What’s Falling Now?
By Brad Thomason, CPA
A lot is written about investment theory. Less about investment practice. What I mean by that is that you can find a ton of content (much of it repetitive…) about broad principles. But when it comes to actual steps, you have to look harder. There’s a lot less content about what a typical day in the life is like for a person engaged in the mechanics of making investments and managing portfolio capital.
I think you would find pretty broad support for the premise that investing is rooted in analyzing information and then making decisions based on the analysis. From this follows the idea that the aim of those decisions is to deploy capital in the manner which has the best prospects for achieving portfolio goals. To me, the implied action step from this theoretical framework has always been that you would get up each morning, survey all of the latest investment data anew, then completely reconfigure your entire portfolio based on that most-current assessment of the available information.
Which would be completely unworkable. And probably a bad idea, too. For any number of reasons.
But the point remains, to go from being a person who reads a lot about investing to actually being an investor, you have to take some actions. And to remain an investor, you have to understand that you are engaged in a series of actions – probably spanning years or even decades – as you move pieces of your capital from one investment to the next in pursuit of your return needs.
One of the easiest and most practical ways to start the process of deciding what the next investment is going to be, is simply to take a look at what has been falling in the recent past. We’ve talked about this before (and you made some money in both gold and oil if you followed up on the information). Today’s losers are often tomorrow’s winners (or more accurately, next quarter or next years’ winners…). Mean reverting behavior in exchange-traded markets is common.
Even though this isn’t a stock investing site, we know that many of our readers still have some of their capital in that market. Plus, stock market data is easy to get to. So let’s take a look at which sectors have been having a tough time this year, in spite of the general market not taking any major hits.
Here’s a fast way to get some insight: Do a Google search for “sector performance year to date.” In under a minute you can find links that will show you what’s been having trouble. At the moment it appears the energy sector has had a tough year, at least relative to everyone else. Real estate was having some trouble, but has started swinging back the other way.
Seriously, that took under a minute. Found a current trend-play to take a look at, as well as something to watch for a reversal. The strong performance in virtually every other sector tells me that maybe the latest entry points on those were missed, and that waiting for a dip might be the better play for exposure to those allocations.
Want to look broader, say into commodities? Similar Google search, and another minute of scanning, shows that cocoa and natural gas have gotten hammered this year (so we maybe want to look for ways to play those recoveries when they finally show up in the trend); and palladium has had a really good year (+29%), so watching it for a future crash would be better. Then you can hop on it when it shifts into being a recovering loser. Because often times the ones that run up the hardest are the ones that come unpinned the fastest.
Foreign stocks? China is still depressed from its fall in 2015 and early 2016, and took another small tumble right at the beginning of the year. It hasn’t really snapped back with any kind of sustained recovery yet. A lot of other foreign markets have done pretty well in 2017, but if you check back in once or twice more between now and the end of the year, you might find a few breaking off from the pack and setting up a nice move for sometime in 2018.
You have to invest to be an investor, and you have to do some analysis to know what to invest in. You can make that process about as complex as you want. But if you prefer to keep it simple – not to mention fast – just keep an eye on what has bombed or is bombing, and you will have a ready-made list of what to watch in the coming weeks to find your next buy. Waiting for something to fall is certainly not the only way to go about making investment selections. But if you are looking for something that’s easy to measure and has a long history of producing some significant returns, it might be the only one you need.