As quickly as you can, name your favorite:
- Vacation spot?
- Piece of clothing?
Now … what's your favorite stock?
I bet you struggled for a quick response to that last one but likely didn't hesitate to answer the first seven. The brain only has so much capacity to recall items quickly. The magic number of items is seven. Countless psychological experiments confirmed seven as the limit of human recall on average. Hence, it's known as "the limit." That's why phone numbers are seven digits – because beyond that they are heard to remember.
There's probably a good reason stocks don't make it in your personal limit: they just don't make us feel good (well, at least for most people – they make me feel good, and I know my favorite stock before my favorite movie). But I'd bet that, for most people, stocks are boring things. People know they may own them somewhere in a fund managed by someone they never met in their 401(k). And that's it.
But the great irony I realized years ago is that the very things that can make us all rich are the things we generally pay the least attention to. For example: say your fridge died. You need a new one fast. You hop on the internet and search types of fridges. You read reviews and watch videos. You research measurements and depths. You must find your old one to know what to replace. You visit multiple stores. You talk to multiple salespeople. You narrow it down to three models.
But then you return to the internet for more in-depth reviews. You then go back to the stores to see which one could offer you the best price. Only after all that deliberation do you then pull the trigger. You didn't want to jump into a huge decision like that. You wanted to know the best value before you committed. But you ordered in food for nearly a week and never factored that cost in … or the cost of replacing new food that has now bad but would not have if you acted faster.
Now: how much time do you spend researching a stock you're going to buy? I'd bet if someone just told you a ticker and said it's great, you'd buy it without hesitation. Most people wouldn't even look it up when they hear a "tip."
But fridges won't make you rich. Picking stocks that go up 2x, 3x, even 10x or more will. So why do we spend vastly more time researching appliances than we do on investments?
Fortunately, there are many financial advisors or research services that "do it for you." That frees you to focus on fridges, cars, on-demand shows, and other life stuff. It's a fascinating phenomenon, but a real one. The mind has a tendency to focus on the small gratifications but leaves the big ones up to chance.
This brings me to market shocks and getting shaken out of great stocks when things get rough. When the 2020 presidential election reached its conclusion, several COVID-19 vaccine announcements immediately followed. The stock market looked like a Space X rocket launching. Every stock was up.
Quickly, a nasty pattern emerged: a rotation out of growth stocks into value stocks. Companies battered by COVID looked to benefit from a country reopening after widespread vaccination and defeat of the virus. Big tech and growth stocks were suddenly poised to be out of favor as every American hypothetically might get back on planes, eat at restaurants, shop at malls, and enjoy the good old life.
This can be seen in the Russell 2000 index – full of small-cap and value stocks. It is up 16% this month vs. the NASDAQ's (tech and growth-heavy index) 8.6% gain (Source: FactSet). That's nearly double.
Suddenly, "stay at home" stocks looked like last year's news. Many who owned these great stocks must have looked at their portfolios bleeding and started wondering: "Is their time over? Should I sell?"
Those who answered yes may be kicking themselves years from now. You see, the massive rotation we saw was likely caused by a mini "quant-quake." Algorithmic traders were crowded into long growth stocks and short value stocks. When you add leverage to that equation and get a hairpin turn in the opposite direction, you get a mad rush for the exits.
When you must sell growth stocks you are long because they are falling and you must cover short value stocks because they are rising, you intensify the very move killing you. Several articles last week came out detailing the woes of quant funds, including this one.
The takeaway here is that the market rotation looked to be forced selling of growth and forced buying of value. The key is to not lose sight of the big picture, which is: big money is buying bigly. Last week was another huge week of stock buying.
Every sector saw more than 25% of the universe of stocks bought in an unusually large way. This echoes my view that stocks get sold into and bought after presidential elections. The fact that value stocks have been bought more aggressively while growth is being held back does not mean that one should rush to exit growth stocks. In fact, I'd argue that you should look for deals in that space as others must reduce their exposure.
Focusing on quick trades is like focusing on the fridge instead of your portfolio. Don't miss the big picture. Picking stocks with excellent sales and earnings growth being bought by big money is a great recipe for long-term success. Trying to capture the quick chop or avoid short-term pain might cost you in the long run.
The amazing Helen Keller may have said it best: "Avoiding danger is no safer in the long run than outright exposure. The fearful are caught as often as the bold."
The Bottom Line
We (MAPsignals) are bullish on high-quality U.S. equities in the long term, and we see market pullbacks as areas to pick up great companies.
Disclosure: The author holds no positions in any securities mentioned at the time of publication.