It's easy, You're Backwards!
When 90% of people are long something, the only thing that can push it higher is if 10% of the capital goes into that thing. That provides 10% upside and 90% downside. Although in practical terms when assets get too neglected there are obvious opportunities to use that cash to immediately get more cash back. For instance, lets say a profitable company was selling at under the amount of cash it has on the books and it earns enough money to pay for any debt obligations it has. Anyone with enough money to take over this company buys the company outright, sells off enough of its asssets and returns the value to shareholders, or returns them directly, and then owns the rest of the company for free. There are so many securities out there, that there's a practical limit to how much any amount of capital can move without creating irrational levels of opportunity.
You'll never make any significant money following any variable in isolation or following the herd and we're all geared to make the obvious plays. Granted, in an early bull market you can benefit a lot from grabbing onto secular growth companies and holding forever, and with probably $100 trillion in global value (not including derivatives) There's still a lot of room for growth, particularly if an entire asset class of stocks is in a secular bull as well.
Everything happens according to nuances. A fundamental might work, but only within a specific framework of classifying the companies properly and sticking to that classification. Technicals might work within a specific framework of risk management and liquidity relative to the capital you move. Mean reversion might work in the context of only entering S&P companies with high volume. Sentiment might work within a framework of how you manage entry and exits. But nothing indefinitely works broadly forever in every case even in terms of a statistical edge.
If you give me a reason you buy a stock, I can give you all the reasons it will fail.
If you buy a stock because of a story, that story is already priced in. If you buy a stock because it's trading below book value, that company may have to sell assets to survive if it is lsing money or will lose money and many of the book won't sell at book and many assets will or already have declined in value since the last reported numbers not to mention the opportunity cost of time holding onto an asset that may never appreciate in value. Price to cash sounds great until the compnay loses money and is priced even more below cash while at the same time losing cash at a rate in which they wcould return all the cash. Negative enterprize value (price to cash after paying off debts below 1) can remain there forever and never liquidate or can lose enough money to not yield a return.
A technical breakout can fail and no longer be a breakout and waiting for confirmation will not get the full results and will often buy before the reversal. Buying at support will fail if that support breaks and becomes resistance and if you fail to manage it's a problem. Negative sentiment stocks may get worse sentiment or continue to lose money such that even if sentiment improves valuing it at a particular fair multiple by the time that happpens the stock may be down.
Knowing that every method you will ever look for is flawed, you can start to build a system knowing the flaws and find context in which a system will work often enough so that the risk and reward and probability are aligned in your favor moving forward.
Some of the greatest stock performers come from the negative operating margins and returns on assets. Moderate earnings growth often times is better than outstanding earnings growth and earnings can miss or beat expectations so past and future earnings growth don't tell you much.
If earnings cycle and do so by sectors and industry along with sentiment of earnings expectations and stock by price expectations, you can put the story into cyclical and secular context.
1)Is the stock benefiting from a cyclical tendency which tends to revert and is best being treated counter intuitively? Is it just a chaotic unpredictable industry in which you are better of looking at statistical reversions in expectation? Or is it benefiting from a secular move and best to overpay where value investors will miss on the Apples and Teslas and Amazons or at least be very late on due to unwillingness to identify it and recognize that overpaying baseed on earnings or even PEG is more than correct if the growth continues tor even accelerates for a long enough time period.
2)If it's benefiting from a cyclical move is that related to a sector rotation, the country undergoing a cyclical or secular move or the industry, or a specific fad within several industries and connected with a theme (5G, benefiting from connection to China or another country, bennefiting from inflation or deflation, or capital rotation, Befitting from a connection to "space race, robotics, AI,quantum computing,new tech",etc)
3)Once you evaluate what the stock is, what it's connected to, what the broader picture is, you can then begin to think about transformative change potential to and around the industry nd then the cyclical economical type change. For instance, if you overbuild ships in periods of high demand and that demand decreases substantially, even a return to higher levels of demand as it was before still may not be capable of pushing up freight rates for shipping stocks. It's only after the containers and ships are repurposed, the assets are sold, the parts re scrapped the material prices rise such that the ships are sold for raw material that the shippers will be able to return. So they become a play only useful if price to cash is low, price to book is low and sufficient for the coming declines. THey may trade in expectation and anticipation well ahead of the turnaround, but knowing what it will take is a much better step towards analysis. If you know an industry will...
you know what, no! I've taught you way too much, I'm not a nice teacher, I'm the options asshole! figure it out yourself!
