At VMF Research, our focus extends beyond simply publishing actionable investment recommendations. While that remains a primary goal for us, we are equally committed to ensuring you understand the thought processes and reasons behind our decisions. Dedicating time to the more comprehensive articles on our website may require a bit of patience and effort, but we believe this investment in knowledge pays dividends. Embracing the age-old wisdom, 'Give a man a fish, and you feed him for a day… teach a man to fish, and you feed him for a lifetime,' we aim to equip you not just with recommendations, but especially with the tools for sustained success. This philosophy is at the core of our value proposition.
To fully appreciate how we think at VMF Research, it is crucial to first understand the pillars that support our investment process. Therefore, let us introduce them:
1. Fundamentals
Fundamental analysis is crucial for understanding the underlying economic and financial factors that influence the value of a company's equity or debt, or even an entire market. This approach entails a deep dive into a range of financial metrics, including revenues, earnings, profit margins, debt ratios, and free cash flow generation, among many others. It also extends beyond these quantitative measures to encompass important qualitative attributes, such as the quality and integrity of management teams, governance structures, and the power of brands. The goal is straightforward: to estimate the intrinsic value of an asset. By doing so and comparing this value to the market price, we aim to identify undervalued assets that can be acquired at prices below their intrinsic value. Warren Buffett, one of the most successful practitioners of fundamental analysis, famously encapsulated this approach when he said, 'Price is what you pay… value is what you get.' This quote perfectly captures the essence of fundamental analysis within our Investment Process.
2. Technicals
Technical analysis focuses on evaluating price behavior and the actions of market participants. This analysis emphasizes decision-making and recognizes the influence of investors' emotional and cognitive biases on their actions and, subsequently, on prices. For technical analysts, price is king! It is the ultimate data point, incorporating all information and factors influencing the interaction between supply and demand for an asset at any given moment. When these factors and expectations change… the balance between supply and demand shifts, resulting in immediate price reactions. A fundamental assumption of technical analysis is that prices trend. Therefore, we utilize various technical analysis tools to determine the trend, identify it as early as possible, and recognize when it is changing. These tools also aid in improving our decision-making by determining when to open and close positions and how to manage risk more effectively through strategic position sizing and the definition of stop losses. Technical analysis plays multiple roles in our Investment Process, but its primary goals are to help us exit investments early when we are wrong, thus enhancing risk control, and to keep us invested in the strongest relative trends within our opportunity set, allowing us to let our winners run.
3. Sentiment
While sentiment analysis traditionally falls under technical analysis, we elevate it to its own pillar due to its profound impact on decision-making. This discipline provides objective and quantifiable insights into the otherwise subjective realms of human emotions, opinions, and moods. We employ a broad array of tools and techniques focused on analyzing two pivotal emotions: fear and greed. Specifically, we aim to pinpoint moments when these emotions reach extremes, as such times often signal significant turning points in market trends, such as price exhaustions. Sentiment analysis not only complements our technical analysis but also bridges to fundamental analysis, offering explanations for why market prices may deviate significantly from intrinsic values. For instance, during peaks of greed, markets may exhaust potential buyers, becoming susceptible to sharp corrections. Conversely, in troughs of fear, a depleted pool of sellers can set the stage for powerful recoveries. By identifying these emotional extremes through sentiment analysis, we enhance our ability to make well-rounded investment decisions that draw on both technical and fundamental insights.
4. Macro
Macro analysis involves studying and evaluating broad economic, political, and societal factors and trends that significantly impact the performance of financial assets in our model portfolios. In this context, our approach focuses on understanding economic and market cycles and pinpointing our position within each. We monitor various cycles, including the business cycle, earnings cycle, presidential cycle, debt cycle, demographic cycle, and more. The progression of these can be likened to the changing seasons… just as certain activities are best suited for winter or summer, different investment strategies are optimal at various stages of these cycles. However, unlike the predictable calendar year, identifying our precise position in financial cycles is more complex. These cycles vary—some are short-term and regular, while others are long-term and irregular in duration. To navigate this complexity, we construct and monitor leading, coincident, and lagging indicators, enabling us to adjust our model portfolios as necessary. By staying attuned to the macro environment and the cycles that influence it, we enhance our capacity to make informed investment decisions and manage risks more effectively.
5. Liquidity
Liquidity analysis involves assessing the impact of monetary policy and money supply on asset prices, and consequently, on our model portfolios. We focus on the size and trends of central banks' balance sheets, particularly whether they are expanding or contracting. Since the 2008 financial crisis, central banks and monetary policy have significantly influenced financial markets, as evidenced by the strong correlation between the S&P 500 and fluctuations in the Fed's balance sheet. While correlation does not imply causation, we remain data-driven and closely monitor the actions of the world's largest and most influential central banks. The expansion or contraction of these balance sheets can be likened to air inflating or deflating a financial balloon, with asset prices rising or falling in response. Additionally, we examine the evolution of credit in the economy—its expansion or contraction, and whether it originates from commercial banks or shadow banking institutions. Ultimately, our liquidity analysis plays a crucial role in our investment process, guiding us to adopt a risk-on or risk-off market stance based on the overall direction of the major central banks' balance sheet sizes and the money supply dynamics in their respective jurisdictions.
When you subscribe to our services, you not only gain access to an extensive range of tools and techniques from each of these five pillars, but you also witness how these are applied in real-time to construct our model portfolios. This is our core value proposition: to improve your financial literacy and assist in the construction of more efficient model portfolios. We design each tier of our services with a specific purpose in mind, and the demands placed on each pillar may vary depending on the portfolio construction approach implemented in each tier, as they differ. Furthermore, while each tier can stand alone, we have designed them to work together in a holistic manner, allowing for the compounding of insights and ideas across our product offering. So, this Investment Process is definitely more than the sum of these five pillars... it's a living entity that compounds insights from all of them and is constantly evolving and adapting.
If you would like to know more, we invite you to subscribe and experience firsthand the implementation of our proprietary Investment Process... our aim is to enhance your own!