Investing takes patience – do you have what it takes?

Stocks wanted to rally yesterday but were held back by the massive gravity from planet NVIDIA which suffered setbacks. Some FOMC members are softening their language – it will take more than talk to move the needle.

What goes up… You bet folks, it is time for my “why things go up and why they go down” lecture. Let’s just start with this basic tenet to get it out of the way. STOCKS GO UP AND THEY GO DOWN. It is just the nature of how the market works. Implied in that statement is the fact that there is no such thing as a stock that simply goes up every day and forever. At least I haven’t found any in these past 35 years, if you have, DM me, but please don’t try to sell me a bridge.

You do your homework, as prescribed by me. You find your best-in-class company in a sub-industry that you wish to get exposure to. Why, because you believe that in the current macro environment along with where we are in the business cycle, this sub-industry will benefit over the next 18 to 24 months. THAT’S RIGHT, this isn’t a day-trading thing, it is for long-term focused investing, which means IT TAKES PATIENCE. If you do not have patience, you should avoid the stock market, give your money to charity, and stick to video games. But if you can muster some patience up, let’s get cracking, shall we.

So, you know your sub-industry. You look for the best stocks in the space. Those are the ones that have solid basic fundamentals. Those would be a healthy balance sheet, strong cash flows, and quality earnings. In plain English, that means tolerable debt, consistent cash flows predominantly from operations, and smooth, growing earnings. Compared to its competitors, those fundamentals are clearly stronger. Speaking of earnings, what are the company’s prospects for those in the future? Does it have a killer-product with clear barriers to entry (also known as a wide moat) and a first-mover advantage in a growing target market? If it does, that means solid earnings and cash flows can be expected in the future. Now you examine management. Does the C-suite have a revolving door or does the company have a stable of strong can-do management. Hint, you can learn something about that if on earnings calls other officers besides the CEO also speak to investors 😉. Has that management team survived real trials and tribulations in your target company or their former wards? Are they responding to shocks in the market? Have they hit targets that they publicly set for their companies? So far so good?

Now you look at value, but this is a tough one. If you are looking for a growth stock, chances are that your best-in-class company is more expensive than its competitors using standard multiple analysis. In other words, you can’t always buy cheap. This brings me to the most important part of the discussion. Let’s just pause a second to make sure that this gets the focus it deserves. I am sad to report that I often see the phones light up on the trading floor when the markets are suffering severe pullbacks. Those investors are not calling to sell in panic, but rather to buy the dips. Now, there is nothing wrong with buying something on sale. Some famous mid-western investors probably once said something like “by on fear, sell on greed,” or, more famously, “buy when there is blood in the streets.” I can’t argue with that. HOWEVER, you must be selective on what you buy. And here is a simple, time-tested trick to filter out the bathwater to save the baby. IS YOUR STOCK DOWN FOR THE RIGHT REASONS, OR THE WRONG REASONS? Remember that and follow me to the finish.

You are thinking, “come on Marko, it can’t be that simple.” Sorry, my friends, it really is. Now answering that question accurately isn’t always easy, but it really does start with that very question. Has the company been in business forever with really cool products and well-liked brands, but unable to get earnings growth out of those brands? Don’t get caught up on the fact that you have childhood memories about its products and that your grandchildren also love them. Stay focused. If the growth is just not there, the company may be selling off for the RIGHT REASON. In other words, it is a value trap, and you should not buy it. On the other hand, let’s say the company you are watching has all check marks from the last 2 paragraphs. Because of that, it is flying high, but you are nervous to buy, fearing that you will get in on top, so you watch it… carefully… PATIENTLY. The market pulls back, and your stock goes with it. Has anything changed? Is the market just consolidating but still in a positive secular trend? That means that your stock is down for the WRONG REASON. In other words, you may have been given a buying opportunity. Here is a similar but tougher scenario. Let’s say the market is in a positive trend. One day, the stock you are watching PATIENTLY pulls back. You scour the internet for news and find that company has lowered its forward earnings guidance. It is down by more than -10% in the premarket because no one wants to hear about downward revisions on growth stocks. But you are patient AND diligent. You dig further and realize even with the minor downward revision the company’s earnings are still growing faster than the broader market and its competitors. In fact, management explained the reason for the revision, and it is related to a one-time event. BUT the stock is down by -10%. It is likely that the stock is down for the WRONG REASON, and you have been presented with a buying opportunity. Finally, sometimes stocks go down simply due to buyer fatigue. Weak hands look to take profit or buyers simply decide to rest for a bit. Remember how we started this morning’s discussion? Stocks don’t go up every day, forever. You have been patient; you do your diligence and find that the stock is down for the WRONG REASON. I am sure, at this point, you know what to do next. Being diligent is hard but not impossible. Being patient is even harder… BUT ALSO NOT IMPOSSIBLE.

YESTERDAY’S MARKETS

NEXT UP

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• Conference Board Consumer Confidence (June) may have slipped to 100.0 from 102.0.
• Fed speakers today: Governors Stephanie Bowman and Lisa Cook.