Investment principles

Some principles for new analysts - want to get forum view or pushback.

  1. losers average losers

  2. good stocks have good looking charts. bad stocks have bad charts. good stocks go up to right, bad down to the right. generally true over time. buy good charts, short  bad charts. 

  3. you need momentum. great stocks have good momentum, tend to outperform on good days in market and go down less in bad days. who cares if you think the business is great when it goes down every day, means there are sellers and it will keep bleeding

  4. narrative is critical to momentum. investors like BIG stories. AI, GLP1, EVs. they HATE unknowns. what does crypto do to banks? if the company is beating earnings and has great valuation, it doesn't matter if the narrative is not positive. who will step into it? 

  5. you don't get rich on nuance. market thinks  x but you think y. it doesn't matter. thats why SOTP don't work until company starts doing wlel. instead think what happens to stock if x happens, because that is how stock will get priced by new investors unless y is proven otherwise

  6. find companies that are crushing it. management sounds awesome. data is accelerating. don't long companies because "temporary headwind, stock cheap." that is get blown up.

  7. if stock isn't working, sell it. if it is, add. market catches on to things. remember #1. you can buy it back when it starts working. whether that is -20% or +20% doesn't matter. if anything buying +20% means company is de-risked on some issue that caused it to not work to begin with

  8. no one cares about valuation. if your thesis is that its expensive because earnings quality is bad or its cheap, I will pass. every algo knows what the P/E is

 
Most Helpful

Seems like you are recreating a "jump on the latest theme"/"momentum in well followed names" strategy.

Can this work?  Perhaps - devil is in the details on how it's implemented and how ahead of the market you are.  What I usually see with people who like to think about stocks in this way is they fall into a bunch of hindsight bias: "I knew EVs were going to be big, so I would have gone long tesla in 2019,"  "NVDA was such a no brainer," "big tech was an easy buy."  In reality you might get more ARKK style performance when you are actually trading.

Some of the best investors I know trade nearly 100% against your rules looking at valuation, finding temporary headwinds and catalysts for value/rerating.  Once again, devil is in the details on how to implement that.

 

yes good points. though i think one of the key lessons is also knowing when to jump off momentum.

stock acting weak on good numbers when it used to outperform is a huge signal to sell or flip short.  or co that used to beat a lot starts missing, or left for dead company that starts acting well again. all of these are valuable price signals on incremental buyer/seller which is what drives marginal stock moves 

 

Hate to break it to you, but when the momentum stock starts missing earnings, the stock gets cut by 40% and you're late in selling. You're delusional if you think you'll be able to time the top better than others, because everyone is playing for the same thing.

 

My advice -

Investing cannot be a checklist. If it were so it would have been automated 25 years ago. It’s up to you to understand WHY certain ideas work so that you can find the nuances. You cannot find a single right answer in investing and it’s absolutely pointless to try.Study micro economics. Study valuation. Study strategy. Study philosophy. Make your own rules. There is no equation.

 

These strike me less as investment principles and more as trading principles. Discretionarily playing momentum / trend following on equities seems like a difficult game to play, even though in a bull market environment it might appear that it is relatively easy to profit this way. 

Price is what you pay, value is what you get (I know buffett isn't applicable in 2024, but its still a good quote). Having a flexible or bayesian view on valuation is good, but can't say I agree with "valuation doesn't matter". Note: this doesn't mean indiscriminately judging valuation based on absolute/relative P/Es, obviously, but the degree of earnings revisions matter if your stock is 10x vs. 40x fwd EPS. In this context, valuation def matters. 

Maybe thats all semantics... anyways, I generally agree that technicals are an important barometer to track. But otherwise not sure I really agree with the general sentiment here. Important to define the game you are trying to play though: short term? longer term? etc. 

AFAIK, even in pod world, trading momentum and narrative + yipit + earnings variances only gets you so far

 

Like when a business is inflecting and profitability becomes more apparent (ie software biz from ev/revenue to ev/fcf)?

 

Dont know if it applies specifically to this post, but after reading the above, I was shocked about the lack of fundamental factors involved in the investment process. My investment principles are more like the opposite of what is mentioned here (both on a personal and professional level):

- Quality matters - a business needs a clear reason to exist (Kodak vs. Digital)

- Do not just follow narratives - railroads provided a clear advantage and investors lost money on nominal, absolute and relative terms (1800s). Disruptive technology can change the world but the unprofitable if not invested at the right level

- Capital intensive projects (or investments) should be rewarded with long-term profits in excess of cost of capital. If a business is not protected for the time needed to recover the investment, technology will disrupt it before it is able to generate meaningful pay-back to investors

- It is easier to identity losers from technology than winners (MP3 vs. Discman vs. iPod)

- Capital structure does not matter until it matters (lease obligations / Wework)

- Trends only remain if there are “strong hands” involved. A bubble can continue until there are no other fools interested in buying. 

- Cigar butts are ok if there is a cash yield / liquidation value (with a real catalyst) to justify the investment 

- Convexity is important. A company that is doing great can provide multiple additional opportunities to an investor. Do not sell if valuation / target IRR is th only justification for the sale. If thesis remains applicable, keep invested

 

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