That quote come from our global macro specialist, Eric Fry. In his Smart Money update this week, Eric discusses one of the most important things you can do to protect your money … Dump losing stocks. It’s hard to do. No one likes to lock in a loser and accept being wrong on an investment. But being disciplined enough to take this step is required to protect you from further losses … as well as to avoid the opportunity cost of missing better returns elsewhere. Today, let’s find out Eric’s simple method for weeding out the losing stocks in your portfolio. I’ll let him take it from here. Have a good weekend, Jeff Remsburg |
This Simple Purge Tactic Can Lead to Portfolio Success
By Eric Fry
As we slowly tread through the infamously treacherous months of September and October … and as we approach what could be the most contentious and acrimonious presidential election in our nation’s history … we must exercise caution.
In last Thursday’s Smart Money report, I told you that my No. 1 tactic for exercising caution is “Reducing your overall exposure to stocks and/or implementing stop-loss limits on most positions.”
In other words, dumping “stale” or losing positions that have been taking up space for quite a while. If you hold stocks like these, they should be the first to go.
I know, it’s difficult to “concede defeat” on a stale or losing position, especially if you’ve held that stock for a long time. But we’ve got to do it.
Clearing out stocks like that can help you to focus on better opportunities … and raises the capital necessary to invest in those new plays.
And so, I want to show you a “method” to help you make these difficult decisions.
We’ll go over that today.
Plus, I just put together a list of 25 stocks that I believe all investors should “dump” right away … and I’ll show you how to get a hold of that list, too.
Take a look …
The “Spark Joy” Method
Marie Kondo, the “decluttering” guru, has made millions of dollars by devising and popularizing a common-sense method for purging a home of unnecessary and unwanted “stuff.”
We investors could enrich ourselves as well, simply by applying some of Kondo’s cleanup tactics to our portfolios.
Kondo’s decluttering strategy features one essential question: Do the items you wish to keep “spark joy”?
Items that spark joy should remain. Those that don’t should go away.
This tactic can work wonders on an investment portfolio, too.
Now, you may ask, how can a stock “spark joy”? If so, then just ask, “Will this stock make me rich?” … “Will this stock be a 10-bagger?”
Remember, your goal is to identify the items you wish to keep, not the ones you wish to discard. The discard pile is simply the by-product of what you wish to keep.
In order to “Marie Kondo” your portfolio, purge it of the companies using yesterday’s technology to compete in today’s world … and companies that are trying to hang on to an outdated business model, about to be hit hard by today’s most disruptive firms.
Do you own any of a traditional electric utility company like Edison International (EIX) instead of the best companies that are developing “smart” residential energy storage technologies — one like SolarEdge Technologies Inc. (SEDG)? If so, you are making a huge mistake and missing out on huge gains.
Look at this sales growth chart …
Here’s a chart of five years of growth comparing traditional payment processors like Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) to the growth of the new technology disruptor in the same space, Square Inc. (SQ). It’s just no contest …
Obviously, none of us has a copy of next year’s newspaper. We can never know exactly what the future will hold.
Therefore, determining which stocks will soar and which ones will plummet is an inexact science. However, based on decades of stock market history, we know a few key details about what produces investment success over time. For example, we know that:
- Fast-growing companies tend to produce better investment results than slow-growing ones.
- Lowly valued companies tend to produce better investment results than richly valued ones.
- Cash-rich companies tend to produce better investment results than heavily indebted ones.
- Companies that generate positive cash flow tend to produce better investment results than companies that generate negative cash flow.
- Companies that possess a formidable “moat,” as Warren Buffett calls it, tend to produce better investment results than companies without any special competitive advantage.
So, when we examine the stocks in our portfolios, we should favor those that possess one or more of these winning traits.
Obviously, some stocks that possess serious flaws will buck the odds and perform well anyway. Sometimes heavily indebted, slow-growing companies find a way to reverse their declining fortunes and become major successes. But companies like that are rare outliers.
You don’t want to pursue investment success by betting on flukes. Instead, you want to stack the odds in your favor as much as possible.
And I’ve discovered a way to do that …
The “Portfolio Purge” Formula
It’s a simple tactic for raising the odds of investment success — for determining which stocks are likely to flourish … and which are likely to disappoint.
You may be shocked at how simple this two-part filter is. But despite its simplicity, it is extremely valuable and powerful.
I routinely use this simple test to identify potential investments. Obviously, my research does not end there. Once I identify a potential investment, I qualify that stock by conducting additional targeted qualitative and quantitative research.
Some investment candidates make the cut. Most don’t.
And more pertinent to today’s discussion, I also use this test to identify stocks to avoid … and dump.
Knowing which stocks to avoid can work wonders for your portfolio.
But what many investors fail to realize is that well-known, popular stocks are often the most dangerous. I’m talking about once-popular stocks like Enron, Countrywide Financial, Fannie Mae, Kodak, Blockbuster, and even General Motors. But my “Portfolio Purge” Formula cuts through all the noise. It doesn’t care if a stock is popular or unpopular.
So, for the first time since early this year, I applied this test to the S&P 500 (excluding financial sector companies) to find a “Bottom 25.” Based on historic tendencies, these stocks, as a group, will struggle to keep pace with the overall stock market during the next five years.
If these stocks were graduating high school seniors, they would be voted “Least Likely to Succeed.”
Certainly, this list might produce a couple of outliers — stocks that will manage to reverse their negative trends and deliver shareholder-pleasing results.
But most members of this group are likely to disappoint.
If you own any of them, be sure you’ve done your research and that you have good reason to keep them.
If not … purge them from your portfolio.
To learn how to get my “Bottom 25” list — and the details of my “Portfolio Purge” Formula — don’t miss this special presentation I put together.
To view it, click here.
Regards,
Eric Fry
