Yahoo Finance Finding True Market Leaders: Anatomy of Winning Stocks
Want to outperform your peers and the market? Investing is all about stacking the odds of success in your favor. Today we are going to discuss ways to do so:
Are you in a Bull Market? (Important!!)
Ensure that you are in a bull market because roughly 75% of stocks follow the market direction. Just like a farmer must wait for the right season before planting crops, an investor should wait for a bull market before aggressively buying stocks. In other words, a farmer would not grow crops in the dead of winter when the ground is frozen over, and a savvy investor should not take to on too much long exposure in a bear market environment.
How do I Know if I am in a Bull Market?
To determine market direction, overlay a 200-day moving average on the daily chart. Above the 200-day means stocks are in a bull market, and below it means investors should be cautious. But don’t just take it from me; take it from multi-billionaire investing legend Paul Tudor Jones. In an interview with Tony Robbins, PTJ revealed, “My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: How do I keep from losing everything? If you use the 200-day moving average rule, then you get out. You play defense and you get out.”
Image Source: Zacks Investment Research
In conjunction with the 200-day, investors can track the net new highs versus lows in the market. If more stocks are consistently making new highs than new lows on a daily basis, then you guessed it, we are in a bull market.
Image Source: StockCharts.com
A Body in Motion Will Remain in Motion
Buy stocks that already have momentum. Newton’s First Law of Motion states that “A body in motion will remain in motion..”. The same applies for stocks. Want to find the next stock to double? Find stocks that already have doubled. Recent examples include Nvidia (NVDA) and Super Micro Computer (SMCI).
Image Source: Zacks Investment Research
Find and Invest in America’s Innovators & Disruptors
The best stocks come from industries that are disrupting the way we live. Netflix (NFLX) took us from Blockbuster to streaming. Amazon (AMZN) took us from brick and mortar to ecommerce.
Harness the Power of the Zacks Rank
The fastest and most straightforward method to size up a company’s fundamentals is to look at its Zacks Rank. The Zacks Rank was created by Len Zacks, the Founder and CEO of Zacks Investment Research who has a Ph.D. from MIT and spent countless years on Wall Street testing statistical models to uncover ways to beat the market. His research led to a breakthrough discovery:
“Earnings estimate revisions are the most powerful force impacting stock prices.”
Stocks discount the future. With that in mind, find the stocks expected to grow the most in the future.
Make Asymmetric Bets, Manage Risk
Depending on how you look at it, the beauty of the stock market is that you do not have to be perfect. Even if you find fundamentally strong, institutional quality stocks, you will be wrong and wrong often, and that’s okay. Take asymmetric bets - I like to shoot for a 5-to-1 reward-to-risk ratio – meaning for every dollar I risk; I am shooting for a 5x the win. In baseball terms, you want to be a slugger like Barry Bonds, not a base hitter. By taking on an asymmetric reward/risk framework such as the 5/1 r/r, you only must be right 30% of the time to be profitable. Furthermore, if you are correct 40% of the time you will make a fortune. Let the simple math work in your favor when it comes to investing!
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
Netflix, Inc. (NFLX) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
Super Micro Computer, Inc. (SMCI) : Free Stock Analysis Report
