Use trends as guiding beacons in gloomy markets

INVESTING based on trends is arguably the most important toolkit of any long-term investor. Its importance stems from its versatility as it may be used from a fundamental or technical perspective. Trend investing revolves around the idea that the probability of investment success is higher if we were to go with the flow of the market or its structural trend rather than against it.

Trends (or the lack thereof) may be identified by their direction - up, down or flat. When stock prices move in an uptrend, we call it a 'bull' market and conversely a downtrend is known as a 'bear' market. Trend investing is guided by the assumption that markets are mean reverting, and that a trend often swings and overshoots or undershoots around the trend line or average. When a trend overshoots, it invites the tendency for a market correction back to the trend average, and vice versa.

In recent years, equity investing has been hugely profitable. In USD terms, global equity investors (with MSCI AC World Index as proxy) have enjoyed an annualised total return of 11 per cent over the past three years - a significant deviation from its long-term average of 7 to 8 per cent. And that's partly because earnings growth (in absolute terms) has moved above trend averages.