Every so often, I remember a critical idea every investor must know.
“If you can’t understand the catalyst that will move an investment in your favor, you are the catalyst of someone else’s profit. Even if you understand the catalyst, you will be wrong and must have a plan.
“Wall Street is pretty good about cleaning up the ill prepared.”
That’s from Howard Lindzon, co-founder of StockTwits, and it deserves to be written in stone.
Mr. Lindzon penned this gem a while ago when a whole bunch of people were betting big on Plug Power Inc. (NASDAQ: PLUG) to keep up a massive upward run.
From the start of 2014 to March 7th, the share price rose a good 400%. All it took was one analyst slapping on a 25% downside potential for people chasing the gains that day for the bubble to implode.
The crowd turned on the analyst to vent their collective outrage, and Mr. Lindzon took them to task.
No one wants to be the person left fuming and helpless. It would be a whole lot easier for us to avoid it if virtually everyone else didn’t seem to be sitting in the same boat right now.
But this is bound to happen in a confused market, and we have to adapt to survive.
Apathy Training
Judging by the kinds of reactions we’ve seen in recent years to good job reports like what we just had on Friday, the Dow and S&P 500 should have tanked that day.
Instead, they completely ignored the risk of $267 billion of imports from China becoming far more expensive, along with the guarantee that the Fed will accelerate interest rate hikes.
These two factors have been consistently cited as catalysts for all the previous “good news is bad news” drops in the markets. That isn’t the case anymore.
Perhaps the climate is truly changing, but what is more likely is that the market has decided to muddy the waters and aimlessly meander in circles.
The old catalysts don’t carry the same weight they used to, while nothing has replaced the weight they carried.
We’re in an apathetic age.
Quite frankly, why should anyone care? We’re a stone’s throw away from a bull run that has lasted a full decade — one that has always had the guarantee of government intervention to bolster headline numbers as well.
Sure, the Fed can engineer it and corporations can play along, but the investor-class masses carry the weight and they have long since been enticed to play along to the bitter end.
So here we sit. The longer we do, the more of a chance there is for us to lose sight of the catalysts that will propel our investments forward, and thus become someone else’s profit.
Our limited capacity to understand and prepare for whatever will happen puts us in a bad position to get caught with our pants down if we place large and broad bets on anything.
The Stock Picker’s Market
I don’t think we’re at a loss for something to do, though.
One of the beauties of investing is that you can make it as broad or granular as you want.
In this sense, we still have plenty of options, though we won’t know if we’ll get a bit of a boost from a tailwind or struggle with a headwind.
A sideways, uncertain market is a stock picker’s market. When the big picture doesn’t show you a catalyst you can understand, start drilling down.
Yes, the broader market will create headwinds and tailwinds, but making sure you know the catalysts that will help or hinder a company will give you a decisive advantage over the countless others who sit in place and wring their hands.
Our editors are doing that right now for their readers…
Jimmy Mengel is providing constant updates and guidance for the emerging cannabis sector.
Nick Hodge has uncovered what will probably become America’s largest gold mine.
Gerardo Del Real just released research on a best-of-breed company sitting on a veritable mountain of one of the most profitable metals in years.
And Jason Simpkins just launched our newest service, The Wealth Warrior, with information about a company that is fighting the “Fake News” disinformation campaigns that have plagued both political parties — if we’re honest — for too long already.
Whatever you do, just remember…
If you “can’t understand the catalyst that will move an investment in your favor, you are the catalyst of someone else’s profit.”
Act accordingly.
