful investing strategy (the one that had the highest return relative to the risk taken) was what O’Shaughnessy called the “trending value” strategy.

When I read about the “trending value” strategy, I woke up my wife at 11:30 p.m. to show her. (What kind of husband am I, waking her up then?)

“What’s the big deal?” she said.

“This is EXACTLY what I’ve been writing in True Wealth for years,” I told her. “We look for value, and we wait for the uptrend. And this is what O’Shaughnessy discovered that works best over the last half century!

[ad#Google Adsense 336×280-IA]Specifically, investing in stocks with the “trending value” returned 21% a year since 1965. If you had invested $10,000 in the trending value strategy in 1965, it would have turned into $48 million.

It was right there. Page 625. No. 1 out of hundreds of strategies. I loved it. While we don’t do “trending” or “value” exactly like O’Shaughnessy does in the book, it still validates our True Wealth principles of looking for opportunities that are cheap and hated, and in an uptrend.

It’s interesting to me because “trending value” is what I do… but this leaves me with no friends in the investment world…

You see, the world has two types of investors: value investors and trend followers. Behind closed doors, the two groups don’t like each other. They each think the other group is full of fools.

Me? I have no friends in either group. The fact that I could believe in using both value AND the uptrend doesn’t allow me in either club. I am a fool to both groups…

But it turns out, I get the last laugh… Trending value is the best risk-adjusted strategy out of hundreds of strategies tested back to 1965, according to this excellent book.

So while I have no “friends,” it turns out, we’re doing what’s proven to work.

So where do we stand today in the markets, looking through a “trending value” lens? Here’s what I see going on…

I believe we have what we want… we have our “cheap, hated, and in an uptrend” setup in place.

The shaky part is the uptrend. It’s barely in place, and it’s teetering…

I believe stocks (and most investments) bottomed out at the beginning of October, when the S&P 500 index stopped falling near 1,100. I believed that was the start of a new uptrend – a new bull run.

Hundreds of percent gains are possible in the next big uptrend. Stocks are dirt-cheap and hated. We have the recipe we’re looking for.

Our upside is dramatic, and our downside risk is small.

Stocks in general are cheap. So I am willing to give up a little downside risk (using a stop loss) to participate in the incredible upside potential from here.

“Trending value” is what works in investing. Right now, we have the value. But the uptrend is tenuous. If stocks hit a new low for the year, the uptrend is gone… We’ll have the value, but not the trend.

If that happens, there’s no need to be aggressive in the stock market… we’ll simply wait for the next uptrend.

Trending value is what works in investing. Stick with it…

Good investing,

— Steve Sjuggerud

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Source:  Daily Wealth