Stocks trade in cycles

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Last year I wrote a post about investing for the winter months.  I wrote that blog because over the years I have seen that some stocks (NFLX, SBUX, BBY, WMT, AMZN) just tend to do better during or after reporting earnings from the winter months.  This is because they see a disproportionate amount of volume and demand at a time when more Americans are spending and consuming.  This means more profit which means more earnings which means higher stock prices.

This is not to say that there aren’t some stocks that do better during the summer and spring, there are.  Maybe around that time I will write a posts about investing in Las Vegas Sands or Wynn or theme parks, but this is not that post, ok.

Sector Rotation

I was reminded that stocks trade in cycles last week when I was listening to Jim Cramer.  I try to listen to his show every day at least the intro where he gives an overview because all content matters.  On that show Cramer mentioned stocks that are great stocks but that have been losing money.  I immediately thought of Under Armour.  His thinking is that big hedge fund and institutional money, the money that tends to move the market, rolls out of certain stocks and into other areas that tend to have better growth opportunities during certain times of the year.  This is called Sector Rotation.  From a profit seeking motive of an active investor this makes complete sense.

If the club portfolio had more flexibility I would do the same thing.  You want to be able to invest in companies that do well in certain times of the year and then roll those gains into companies that do better during other times of the year.

The downside of buy and hold 

The downside of being a buy and hold investor is you have to take the bad times with the good times.  This is what lazy investing (aka buy and hold) gets you, average. Averaged out returns when your gains mix with your losses.  If you are an active investor you can take the good times and roll them into more good times to get outstanding returns.  This has always been by goal.  The goal is to take gains and compound them into more gains.  You can do that by knowing when certain markets are going to move and certain markets are going to fall flat.  This active investor strategy is called “buy and homework”, not buy and hold.

It’s ok to guess wrong

The downside of this is when you guess wrong.  Lets say you bet on Under Armour and then UA falls flat.  This is also what happened when we bought into Amazon.  We bought high and then it dipped.  You have two options, you can sell and look for a hot market, or you can hold, average down and wait for it to come back to you.  Neither of these strategies is right or wrong, it all comes down to your goals and your risk tolerance.

If you don’t want to be an active investor, active meaning you do the homework required to find good trades, then you would be better off waiting.  If you are willing to do the homework then you should sell and find a better option, this is exactly what I proposed to do with Snapchat.  If a position turns against you then you have to adapt and reevaluate.  The decision to buy was under different circumstances. Readjusting and contradicting your thesis doesn’t make you wrong it makes you smart.  If circumstances change and you don’t change you are lazy.

Conclusion

The point of this post is to realize that if you hold quality companies that turn against you it might just be that the market cycles are shifting, they will come back, just like the tide comes back in.  Another point of this is to encourage you to take gains off the table and then look for another play.  You don’t have to be tied to one holding, remove the emotional ties that come with investing and look at the trends, numbers and reality of what you hold.

If you wan’t to get involved with what we are doing I highly encourage you to come on board.  Membership in the club is only $7 per year (a whole lot less than your netflix subscription) but not only will you more than make your money back, you will make it back in knowledge, connections and experience.  Email info@capitaltodd.com to join today.

Be great, invest well,

Todd Millionaire

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