Staying disciplined to your market strategy is hard, but that’s what Louis Navellier just did with Amazon — here’s what was behind the decision
Statistically, you and I are terrible investors …
This unfortunate reality is the takeaway of research done by Dalbar Inc., a company that studies investor behavior and their market returns.
What Dalbar has found is that the average investor woefully underperforms the broad market.
To illustrate, take the 20 years that ended on 12/31/2015. Over that time, the S&P 500 averaged 9.85% a year.
And how’d the average investor perform?
Let’s put some actual numbers on this. Lots of times, percentages tend to mask how real dollars feel.
If you’d put $100,000 into the — let’s call it the “average investor index” — back in 1995 and let it compound at the aforementioned 5.19%, then 20 years later, you’d have amassed $275,099.
That’s pretty nice.
But let’s now say you’d invested that same $100,000 into a market index fund in 1995, then let it compound at 9.85%.
That would have turned into $654,638 — nearly 140% greater than the returns of the average investor.
By the way, this gap between market performance and the average investor hasn’t gotten better since 2015. Last year, investors lost nearly twice as much as the market — a 9.42% loss compared to just 4.38% for the S&P.
***One of the largest contributors to this underperformance is the reality that most investors don’t have a plan, and therefore, they buy and sell emotionally, often at the worst possible times
The world’s top investors tend to have one thing in common — a specific, detailed market approach that they stick to with great discipline — even when times get hard.
Take, arguably, the world’s best-known and most successful long-term investor, Warren Buffett. From 1965 through early 2017, the S&P 500 delivered annualized returns averaging 9.7%, including dividends. Buffett (through his company Berkshire Hathaway), generate 20.8% per year over that same period.
That’s dominating outperformance.
Now, what’s important to understand is that Buffett’s long-term average hides some less-than-amazing years. But during those lagging years, Buffett remained faithful to his plan and his market strategy — regardless of what was going on in the broader market.
You see, Buffett is what’s known as a “value” investor. What this means is he looks for investments that are being overlooked by the broader market. For example, while shares of XYZ company might be selling for $5 per share, Buffett believes they’re actually worth $8 per share.
Now, a “value” approach to the markets doesn’t always outperform. In many years, a “growth” approach outperforms — think high-flying tech stocks that are wowing investors by posting massive revenue-growth numbers.
What this means is that in many years, Buffett’s returns actually lagged those of the broader market.
To illustrate, below is a chart of Buffett’s long-term percentage outperformance relative to the S&P. Basically, the zig-zag line shows Buffett crushing the market one year, then losing to it the next.
Notice that while Buffett outperforms regularly, there are still many years when he posts substantial underperformance.
Now, think about how Buffett’s returns might have been affected if he’d changed his focus away from his value strategy, and toward a “can I beat the market every year” approach?
He’d have constantly been changing up his stocks, churning his portfolio as he tried to time market-changes, and adjust to new conditions (which is something the average investors tends to spend a great deal of energy trying to do).
The bottom line is a smart investment plan, combined with discipline and patience, is what creates long-term wealth.
***Here at InvestorPlace, one of our own disciplined analysts just made what I consider a hard market decision by sticking to his investment plan
Louis Navellier is a numbers guy. While other analysts move in and out of stocks based on hunches and gut-feelings, Louis’ investment plan is rooted in objective, impartial numbers.
This well-defined, strict set of criteria guides him into select, elite stocks — and as importantly, if not more importantly, those same criteria tell Louis when to sell. It’s then up to Louis to show the discipline to actually follow through.
Yesterday, Louis did something that caught my attention … he recommended his subscribers sell a beloved market-darling …
Simple — it no longer met Louis’ criteria for an outperforming stock. And as a disciplined, market veteran, Louis understands the importance of standing by your plan.
In the second quarter, Amazon posted earnings of $2.6 billion, or $5.22 per share, on $63.4 billion in sales. The consensus estimate called for earnings of $5.57 per share and revenue of $62.48 billion, so Amazon missed earnings estimates by 6.3%.
In light of the earnings miss, analysts have lowered earnings forecasts for the third quarter. Currently, the consensus estimate calls for earnings of $4.53 per share, which is down from previous forecasts for $6.63 per share three months ago. Let’s take this as our cue to exit.
Now, consider the difficulty of making this call …
Amazon is one of the most popular stocks in the world … it has its fingers in everything from e-commerce, to cloud computing, to digital streaming, to artificial intelligence …
It’s also one of the most popular search terms on InvestorPlace.com and is the reader’s choice for our annual, best stock contest for 2019. And plenty of analysts are suggesting the stock will keep rising.
On that last point, here’s a headline from CNBC that came just yesterday, referencing Amazon:
But in the face of all this, Louis stuck to his system — something most investors find incredibly challenging. Below shows why he did this — Amazon now has a “D” rating in Louis’ Portfolio Grader:
***It’s not the first FANG stock that Louis has removed from his portfolio because it no longer met his strict criteria
Earlier this summer, Louis made another hard call, selling a different FANG.
Back on June 11, Louis instructed his Accelerated Profits subscribers to sell Netflix.
Was that sell decision easy or hard?
Well, below is how Netflix’s chart looked on June 11.
I look at this chart and see explosive gains coming out of the gate in January, followed by slower, incremental gains, and then a bit of sideways sawtoothing. Though you could argue the stock was beginning to drift lower, to me, there’s nothing in this chart that’s shouting “sell!”
On top of that, keep in mind that in the previous quarter, Netflix’s U.S. subscriptions had posted a gain of 1.7 million. Overall, subscriptions were up 26% year-over-year. And earnings per share were up, too, by 18.8%.
But Louis’ system was resulting in some red flags, so he made the hard decision to sell. And what’s happened since?
To learn more about Louis’ approach, click here.
***Now, I’m not suggesting Amazon is going to drop by 25% over the ensuing months
It could very easily push higher. But as investors, we can’t control that. All we can control is our actions, and whether we remain disciplined to our specific plan.
For all your Amazon investors, why are you holding Amazon? Please understand, I’m not saying you shouldn’t be an investor. I’m merely trying to draw attention to whether or not you’ve evaluated your reasons recently.
For example, the rationale behind an Amazon-purchase, say, four years ago, may no longer have any relevance to Amazon’s prospects in today’s market. The challenge is to ask “If I didn’t own this stock already, would it be deserving of my money right now, based on how things look going forward?”
If the answer is “no,” then why are you still holding the stock?
Now, there are always some complications, such as “well, my capital gains are huge and I don’t want to suffer the tax hit.” Okay, well, you’ve just identified your reason — though it’s not a pure investment reason — but at least it’s a considered response.
What you don’t want is to blindly hold an investment that might no longer fit your market plan. But the only way you can determine that is … by having a clearly defined market plan.
Warren Buffett does, and he’s created an obscene amount of wealth for investors over many decades. Louis Navellier does, and he has one of the most respected track-records in the entire newsletter industry.
Have a good evening,