I often wonder why only some active investors succeed while most fail.
With the advent of the internet, commission-free trading, and more information accessible than ever in human history, small, individual investors are empowered like never before.
Nevertheless, despite the many tools at their disposal, it seems to make little difference.
It’s the Market, Silly
At the heart of the issue is the fact that amateur investors often discount the power of the general market.
If an inexperienced investor is correct on a trade, they may feel accomplished, intelligent, and proud.
Conversely, when new traders have an unprofitable trade, they often will chalk up the losses to market manipulation or the advent of high-frequency trading.
However, there have literally been monkeys that have picked winning stocks. Whether it’s due to beginner luck or pure randomness, you decide.
Investors must accept that the single largest factor impacting a trade’s success or failure is adherence to the general market environment. 75% of a stock’s move is directly linked to the general market’s direction.
In other words, even if you are a great “stock picker,” you likely lost money on the long-side in the bear market of 2022.
On the other hand, if you have purchased tech stocks in the roaring tech-centric bull market of 2023, you are likely in the green.
Do You Have Staying-Power?
What do a star baseball batter and a ping pong professional have in common?
Obviously, they are highly coordinated and skilled at their craft. Still, what I want you to remember is that they both tend to keep the ball in play.
Professional ping pong players can keep the ball in play for minutes with intense focus (this seems like an eternity in real-time). Amateurs get worn out.
Baseball historians often put Boston Red Sox legend Ted Williams at the top of the list of the best hitters ever.
In fact, when Yankee legend Joe DiMaggio broke the record for consecutive games with a hit, Williams still held a higher batting average!
How did he accomplish such a feat?
Williams walked 147 times and only struck out 27 times. In other words, he waited for his pitch.
Most investors fail because they conflate their performance to factors outside the market’s direction. Amateur investors lose hope in bear markets and equate brains with bull markets. Remember, if they don’t scare you out, they’ll wear you out.
Do you have the patience to wait for your pitch?
Wall Street is Filled with Distractions
You may wonder, “How do I determine if I am in a bull market or a bear market?”
Unfortunately, most investors succumb to watching financial television or get stuck listening to the news.
A financial news station’s success depends on ratings, not correct market calls.
Bombastic, bearish, and viral headlines win out, while calm, collected analysis takes a back seat.
Yet another pitfall newbies fall into is hyper-focusing their energy on economic numbers.
The issue with relying on economic data is that economic numbers are delayed. Understand that Wall Street is a forward-looking, discounting mechanism.
Did you know that over the past three major economic recessions, equity markets bottomed months before earnings did?
That’s right – if you waited for earnings to bottom after the internet bubble, the 2008 Global Financial Crisis, and the COVID Crash, you would have missed out on a significant chunk of the beginning of a multi-year bull market.
Not only are economic numbers stale, even the savviest investors would not know how to interpret them if given the numbers ahead of time.
Exhibit A: In October 2022, stocks bottomed the exact day the “highest inflation in 40 years” headline hit the news.
How many investors would have predicted such an outcome?
Price Is King
You don’t need to be overly sophisticated to identify trends.
Paul Tudor Jones is an investor who came to prominence by successfully predicting and profiting from the infamous “Black Monday” crash of 1987, which sent the S&P 500 plummeting by 20% in a single day.
In an interview, Tudor Jones divulged a not-so-secret, unsophisticated, but powerful metric at the heart of his trading system by saying, “My metric for everything that I look at is the 200-day moving average of closing prices.”
He added: “I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: How do I keep from losing everything? If you use the 200-day moving average rule, then you get out. You play defense, and you get out.”
You would have side-stepped every major market correction by simply avoiding the market when it is below the 200-day moving average.
Conversely, you can catch every primary bull market by getting long stocks above the 200-day moving average. You won’t catch the top or the bottom, but you will catch the meat of the move, and that’s what counts.
Of course, the indicator is not a panacea – none are. However, it can provide investors with much-needed structure.
Furthermore, the economic data is reflected in a price and volume chart. The market cannot hide the basic tenets of supply and demand.
Learn to simply examine price and volume, determine the overarching trend, and get more sophisticated from there. Remember, only price pays, not big, bold theses or opinions.
Where Should I Park My Money?
Now that we have hammered out the basics, let’s move into stock selection.
Continued . . .
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You must have a strategy and holdings that diverge from the major indices to beat the general market.
Here’s where it gets tricky – markets are cyclical.
For example, in 2022, tech stocks got destroyed and underperformed dramatically.
Fast-forward to 2023, and the exact opposite is taking place – tech makes up the leading sector by miles.
So, how do I select stocks? All else equal, I want to be long technology stocks in bull markets (the price of S&P 500 > 200-day moving average).
As you can tell, I take a practical, common-sense approach to investing, but I have found it to work.
I focus on tech-oriented growth stocks because they have outperformed in the long run and from a total return perspective.
I took the time to compare the S&P 500 Index to the Nasdaq 100 Index over the past 25 years.
Even when you factor in the devastation of the post-internet bubble burst, the Nasdaq 100 is higher by 604%, while the S&P 500 is higher by 532%.
To get a clearer view, the Nasdaq begins to really shine when you consult a 20-year chart. While the S&P 500 Index gained 566%, the Nasdaq has soared 1061.7% over the same period!
Do you want to achieve super returns? Simply wait patiently for a bull market, identify institutional quality growth-tech stocks with a major catalyst, and become a slave to the price and volume action…
Now that I think of it, the market is in a roaring bull.
It’s time to dive in.
The advent of the Artificial Intelligence (AI) revolution is sure to drive tech earnings (and stocks) to dizzying heights. You’ve waited long enough. Your pitch is here, and it’s time to swing that bat.
So where do you start?
I invite you to look inside the portfolio I’m managing, Zacks Technology Innovators.
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All the Best.
Andrew Rocco
Andrew is Zacks’ technology stock strategist. His passion is education, where he aims to provide valuable insights from both a fundamental and technical perspective. Now, before the Sunday deadline, he offers you $1 access to his Technology Innovators portfolio.
¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research’s newsletter editors and may represent the partial close of a position.