Investment Methodology
Financial terms and concepts can often be difficult to understand so to better illustrate the process we have included an analogy of a doctor treating a patient.
Our investment decisions are based on the combination of market and investment outlook. The most opportune time to invest would be when these factors confirm each other.
Fundamental Outlook
Important factors in determining investment decisions are the market fundamentals. This includes, but is not limited to, interest rates, company earnings, inflation measures and economic growth figures. Significant forces that influence these factors such as government, economic, tax and Federal Reserve Board policies are evaluated for their potential impact on the market. The fundamental outlook gives us the market backdrop i.e. the current trading environment and business cycle.
ANALOGY: This would be similar to a doctor taking into consideration the family background and profile of the patient when determining a possible prognosis.
Technical Outlook
Technical indicators are used to determine the exact entry and exit points in the stock market. Our technical analysis focuses on the relative strength or weakness of the stock market. We focus on market internals, which includes, but is not limited to, market highs/lows, advance/declines, up/down volume and market sentiment.
ANALOGY: In comparison, a doctor would check a patient's vital signs such as temperature, blood pressure and pulse rate.
Seasonal Outlook
In examining the history of the market there are distinct periods of time when the market has a better chance of delivering positive or negative performance. We refer to this as our seasonal outlook.
ANALOGY: This is similar to a doctor preliminarily ruling out a certain prognosis due to the probability of that occurrence during a certain season i.e. the flu in the middle of the summer.
Long-Term Fund Outlook
Investments are analyzed to assess their consistency of performance over the long term with much emphasis placed on their risk-adjusted return using Modern Portfolio Theory measures such as Alpha, Beta, and Sharpe Ratio. Potomac screens a database of thousands of investments to determine which investments exhibit the strongest risk adjusted returns. The selected investments are then added to our daily analysis database.
ANALOGY: A doctor that uses medications that have been in use for the longest period of time with the fewest instances of negative reactions would be using a similar strategy to reduce risk.
Short-Term Fund Outlook
Potomac uses proprietary investment research on a daily basis to uncover investments that exhibit the greatest risk adjusted returns on a short-term basis. This could include but is not limited to moving averages, money flow, and other technical indicators. While there may be many investments with outstanding long-term historical performance it is important to track daily fluctuations and trends to uncover the best possible potential investment.
ANALOGY: This is similar to how a doctor might know what medications are currently working best for certain treatments.
