This is episode #10 in a series of 16 Investing Opportunities articles. In this edition we focus on one, and only one thing: actively manage our stocks shortlist in order to find the optimum entry points for the right stocks. This implies we don’t want to get into all of the stocks in our shortlist, obviously. A shortlist is meant to contain the most promising stocks, but some of them have to fall off and just one or two of them will be the ultimate pearls that we are looking for. Many investors don’t understand that investing is a process. It may take months, sometimes years, until you find the right entry point as part of a new uptrend. It’s a concept that seems very hard to understand probably because we live in times of quick action. Investing is not about acting quick, it’s about being patient until ALL conditions are right. In this article we look into the 6 candidates for a ‘value investing’ portfolio as well as the 2 candidates for our ‘momentum investing’ portfolio.
Last week we said the following:
- We believe stocks will move into a new RISK ON cycle. This means they will start a new upleg.
- This only will happen if 10 year Treasury rates will stop falling, otherwise our thesis will be invalidated.
- Assuming stocks will go up we scanned over 1300 charts covering approx. 700 securities.
- Per our 1/99 Investing Principles we identified some 10 securities that look really good.
- By making tough choices we came to a list of 6 candidates for what we called a ‘value investing’ portfolio.
- We identified 2 candidates for what we called our ‘momentum investing’ portfolio.
That was the ‘macro’ level exercise.
What’s next is the ‘micro’ level exercise. This is a continuous effort to monitor the stocks in our shortlist, find THE best stocks based on chart and other relevant data points that we may find.
It is on a ‘macro’ level that we identify the high level direction of the market, but on a ‘micro’ level that we eventually come to a decision.
This may sound rigid … and guess what, it is rigid. It is meant to be a rigid exercise. And there are very good reasons for this.
If anything we have protect our capital.
The best way to look at markets is that it’s a giant marketplace where everyone is going to try to rip you off. It’s the best attitude you can have in order to be careful.
Think about it. Shorters will try to fool you, management of companies will bring you the most fabulous story about their company and stock outlook, other market participants may be sending capital to other asset classes (not the one you believe will go up).
Last but not least, your own emotions and perceptions will try to convince you that the direction in which you believe markets are headed is the one and only truth. We call this bias.
As investing in markets is one giant place full of traps what’s the best way to protect yourself?
Correct, by being as smart as you can. But also by taking the time you need to come to what you believe is the best possible decision. This is a process that takes time.
Conditions need to be right, and you need to ‘see’ and ‘sense’ that this is the perfect setup.
As per Stan Druckenmiller:
Only maybe one or two times a year do you see something that really, really excites you.
The point of Druckenmiller is this: the few opportunities per year that pass by are so profitable that it really pays off to wait for them and go aggressively after those opportunities. It is a much more profitable idea to only trade a few times per year and get serious returns as opposed to trade much more often in a much more diversified way.
One great analogy with investing in markets is ‘hunting’. You don’t shoot in all directions nor do you shoot just simply because you have bullets available. You may need to patiently wait for a great opportunity, where all conditions are right, before you pull the trigger.
Even then it may appear you missed, and you do one or two more attempts before you really hit your target.
Look at how many months we had been looking into First Majestic Silver (AG). We got it right eventually, flashed a strong buy which resulted in a 70% rise. Early September we suggested to sell (largely or entirely) to secure profits.
It is the power of accumulation over time (compound effect of profits with minimal losses) that creates astonishing results on the long term.
THIS IS INVESTING.
In the remainder of this we will share the charts of 8 stocks that we are closely monitoring as part of our hunt. Again, this is based on our thesis that stocks will transition into a new RISK ON cycle which is based on stabilizing and/or rising Treasury Yields.
Our detailed findings along with 8 charts are documented in the remainder of this article.
