An instructive tale on winners and losers … going into 2021 with eyes wide open … a mindset to help you growth your wealth
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***On Friday, March 20th, stocks were plummeting
From February highs, the S&P was down 32% with no bottom in sight.
On that day, here’s what Matt McCall, editor of Early Stage Investor, wrote to his subscribers:
I know it’s scary out there. I know the headlines are terrible. I know stocks are down big. But as I’ll detail in a moment, now is NOT the time to panic.
Had I been in Matt’s shoes, I absolutely would have been panicking.
That’s because Matt had launched a sub-portfolio for his Early Stage Investor subscribers back on February 5th.
Called the Microcap Millionaire portfolio, its timing was flat-out awful, as you can see below.
By mid-March, the holdings in that portfolio were bleeding — some far worse than the S&P itself.
For example, below you can see one of Matt’s Microcap Millionaire picks down 52% within weeks of his initial recommendation. The S&P was down just 25% over the same period.
And yet, in his March 20th update, with the market collapsing, Matt urged calm.
***Fast-forward to yesterday, and Matt’s subscribers just closed out a portion of that position … for a gain of nearly 300%
Yesterday morning, Matt recommended his Early Stage Investor subscribers sell half of their position in Silvergate Capital (SI).
Here’s why …
From Matt:
With the stock up about 300%, selling half your shares now allows you to lock in a double on the entire trade. From this point forward, you’re playing with house money (one of my favorite things to do!) … and still in position to capture further upside.
I do see more upside ahead, but right now I believe the stock is overextended. That’s our cue to lock in our big profits.
First, a big congratulations to Early Stage Investor subscribers on another great winner.
By the way, to add additional context, I should note that the average gain in Matt’s Microcap Millionaire portfolio is now 114% as I write Wednesday morning.
Second, I highlight this story because it illustrates what could be an important principal to keep in mind as we head into 2021 …
Remaining calm in the face of volatility and staying focused on the longer-term.
***Going into 2021 with eyes wide open
Almost three weeks ago, we profiled Matt’s predictions about the market in 2021 here in the Digest. One of his calls was that we’d see increased volatility next year.
Here he is, explaining:
I believe it will be (a profitable 2021 in the market).
But you can have a profitable year and still have corrections. In fact, most years have at least one …
For 2021, I’m upping my prediction to account for increased volatility and the higher probability of two pullbacks of at least 10%.
We’ll have a new presidential administration, the vaccine rollout could hit a bump or two, and the stock market could get frothy at times. All are possible reasons for a correction.
Keep in mind, Matt wrote “at least 10%.” That could easily turn into 20% … or far more.
Sitting here today near all-time highs in the market, it’s easy to forget the temptation to panic when stocks are collapsing, such as back in March. But when your portfolio is being gutted, keeping a level head and a focus on the longer-term can be incredibly challenging.
The experience with Silvergate is why such a focus is needed, especially as we move into a 2021 that could see two or more rounds of significant volatility.
Back to Matt:
Too many investors have missed out on this year’s huge rally from bear market to all-time highs, and I want to do whatever I can to help whoever I can avoid that same mistake in 2021 …
I believe we’re about to witness one of the biggest stock booms in U.S. history. And carefully selected, high-quality stocks will EASILY go up 300%, 500%, and even 1,000% over the next few years.
***There are two critical details in Matt’s comment that we should draw out
The first is “carefully selected, high-quality stocks.”
Matt didn’t sell when Silvergate was down 52%.
How?
After all, most investors would panic being that far underwater. The voice urging “sell now to save what you have left!” can reach a deafening volume.
Matt was able to hold because he had thoroughly researched Silvergate. Because of this, he knew that a 52% selloff wasn’t reflective of Silvergate’s true market value.
With this in mind, he saw 52%-down for what it was — the collateral damage of a panicking “sell first, ask questions later” market.
When you don’t truly know your stocks or their value, that’s when you allow for doubt to creep in. And doubt is often what leads to selling at wealth-destroying prices. After all, when you’re down 52% and you don’t really know what your stock is worth, how do you know whether the selloff is warranted or baseless?
You don’t.
But when your research gives you a conviction that you’re holding a quality stock, and the market is simply pricing it irrationally for the moment, that’s when you can hang on for however long it takes — even though it’s uncomfortable.
And this leads us to the second detail we can’t overlook in Matt’s comment above (bold added):
… carefully selected, high-quality stocks will EASILY go up 300%, 500%, and even 1,000% over the next few years.
Investors need a reasonable timeline-expectation — whether it’s for racking up big gains or for clawing back from an unexpected selloff, like Silvergate.
On that second note, let’s say Matt underestimates next year’s volatility, and the market ends 2021 down 25%.
What then?
Well, first, as we just noted, you focus on the inherent value of your stocks and the longer-term trends driving them — not the market’s irrational suggestion of their value in that moment.
But to our second point, then you simply wait.
With investing, there’s no “game over.” No shot clock … no fourth quarter … no 18th hole …
Given this, you resist the urge to be impatient; instead, you remind yourself that even the biggest trends can take time.
You focus on the trillions of dollars of wealth that will flow toward artificial intelligence, 5G, precision medicine, the Internet of Things (IoT), driverless cars, and blockchain technologies over the course of this decade.
***Now, with that voice of cautious preparation behind us, let’s end on a more exciting note
While we need to be prepared for volatility in 2021, there’s plenty of reason to believe it will be the good kind of volatility — meaning steep market gains.
Let’s circle back to Matt on this:
We have not one but two approved vaccines … and both were incredibly effective in their trials. Plus, more are likely in the near future.
The European Union approved the Pfizer-BioNTech vaccine (in recent days), and the first shots should be given next week. Scientists believe the vaccine will be effective against the new, highly contagious strain England has warned about, which was one of the reasons for the selling this morning.
We also have an agreement in Congress for a second stimulus bill that will inject roughly $900 billion into the economy. It includes checks to Americans for $600 per person (up to certain income thresholds), as well as help for the unemployed, businesses, schools, and childcare.
As you already know, the last round of stimulus checks was a massive boost for the stock market. Millions of Americans who didn’t use their checks for savings or paying of bills used them to buy and trade stocks. Charles Schwab had over 600,000 new accounts opened in the first quarter of 2020.
Add this to already record levels of cash in checking and saving accounts, and businesses and consumers are sitting on a historic amount of money just anxiously looking to spend it. Plus, millions of Americans will once again turn their attention to stocks.
And before you think Matt is alone in this view, billionaire hedge fund manager, and arguably one of the greatest traders of all time, Paul Tudor Jones shares this belief.
From Yahoo! Money:
“The vaccine’s going to bring us back. We’re going to have an incredible growth rebound,” the investor predicted, as pent-up demand from the last year gets carried forward in a big way.
“I have four kids in their 20s. And, it’s like a horse at the beginning of a race,” Jones said. “They’re so ready to get to see their friends, to get to restaurants, to vacation. They’re just ready to get out and go crazy, like I think everyone else in the world,” he added.
For that reason, the investor sees “a second-quarter explosion” in retail, and virtually every other level.
“And you’re going to have this just massive boom …”
Wrapping up, congrats again to Early Stage Investor subscribers on their big win with Silvergate. From the looks of things, 2021 could bring similar gains.
But if we see downward volatility instead, focus on what your research has told you about the quality of your stocks, as well as the strength of the trends that will propel them forward this decade.
That’s how to turn 50%-down into 300%-up.
Have a good evening,
Jeff Remsburg
