Mental Strategies to Ride Big Trends
Riding big trends is far easier than day trading tiny wiggles day in and day out. You will even come out far ahead. Here I share with you some mental strategies to do this right.
I talked to several friends over the past weeks who are at the beginning of their investing journeys and I recognize a common pattern of counter-productive investment behaviors. They could be the root cause of why people can’t get ahead.
Why Most People Struggle in Investing
Most people are trapped in a mindset that will prevent them from making fortunes.
Firstly, they don’t take investing seriously at all. Not a bit. They think it’s gambling and if you hit it big, they think you just got lucky. People seem to always think of themselves smarter than they actually are. Secondly, they are permanently thinking too small. They are attached to their savings so badly that every tiny blip of red is seen as threat against their financial well-being. They see minus $100 and completely freak out.
A friend chatted me up just yesterday about wanting to close a position that had been in the red for a little too long. He wished to get out as soon as the price hits break-even.
I don’t want to spoil friendships and I reserved my comments, but inside my head I was thinking, “Really? You went through all the stress just to chicken out at break-even? Why didn’t you do your due diligence in the first place so you have some conviction to hold onto it?” He looks at stock prices in a completely wrong way.
I had another call with a friend who keeps asking me what to invest in. I told her this company is great, and that company is great. Do you know what she replied? “They are too expensive now. My sister recommended a similar stock which is only $20.” Seriously? Your sole assessment is the stock price? So you rather listen to your sister than to someone who has already made it.
Always Focus on the Market Cap
Forget about the money, please. Yes, you’ve read it right. It’s paradox when all we care about is the money but here’s the mental strategy:
Look at what’s behind the stock price. Think about it. You’re buying a piece of a company here. What matters is the market cap (short for market capitalization). It’s the total dollar market value of a company’s outstanding shares of stock.
If it was me, I would completely abandon stock prices and feature companies by their market caps only. Stock prices are a fetish and a dangerous allure that invites gambling. That’s why all those penny stock day trading ‘gurus’ get so much attention. People want fast, people want thrills. I can already tell you that day trading won’t get you anywhere, though. You have it much easier by riding big, sustainable trends.
Your money has to be sent to war! It’s a tool you deploy somewhere so that it comes back with even more. Obviously you aggressively plow it into assets that will increase rapidly in value. Things that rise rapidly in value are also pretty volatile. You’ve got to live with that. Volatility is the price you pay for your returns.
You have to trust the process that stock prices gyrate somewhere around an underlying fair valuation and that the power of compounding will do its magic over time. It’s a similar concept to the regression curves I wrote about previously.
The debate about whether to close at break-even will become entirely obsolete. As the power of compounding runs its course, the price drifts further and further away from your entry price. It will stay volatile but that’s simply the nature of the stock market.
Buy Generational Compounders Early
I did the due diligence and bought into a handful of companies with strong conviction. I want to be absolutely certain that I’m invested in tomorrow’s megabrands early. Those are the companies that will increase rapidly in value. They grow 20x in 5 to 10 years and are what I dub generational compounders.
These are the dimensions you have to think in. You only need a handful of those in your portfolio, and you should close holdings for which you don’t have conviction.
If the company has the right products, raving customers, the right management to execute, great team culture and somewhat predictable revenue growth, things will eventually work out spectacularly. I was in the red on and off for 5 years with one of my holdings — five years! I held on because I witnessed how the company progressed and trusted that the market will eventually catch on. It’s up 20x now.
You obviously don’t buy Coca-Cola or Chevron which are already established megabrands. You won’t make any meaningful money with those. You need to have foresight and that’s where your conviction comes into play. You take the current market cap and multiply it by 20x. Then you judge with your best common sense thinking whether that price is worth paying for 5 years down the road.
I didn’t perform complex calculations or compared various greek letters. Throw it all out of the window. That kind of analysis doesn’t work (and I say that as a former Securities Analyst). We want to ride a company’s growth story all the way up. You want to become rich alongside the company founders so you need to find out what makes it get onto an exponential growth trajectory.
Once you have a solid portfolio set up, we can talk hedging strategies to protect against downturns. Here’s where trend following systems with futures contracts will come in handy. If you want to learn a simple tactic, read up on the moving average bounce trading strategy.
There is a ton more I want to teach you. For example, I have 8 dirty secrets for you that investment advisors don’t tell you. I bet you’ll be shocked when you read #6. Just provide your email and I send it over to you.