There are an infinite number of ways to make money in the markets.
The challenge is that you have to find a successful strategy -- and then stick to it, day in, day out, year after year.
The advent of various “smart beta” exchange-traded funds (ETFs) over the past few years makes doing just that quite a bit easier.
I have to confess, I am a huge fan of these types of investment strategies.
The idea of having an index-linked, mainstream market-beating strategy that does not rely on the brilliance of a Warren Buffett or a Carl Icahn -- all for the relatively low fees of an ETF -- has to be one the best deals in the world of investment.
Frankly, I trust these investment strategies more than I trust myself. And I think it is active managers' egos more than anything else that have kept these and other “smart beta strategies” from becoming even more popular than they already are.
That's also why I make extensive use of these strategies with my firm Global Guru Capital's“American Alpha” investment program. This program invests in a portfolio of 10 market-beating “smart beta” strategies that together aim to outperform its benchmark, the S&P 500.
The Compelling Case for Share Buybacks
One of my favorite, and most profitable, “smart beta” investment strategies focuses on companies that buy back their own shares.
When a company announces that it will buy back its own shares, it means a couple of things.
First, the company is healthy enough to have sufficient cash on its balance sheet to execute the buyback.
Second, the company is focused on maximizing returns to its shareholders. By reducing the number of shares outstanding, management increases a company's earnings per share, without the really hard work of having wrung out operational efficiencies. Share buybacks are also generally a more tax-efficient way to return capital to shareholders, compared with paying out taxable dividend payments.
No wonder share buybacks are a tool used by some of the world's best investors. Activist investor Carl Icahn recently made headlines when he hosted Apple (AAPL) CEO Tim Cook on New York's Upper East Side for dinner, trying to persuade him to use Apple's $150 billion cash pile to buy back its own stock. (Icahn later stepped back from his demands.)
Nicholas Vardy is currently editor of the monthly investment newsletter, The Alpha Investor Letter, which provides longer-term global investments. He also writes two weekly trading services, Triple Digit Trader and Bull Market Alert, which focus on making short-term profits in the hottest markets in the world.