01-08-2022: The Two "BIG THINGS"
There is no question that the stock market has had a rocky start to 2022. The S&P 500 is down a little less than 2%, but the Nasdaq 100 is down more than 4.5%.
Rather than get caught up in the “sky-is-falling” emotions of the past week, I prefer to take a step back a bit to make my judgement. Right now, the S&P 500 is down less than 3% from its all-time high. The Nasdaq 100 is down a little more than 7% from its all-time high.
Is this cause to worry and rush to cash? Of course not, but that is what the financial media has been shouting all week. After all, the yield on the 10-year Treasury rose to, wait for it, 1.77%! Though that might be higher than recent levels, it is still lower than the 3.21% level it was trading at in October 2018.
Instead of panicking, I suggest you adjust your thinking and focus on the two things that are the most important elements in stock market success.
The first is to stay on the right side of the market. What does that mean? It means you measure the market to determine its current trend. You don’t have to guess. I even wrote a book about this. You can buy the book here.
Here is a secret I learned in all of my market studies:
“The market stays in a trend… until it doesn’t.”
That is the key for the first element of success. Stay with the current trend until the current trend ends.
The second element for successful stock market investing requires discipline. Always have an exit strategy. If you know what your exit strategy is before you before you buy and keep it updated after you buy, you can avoid making emotional decisions which almost always are wrong.
Part of this second element is like being on a battlefield. The very first thing every soldier learns when dealing with the wounded in battle is to stop the bleeding. This also applies to your portfolio. Do not let a stock bleed losses.
Some of the most popular stocks of 2020 and early 2021 have broken down and investors without exit strategies are bleeding losses.
Here is the most recent chart of Roku (ROKU). This is from stockcharts.com.
At the end of July, ROKU was trading at $490 per share. Less than six months later, ROKU is now at $180 per share. That’s a drop of more than 63%. And that drop occurred when the markets were climbing and making new all-time highs.
Who would suffer that kind of loss? Even if you believe in ROKU and you think it’s a great company, you have to learn to separate your opinion of the underlying company from its stock. Do you really care what the company does? Or do you care about investing in a stock that can make money for you. Do you stay awake at night thinking “I don’t mind losing 63% of my money because they have great technology.” If you think this way, you are a stock collector; not a profit collector.
Other stocks that have seen drops equally as spectacular. TDOC has dropped 73% in the past year, SQ has fallen 50%, and ZM has dropped 62%. Why would anyone accept these huge losses? Remember, the goal is to make money.
I always have an exit strategy in place when the market turns against the stocks my clients and I own. I spend more time focused on selling than I do deciding what stock to buy. Buying is easy, selling is hard, but selling is how you make money and protect your money.
If you follow these two elements – to always be on the right side of the market and to always have an exit strategy – you will be set up for success in 2022 and beyond.