Have you noticed how all the talking heads and pundits are desperately trying to explain this market? Some are trying to apply 'normal' analysis, such as interpreting the unemployment numbers, earnings reports and guidance reports... sorry... that's not working. If that was working, the market would be dropping like a rock. Some are offering their 'expert opinion based on decades of calling it right', by saying the market just isn't understanding the complexities of restarting the economy (as if they know what it's like to restart a global economy) and it is the euphoria of potential significant treatments for the COVID-19 virus or that the market thinks it's just a matter of throwing a switch to get back to 'normal', that's driving the market higher. In other words, these pundits believe the market is wrong and that it will soon come to its senses and start behaving rationally. But, instead of trying to figure out why the market is wrong (or right, for that matter), these great market sages should be investing in sync with the market because that is what is generating profits; and, isn't that the objective?
Frankly, I haven't heard so much sage guessing and guessing wrong in my life.
I got an email today from a PhD in economics who is, without doubt, a very intelligent, thoughtful market analyst. He wanted to know whether this market is in a bull cycle or getting ready to crash. I, unfortunately, told him that I do not know (no one does) and, indeed, don't really care, with regard to running a successful portfolio. This concept was very hard for the PhD to deal with... I went on to explain that I am bullish as long as the market is in a decent bull trend, regardless of whether or not that makes logical sense. But, I also told him that this market could reverse course at any time and that is why I have an insurance policy on every holding... my volatility-based stop loss settings that I move up every day that my holdings move up... just in case.
I told him that it is very important to NOT to try to guess what this market is going to do next week or for the rest of this month or for the rest of this year. What is critically important is this: Take what the market gives you and accept that as the best way to success (profitability), but always assume the market will change its mind and change it quickly. This is the hope-for-the-best and plan-for-the-worst approach.
Let me give you a great example that occurred today... As you know, the market boomed higher today and, indeed, moved higher into the close. Our portfolios had a great day and a great week. The market mavens want to know why the market moved higher. Here's the truth: It really doesn't matter why. Yes, I know... you're shaking your head thinking, "The heck it doesn't matter, Mike! It matters a whole lot! We need to know why the market is moving higher. Common sense tells everyone that it's important to know what is driving this market higher!!" Sorry... no, it doesn't. What matters is, the market IS trending higher and as long as the market IS trending higher, we need to be bullish. And, if on Monday, the market turns around, we'll simply stop out of our holdings and put the cash and profits in the bank, and wait to see if the market wants to start trending lower. But, I digress... back to my example...
We bought AMZN on 3/31/2020. It has been on fire and moving higher almost every day since. We could all guess why (not that it matters). I know you have a strong opinion why Amazon has been ripping higher and you're probably right. Today, it sold off a bit. Why did it do that? It simply does not matter. I know what the talking heads and CNBC guessers think about why it sold off and they might be right, but it does not matter WHY it sold off. What matters is, it sold off and guess what? It triggered my AMZN stop loss. Oh my!!! What now?? No panic. No worries. AMZN triggered its stop and we moved more than 17% in profit in that trade into the bank for each client. 17% in just 17 days! I'll take that kind of return anytime I can get it. Is AMZN a bad stock? Nope. Is it a terrible company? Probably not. But, it just doesn't matter why it sold off and triggered our stop. But, here is also what happened in the selling of AMZN? I protected my clients' capital and took risk off the table that the market could suddenly move a lot lower and take AMZN with it. What if the down-turn in AMZN today was the first of many sell-offs? No one knows and I will not guess one way or the other. The insurance policy against losing money kicked in and put 17% profit in the bank. That is all that matters. My clients don't hire me to collect great stocks... they hire me to make them a profit and protect their capital when risk gets too high.
You see, a buy-and-hold approach would hang on to AMZN and if the market drops by 50% (and it could), do you really believe AMZN would not go down, too? Maybe or maybe not. Is it worth to risk of losing 50% to find out? No, it is not.
When you begin to understand that you do not have to be smarter than the market, but only have to be smart enough to understand what the market is telling you, in terms of current trend, you can become agnostic with regard to owning shares of stock. They are just pieces of paper and if those pieces of paper are not generating a profit, I don't care how great the company is behind those shares, I'm just not interested. Never fall in love with a stock... it will never love you back.
Have a wonderful weekend. My client portfolios had a great week. My clients are happy and that makes me very happy. Stay safe and stay well!