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The Single Most Important Number in Investing

The Single Most Important Number in Investing

Source: InvestorPlace Media

A Note From the Editor: We all know what’s happened in the markets in 2022. It makes us wonder: What if you could’ve known in advance? The good news is that there’s an “advance warning” system out there – never before revealed to InvestorPlace readers – that could have identified every major market move of the past 25 years ahead of time.

This system could issue a new alert at any moment. And we’re giving InvestorPlace readers an unprecedented FIRST LOOK at this system… before its next alert goes out… during a special event on Thursday, Sept. 29, at 4 p.m. (You can sign up and reserve your spot for that event here.) Meanwhile, in today’s Market360, we’ve invited InvestorPlace Editor in Chief Luis Hernandez to share with us how he learned about this system.

How many times have you bought a stock…. then sold it a short time later due to a “gut feeling”… only to kick yourself later because it went on to skyrocket?

If you’re like most investors, the answer is probably “plenty.”

Well, we can help put a stop to that right now.

I want to tell you a story about a colleague who figured out a practical solution to this problem. You see, this colleague was great at buying stocks… but he was a lousy investor.

Let me show you what I mean…

In October 2016, my colleague bought Advanced Micro Devices Inc. (AMD).

Chart showing the price of AMD from 2016 to 2021

This chart makes him look like a genius. AMD has moved up as much as 1,000% since he bought into the stock.

But simply buying a great stock doesn’t make you a great investor. You see, my colleague also sold AMD… nearly right away.

Chart showing the price of ADM from 2016 to 2021

Why did he sell it so quickly?

The reason was simple: He trusted his gut.

The same gut that we all use to tell us right from wrong and who to be friends with. You know, that emotional being in us that makes a lot of tough decisions.

Clearly, when it came to AMD, that didn’t work out well. If you’re like most investors, you probably have stories like this, too.

So how is it that we, like my colleague, can buy the right stocks… but wind up being terrible investors?

It’s because using our “feelings” or “gut” is a terrible way to invest.

And in my story, my colleague realized his mistake. He knew that what he really needed wasn’t just a way to pick good stocks, but a regimented process for understanding exactly when to buy a stock, how much to buy, and when to sell it.

The answer, my colleague says, all starts with this formula:

Equation for when to buy a stock, how much to buy, and when to sell it

Here’s how my colleague explained it to me…

Make Momentum Work for You

It’s all about the findings of two Nobel Prize winners in behavioral economics.

Richard Thaler and Daniel Kahneman are heroes when it comes to their studies around investor psychology… and their work that led to winning the Nobel Prize in Economics.

Their first finding was that investors are “risk-seeking when we’re losing.” Think of it as “rationalizing your decision after you make it.”

When a stock is falling, you say to yourself:

  • I’m going to buy this on the dip.
  • This stock will come back, and my breakeven price will be lower.
  • It’s just a paper loss.

Really, what you’re doing is adding more risk by buying more or holding on to a stock that is falling. That sort of thinking ignores the single most important factor in investing: momentum.

In plain English here’s what that means: When a stock has a confirmed uptrend, it is more likely to rise in the short term. When a stock has a confirmed downtrend, it is more likely to fall in the short term.

By buying more of a stock as it’s falling, or by “waiting” for that stock to turn around, you are taking on risk and even increasing risk. You are setting yourself up to lose more money.

So how do you combat that? You cut your losses when a stock is in a confirmed downtrend.

But what Thaler and Kahneman found about winning is even more important to understand. They found that when a stock rises, we are “risk-averse when we are winning.”

Typically, when a stock is rising, we get excited. We have a winner, so we decide to sell our stock to “lock in our gains.”

That’s lowering our risk – which sounds good!

But the truth is that when a stock is rising, and it is in a confirmed uptrend, you are winning. This is the best time to either ride the winner higher or even add more money to the position to take advantage of its short-term rising outlook.

This insight is what led to the discovery of the single most important number in investing and why it works.

This number is the formula I showed you above for the “VQ,” which stands for Volatility Quotient. It’s at the heart of the system my colleague will tell us more about on Thursday, Sept. 29, at 4 p.m. (You can reserve your spot and sign up for that event here.)

And, my colleague tells me, it solves the problem he and so many other investors experience…

How Not to Lose Out on 10X Gains

VQ is a measure of historical and recent volatility – or risk – in a stock or other security. And that measurement is focused on the moves a security makes.

Here, my colleague says, it what it tells you:

  • When to buy a security.
  • How much of a security to buy.
  • When to sell a security.
  • And how risky that security is – how much movement you should expect.

Now, different investors use different strategies to help them make decisions about when to buy and sell. Like trailing stops, which act as a point at which you sell a stock.

You ride your winners and cut your losers.

But using a generic trailing stop percentage, such as 25%, only gets you so far. No two stocks are the same.

That’s why you can use the VQ number for each stock you buy to determine exactly what the right stop loss would be.

On the AMD trade above, if my colleague ignored his gut and just followed a 25% trailing stop, he would have made nearly 50% instead of losing 3.5%. Not bad!

But, had he used a VQ-based trailing stop he could have made more than 1,000%!

Chart of ADM and the original trade, 25% trailing stop and VQ trailing stop

Moreover, my colleague’s VQ system doesn’t just analyze stocks and other securities. It can foresee what’s happenings in entire markets.

It was dead-on accurate about this bear market… and the COVID crash back in 2020. It also could have warned us about every major bear market and bull market going back roughly 20 years.

Every time, my colleague’s system could’ve alerted you ahead of time and warned you to side-step every downturn and get back in at the perfect time.

On Thursday, Sept. 29, at 4 p.m., my colleague – the same man who was great at buying stocks but bad at investing – is going to explain a lot more about how this system works.

And why any investor, regardless of whether they have $500 or $5 million to invest, can help achieve greater gains using the VQ number and this system.

There is no cost to attend or obligation to buy anything. All we ask is you register for the event by clicking here.

I hope to see you there!

Sincerely,

Luis Hernandez's signature

Luis Hernandez

Editor in Chief, InvestorPlace

Louis Navellier, who has been called “one of the most important money managers of our time,” has broken the silence in this shocking “tell all” video… exposing one of the most shocking events in our country’s history… and the one move every American needs to make today.


Article printed from InvestorPlace Media, https://investorplace.com/market360/2022/09/the-single-most-important-number-in-investing/.

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