It’s Time to Mix It Up — Reality’s Starting to Set In

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

There is a marketplace reality that’s beginning to set in this third-quarter earnings season and the plain truth is that the economy is not that robust as yet. You can see this in the economic data that are being presented and you can see it in the raw numbers from corporations. So, as an investor, you have to be highly selective going forward. I’d be in no rush to buy stocks at this time and I’d
certainly be extremely picky.

This means that, if you want to be considering taking on new positions in this environment, only the best of the best stocks will do. I’ve always contended that a risk-capital investment portfolio of stocks has to be made up of several investment themes, but also several investment strategies within the group. By this, I mean that a basket of speculative stocks should represent a mix of trading (or investing) approaches that can easily adapt to the changing nature of the investing landscape. As an example, you might have a few value plays in your portfolio with a one-year time horizon for investment. But, you might also have several momentum trades with close stop limits. I’ve found that, over time, a mix of investment strategies is necessary if you want to outperform consistently. The all or nothing portfolio strategy only works if you get lucky.

Now that the Main Street economic reality is hitting Wall Street, the choppy trading environment for stocks calls for different trading tactics than you’ve used previously. Just a few months ago, all you had to do was own the index and you were making good money. Now, trading action has stalled, so you only want to be considering those stocks that are really outperforming — both in terms of price action on the stock market and operationally within the underlying business.

One of the best ways to come up with lists of great stocks to investigate is to peruse the daily earnings reports to see which companies are outperforming. It may not be that much of a big deal if a company beats consensus Wall Street estimates, but, as an investor, you can use this data as a benchmark for your searches. Most of the finance web sites on the Internet offer all kinds of this data for free and they make it easy to search those companies that beat the Street. Earnings season is always the best time to be researching new stock-picks, so why not take all the companies that beat consensus estimates by 40% and look into them further? Trust me; the list won’t be that long.

It takes time and effort to find the best companies and the best stocks in the entire equity landscape. At any given time, there is only a handful of really attractive stocks to consider. This is especially the case when the broader market stalls. It is incredibly valuable to do your own stockmarket research if you want to be a successful speculator over time. In fact, you have to do your own research, because this is the only way to develop and hone your own market view and your own stock trading skills. You can’t just purchase someone else’s stock-picks and be continuously successful in the equity speculation business. Being good at speculating in stocks is just like playing a great round of golf. No book or service can help you become consistently good at the game — you have to go out there and practice it yourself.