This is episode #13 in a series of 16 Investing Opportunities articles. This edition is published right at a time when we write our annual market forecasts for 2020 which are absolutely worth reading. In edition #12 we look at a Shortlist Of 5 Small Cap Stocks With Multi-Bagger Potential which we published more than a month ago. So why did it take so long to follow up on them? Because we followed them closely to find the one that had the most upside potential. Guess what, none of them is still a good play. A shortlist is meant to follow very closely, on a daily basis, until you have the highest possible confidence to have found the trade you like. If the setups are not what you desire better don’t take any trade. You simply wait. Eagerly waiting sounds conflicting but it is one of the absolute key success factors. A very well timed trade is the basis for success, and it’s how to score the next multi-bagger for our 10k-to-1M portfolio.
Let’s ground ourselves again: what exactly are we trying to accomplish with our MOMENTUM INVESTING strategy?
We look for one multi-bagger stock (high risk play) per year as well as one value stock (value play) that delivers 30% profits. In our hunt to score a successful high risk play and a value play, along the way, we’ll have to accept some losers. The point is to minimize those losses, so cut losses short, to avoid more than 10% loss.
If we do this right our portfolio (more than) doubles every year.
The power of cumulative profits kicks in, and the results after a few years are astonishing!
The key success factors here are based on two principles:
- Finding those few stocks that are worth your capital. We said in the past that the Tsaklanos his 1/99 Investing Principle implies that an absolute minority of stocks is worth your capital. Finding those stocks, markets, currencies, commodities, cryptocurrencies, … is crucial. It is certainly not simple.
- The 3-month cycle(s). This is key as well, and it’s the first time we reveal that our MOMENTUM INVESTING method is based on this 3-month cycle. More about this below.
Every 3 months markets tend to send capital from one sector to another sector. This becomes very obvious in the high risk sectors, or in the high beta sectors.
Let’s apply this 3-month cycle to 4 high risk (high beta) capital flows in 2019:
- In January-March of this year we saw the cannabis sector go up like crazy and biotech stocks went also up strongly. However, Bitcoin and precious metals were neutral.
- In April-June of this year we saw Bitcoin and precious metals go up like crazy. However, cannabis and biotech were negative.
- In July-September of this year we saw precious metals and Bitcoin go up like crazy. However, cannabis and biotech were negative to very negative.
- As of October we saw only biotech act positively.
Now this is based on what we call intermarket dynamics, and it is the basis of the way we look at markets. We follow the flow of capital.
The trick is to be very fast in finding when a trend ends, and when a new one starts. This requires advanced levels of chart analysis as well as a constant look for trend changes (which sector may influence others).
In hindsight it’s all so simple and obvious. But identifying changes as they occur, almost in real time, is the real challenge.
As a reminder we were spot on identifying the Bitcoin rally as well as the precious metals rally. Note that both lasted some 3 months after which a retracement started. We want to play those 3 month trends in our MOMENTUM INVESTING service.
When it comes to the cannabis rally we got it right in January (with the market leader doubling after we flashed a buy alert). However, we should have been more strict in flashing a sell alert in April. We painfully were confronted (again) with the need to be extremely discipline and exit. That’s one of hardest skills to acquire, and everyone has to practice (including ourselves) and learn from past mistakes.
Fortunately our track record this year was great with the exception of the cannabis sector which we should have cut short after the first 3 months of this year. We will never (never) again make this mistake.
One of the things we have discovered over the years we are working in markets and focused on charts is that we need a very high volume of charts combined with a structure that allows to look at sector level (across as many as possible sectors).
The volume of charts to analyze in order to find the ‘right’ ones to buy is in the order of 1,000 charts per week.
In this edition we reveal 2 new stocks: one value play and one high risk play. They both look set for the type of profits we are looking for: the value play could rise 30% and the high risk play might double in the next 4 months.
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