What do the data tell us about buying at all-time highs? … why stop-losses might be counterproductive … a big win for Louis Navellier’s subscribers

Do you put money into this market here at all-time highs?

I used to be nervous about buying a stock when it was setting a record (or a new 52-week high). My fear was: “We’re in thin air up here. It feels like heightened risk for a big pullback.”

But a study of market history tells us such a fear usually isn’t warranted.

Our hypergrowth expert Luke Lango offered some statistics about investing at new all-time highs on Monday.

From Luke’s Daily Notes in Innovation Investor:

Technically, a bull market starts when stocks rally 20% off their lows. However, most investors wait for the stock market to rally more than 20% off its lows and make a new all-time high before calling it a new bull market.

That finally happened for the stock market last Friday. Therefore, by this more common definition of a bull market, stocks have finally entered a new bull market for the first time since 2021.

That’s bullish news for investors because bull markets tend to last a long time.

Since World War II, there have been 13 previous bull markets. On average, they have lasted more than 1,700 days with average stock gains of about 150%.

The current bull market is less than 470 days old with gains of less than 35%.

Judging by historical standards, this new bull market has a lot more runway ahead of it, both in terms of time and gains.

And yesterday, Luke began a buying spree, once again speaking to the reality of purchasing stocks at a new all-time high:

History says this is a breakout worth buying.

When stocks reach new all-time highs, it usually happens in clusters. In other words, once stocks hit an all-time high for the first time in a while, they usually keep making new highs.

Moreover, when the stock market hits an all-time high for the first time in a market cycle, it usually marks the start of a multi-year bull market.

That’s why we view the market’s recent record close as confirmation of our bull thesis that stocks are entering the second year of an AI-powered bull market that lasts into 2030.

Luke isn’t the only one who endorses buying stocks at all-time highs

William O’Neil, who founded Investor’s Business Daily and created the very popular swing-trading system known as CANSLIM, had a quote about this:

It is one of the great paradoxes of the stock market that what seems too high usually goes higher and what seems too low usually goes lower.

My friend Meb Faber, the CEO of Cambria Investments, is a widely respected quant analyst. Here’s his take:

Is buying stocks at an all-time high a good idea?

No, it’s not a good idea, which should surprise no one.

The fact that it is a GREAT idea, well, that should surprise everyone.

Meb detailed the results of a back-test he ran that had two rules: remain in stocks if they’re trading at all-time highs at the end of the month. If they’re not at all-time highs, then move into to government bonds.

Here’s the conclusion:

It turns out, it’s a pretty damn good strategy.  Better returns than just stocks, lower volatility, and WAY lower drawdowns…

It’s an acknowledgement that all-time highs are nothing to be afraid of.

While these studies should give us confidence, let’s take it one step farther to increase your odds of success

The right answer to “do you put money into the market at all-time highs” should consider your own risk tolerance, financial goals, and investment horizon.

Legendary boxer Mike Tyson famously said:

Everyone has a plan until they get punched in the mouth.

It’s easy to look at Luke’s data, Meb’s research, and O’Neil’s quote and make a bullish investment plan: “The historical data tell me stocks are headed higher! I’m in!”

But that punch to the mouth is coming.

I can’t tell you when, but it’s on the way, and it’s going to ring your bell. If you’re not emotionally prepared, you’re going to do what the average investor does best…

Become terrified… sell at the wrong time… and underperform.

The way to avoid this outcome boils down to two things:

• Understand exactly why you’re investing in every stock/asset you purchase.
• Know exactly what would cause you to sell that stock/asset ahead of time, and don’t sell unless that thing happens.

It’s this second point that trips up so many investors, so here’s a recommendation…

If you’re more of a short-term trader, or not able to ride through meaningful drawdowns, or not 100% committed to a stock for the long haul, the “why?” behind selling a stock should relate to a specific stop-loss amount. For example, perhaps 20% below whatever high point the stock reaches while you own it.

But if you’re a longer-term investor who’s buying quality assets, stop-losses can be counterproductive in the quest for multi-bagger returns. You’ll need a different approach.

Now, as someone who frequently praises stop-losses, I feel a tad heretical in making this point. So, let me clear up any confusion…

The agony and ecstasy of being an Apple investor

Time for a quiz.

If you invested in Apple on January 1, 2000, how much would you be up today?

About 25,000%.

