The ABSOLUTE BEST Way to Use Relative Momentum for Smart Investing

Episode Overview

• Veteran investment manager Nick Radge shares his 38-year journey from discretionary technical analysis to a systematic, quantitative approach to trading.
• The core investment philosophy is based on trend-following and momentum, emphasizing that profitability comes from mathematical edge (positive expectancy), not from predicting market movements.
• A critical component of the strategy is capital preservation, utilizing a market "on/off switch" to move to cash during major downturns, thereby protecting capital and investor psychology.
• The discussion covers specific strategies, including using relative momentum to select the strongest assets and an "All-Weather" portfolio designed to mitigate risk for retirees.

Key Concepts

• Technical vs. Quantitative Analysis: The conversation contrasts traditional technical analysis (interpreting chart patterns) with quantitative analysis, which uses mathematical algorithms and rule-based systems to make buy/sell decisions, thereby removing emotion and discretion.
• Trend Following & Momentum: The core strategy is based on the idea that markets always trend due to human emotion and imperfect valuations. The goal is to identify the strongest trending assets (momentum) and invest in them.
• Prediction vs. Probability: Successful investing does not require predicting the future. Instead, it relies on having a "positive expectancy" or mathematical edge, where the profits from winning trades are significantly larger than the losses from losing trades.
• Capital Preservation & The "On/Off Switch": A key defensive tactic involves a system that signals when to exit the market entirely and hold cash. This "on/off switch" is crucial for avoiding major drawdowns during bear markets and preserving capital.
• Relative Momentum: This concept involves identifying the strongest-performing stocks, sectors, or asset classes and rotating into them. Rather than forecasting, the system reacts to existing strength, likened to a "hitchhiker" finding the fastest-moving vehicle.
• The "All-Weather" Strategy: A specific portfolio designed for retirees to mitigate sequence risk by tactically rotating between non-correlated asset classes (equities, bonds, gold, commodities) to achieve stable growth with low volatility and minimal drawdowns.

Quotes

• At 8:12 - "I don't believe there's any predictive value in any kind of analysis, let alone technical analysis... prediction is not necessary to make money in the market." - Nick emphasizes that his strategy is based on probability and mathematical edge, not on forecasting.
• At 9:12 - "It's not how often you get it right. It's how much you make when you get it right compared to how much you lose when you get it wrong." - Nick explains that profitability comes from managing the size of wins versus losses, not from having a high win rate.
• At 18:28 - "Markets trend. They will always trend. They have always trended in the past. They can't not trend." - Radge explains that for a market to not trend, it would have to be perfectly valued and devoid of human emotion, neither of which is possible.
• At 21:13 - "A good defense is half the battle." - Radge emphasizes the financial and psychological importance of preserving capital.
• At 21:54 - "We don't need to predict what the next best sector is going to be. We automatically get pulled into the strength." - This quote encapsulates his philosophy of reacting to market trends rather than trying to forecast them.

Takeaways

• Focus on mathematical edge, not prediction; ensure your winning trades are significantly larger than your losing ones.
• Adopt a systematic, rule-based approach to investing to remove emotion and improve consistency.
• Prioritize capital preservation by having a clear strategy to exit the market and move to cash during major downturns.
• Use relative momentum to identify and invest in the market's strongest existing trends rather than trying to forecast future winners.