Long shipping stocks! :-)
You'll never make any significant money following any variable in isolation or following the herd and we're all geared to make the obvious plays. Granted, in an early bull market you can benefit a lot from grabbing onto secular growth companies and holding forever, and with probably $100 trillion in global value (not including derivatives) There's still a lot of room for growth, particularly if an entire asset class of stocks is in a secular bull as well.
Everything happens according to nuances. A fundamental might work, but only within a specific framework of classifying the companies properly and sticking to that classification. Technicals might work within a specific framework of risk management and liquidity relative to the capital you move. Mean reversion might work in the context of only entering S&P companies with high volume. Sentiment might work within a framework of how you manage entry and exits. But nothing indefinitely works broadly forever in every case even in terms of a statistical edge.
If you give me a reason you buy a stock, I can give you all the reasons it will fail.
If you buy a stock because of a story, that story is already priced in. If you buy a stock because it's trading below book value, that company may have to sell assets to survive if it is lsing money or will lose money and many of the book won't sell at book and many assets will or already have declined in value since the last reported numbers not to mention the opportunity cost of time holding onto an asset that may never appreciate in value. Price to cash sounds great until the compnay loses money and is priced even more below cash while at the same time losing cash at a rate in which they wcould return all the cash. Negative enterprize value (price to cash after paying off debts below 1) can remain there forever and never liquidate or can lose enough money to not yield a return.
A technical breakout can fail and no longer be a breakout and waiting for confirmation will not get the full results and will often buy before the reversal. Buying at support will fail if that support breaks and becomes resistance and if you fail to manage it's a problem. Negative sentiment stocks may get worse sentiment or continue to lose money such that even if sentiment improves valuing it at a particular fair multiple by the time that happpens the stock may be down.
Knowing that every method you will ever look for is flawed, you can start to build a system knowing the flaws and find context in which a system will work often enough so that the risk and reward and probability are aligned in your favor moving forward.
Some of the greatest stock performers come from the negative operating margins and returns on assets. Moderate earnings growth often times is better than outstanding earnings growth and earnings can miss or beat expectations so past and future earnings growth don't tell you much.
If earnings cycle and do so by sectors and industry along with sentiment of earnings expectations and stock by price expectations, you can put the story into cyclical and secular context.
1)Is the stock benefiting from a cyclical tendency which tends to revert and is best being treated counter intuitively? Is it just a chaotic unpredictable industry in which you are better of looking at statistical reversions in expectation? Or is it benefiting from a secular move and best to overpay where value investors will miss on the Apples and Teslas and Amazons or at least be very late on due to unwillingness to identify it and recognize that overpaying baseed on earnings or even PEG is more than correct if the growth continues tor even accelerates for a long enough time period.
2)If it's benefiting from a cyclical move is that related to a sector rotation, the country undergoing a cyclical or secular move or the industry, or a specific fad within several industries and connected with a theme (5G, benefiting from connection to China or another country, bennefiting from inflation or deflation, or capital rotation, Befitting from a connection to "space race, robotics, AI,quantum computing,new tech",etc)
3)Once you evaluate what the stock is, what it's connected to, what the broader picture is, you can then begin to think about transformative change potential to and around the industry nd then the cyclical economical type change. For instance, if you overbuild ships in periods of high demand and that demand decreases substantially, even a return to higher levels of demand as it was before still may not be capable of pushing up freight rates for shipping stocks. It's only after the containers and ships are repurposed, the assets are sold, the parts re scrapped the material prices rise such that the ships are sold for raw material that the shippers will be able to return. So they become a play only useful if price to cash is low, price to book is low and sufficient for the coming declines. THey may trade in expectation and anticipation well ahead of the turnaround, but knowing what it will take is a much better step towards analysis. If you know an industry will...
you know what, no! I've taught you way too much, I'm not a nice teacher, I'm the options asshole! figure it out yourself!
Long shipping stocks! :-)
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