That turns your $10K gamble into a $2.5 million windfall.

But if you’d used a stop-loss, would you have enjoyed this life-changing return?

Nope.

If we go back to 1980, on how many different occasions did Apple investors suffer a brutal “punch to the mouth,” which we’ll define that as a 60%+ drawdown?

Five times.

The worst such drawdown clocked in at 81.8%, covering the period from March 22, 2000, to April 16, 2003.

Imagine you’re trying to save for a downpayment on a home, or your child’s college tuition, or perhaps the new roof to replace your current leaky one…

Are you going to remain in Apple as it falls 81% over three consecutive years?

Fat chance. But even if that were your intention, you wouldn’t have been successful if you’d been using a stop-loss.

Think about it…

Are you going to set, say, an 85% stop-loss which would allow you to absorb that 81% freefall? What would be the point?

And even if you did it successfully one time, consider all the other 60%+ punches to the mouth that Apple investors have suffered over the decades:

In light of such vicious collapses, I suggest a different approach…

If you’re buying today at all-time highs, and you’re adding what you believe is a quality long-term buy-and-hold position to your portfolio, you need a “sell” plan that’s far more robust and existential in nature.

Perhaps it’s a major blow to a company’s core product or service… maybe legislation that fundamentally changes the market in which the company operates… or it could be your growing awareness that the company is failing to keep pace with technological advancement and is at risk of going the way of Blockbuster or Kodak…

Whatever it is, your sell metric needs to be a long-term gamechanger, not just a medium-term price-changer.

Watching this play out in real time

Legendary investor Louis Navellier is one of the early pioneers of using predictive algorithms to scour the markets for quantitatively-strong stocks. Forbes even named him the “King of Quants.”

As a quantitative investor, he has strict investment rules that are rooted in cold, impartial numbers. When these rules trigger a buy, he buys. When they trigger a sell, he sells. It’s pretty simple.

But notice that Louis’ rules don’t usually involve a specific stop-loss. Instead, he watches the earnings strength of his recommendations along with a handful of other related metrics.

Consider what a difference this makes…

In December 2019, Louis recommended that his Growth Investor subscribers buy KLA Corporation (KLAC) which is one of the biggest semiconductor manufacturers in the world.

Within a handful of months, the position found itself down 20% from its most recent high as pandemic fear gripped the markets.

With a stop-loss, Louis might have been forced to sell. But again, Louis’ sell criteria are anchored in earnings strength, not drawdowns.

Fast-forward to January of 2022 through October of 2022. During that stretch, KLAC suffered a 40% drawdown. Again, with a stop-loss, Louis’ subscribers are probably out of the position. Instead, they rode it out.

Well, on Monday, Louis finally recommended his Growth Investor subscribers sell their KLAC stock.

The official gain including dividends clocked in at 304%. A big congratulations to all the Growth Investor subscribers out there for this solid win.

For our purposes today, it’s the “why?” behind Louis’ sell decision that I want to highlight

Louis sold not because KLAC’s stock price had dropped, but because his original reason for owning it changed.

From his sell alert:

We originally added the stock to the High-Growth Investments Buy List in December 2019. At that time, the company had topped analysts’ expectations and benefited from positive earnings revisions.

KLA Corporation continued to beat analysts’ estimates, reporting a 6.3% earnings surprise for its first quarter in fiscal year 2024.

Although the company beat last quarter, KLA Corporation has a mixed earnings surprise history, and I’m not convinced the company will post another quarterly surprise…

The fact is the analyst community has been fairly quiet ahead of its earnings announcement for the second quarter in fiscal year 2024 on Thursday, January 25…

So, I recommend that we take advantage of this near-term strength to book our gain in the stock ahead of its quarterly earnings announcement on Thursday.

Coming full circle, do you put money into this market today at all-time highs?

Yes – IF you’re willing to answer a few questions first…

Are you making a short- or medium-term trade? If so, what’s your stop-loss and why? Are there any other events or triggers that could get you out of your position?

Or are you adding a quality long-term buy-and-hold position to your portfolio? If so, what big-picture variables would drive a sell decision? And are you emotionally prepared to sit through a 60% – 80% drawdown assuming your fundamental reason for owning this stock doesn’t change?

Bottom line: We don’t need to fear buying at all-time highs, but we must do the hard work of preparation ahead of time to maximize our odds of success.

Have a good evening, Jeff Remsburg