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Chapter 1. The No-Frills Investment Stra... > Changing Your Bets While the Race Is...

Changing Your Bets While the Race Is Still Underway

Let’s suppose you have a choice.

You go to the racetrack to bet on the fourth race, research the history of the horses, evaluate the racing conditions, check out the jockeys, evaluate the odds, and finally buy your tickets. Your selection starts well enough but, by the first turn, starts to fade, falling back into the pack, never to re-emerge; your betting capital disappears with the horse. The rules of the track, of course, do allow you to bet on more than one horse. The more horses you bet on, the greater your chances are that one will come through or at least place or show, but then there are all those losers....

Then you find a track that offers another way to play. You may start by betting on any horse you choose, but at the first turn, you are allowed to transfer the initial bet—even transfer your bet to the horse leading at the time. If the horse is still leading at the second turn, you will probably want to hold your bet. If the horse falters, however, you are allowed to shift your bet again, even to the horse that has just taken the lead. Same at the third turn. Same at the final turn. You can stay with the leaders, if you like, or, if your horse falls back into the pack, you can move the bet to the new leading horse until the race comes to an end. (I have, of course, taken some liberties with the analogies, to make a point.)

Which way do you think you’d prefer? Betting and holding through thick and thin, and, perhaps, through your horse running out of steam? Or shifting bets at each turn so your money starts each turn riding on a leading horse?

The first track is a little like the stock market, whose managers seem always to be telling investors what to buy, sometimes when to buy, but rarely, if ever, when to change horses. Buy-and-hold strategies do have their benefits, particularly over the very long term. It is possible, after all, for all stock market investors to make money in the end, which is not true for all bettors at the track.

The second track, however, is more likely to give an edge to the player. Strong horses tend to remain strong, especially when you don’t have to ride them to the finish line if they begin to lose serious ground. That brings us to relative strength investing.

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