Trading Desk: Get Off The Market’s Random Walk

This week has reminded me that while there’s some comfort in hanging with the biggest herds on Wall Street, the real returns tend to end up with those willing to be a bit of a lone wolf. Focusing on the S&P 500 and other big indices is convenient but not efficient . . . and we pay a real price for convenience.

Just look at this week’s results. The market as a whole lost ground because brick-and-mortar themes like the banks and industrials took a break from their recent rally. A little money flowed back to battered Big Tech names, but not nearly enough to repair the damage those stocks have suffered in the past year.

And yet some of my more focused portfolios did extremely well. My IPO Edge, filled with the most promising new stocks to come out recently, surged 3% this week and is now up a blistering 24% YTD. GameChangers, where slightly more mature growth opportunities go, is also compounding a narrow lead on the race to the ultimate scoring zone.

Other strategies sat the week out. That’s just how it goes in a market divided into two warring camps, where a win for Big Tech one day means a loss for Big Banking and the S&P 500 as a whole goes nowhere special.

It’s why I hate it when people talk about “risk on” and “risk off” days as though every 24 hours was a different binary event. That isn’t long-term investing. It’s a roulette wheel, a zero-sum game for everyone but the casino.

Strap into the S&P 500 and the random walk will ultimately take you higher at a long-term rate of 8-11% a year once you average out all the twists and turns along the way. That isn’t bad. For some people, it isn’t enough.

You can reach for differentiated outcomes by overweighting and underweighting stocks and sectors that are obviously doing better than the market as a whole. Energy last year, for example, was a spectacular win with a 60% full-year return . . . but even today, it’s barely 5% of the S&P 500.

Do the math and all the energy stocks put together bolstered the broad market by 3 percentage points, which wasn’t enough to fully offset the crater left behind two massively weighted stocks, Meta (META) and Tesla (TSLA), as they imploded.

Yes, all the Exxon (XOM) and Chevron (CVX) on the S&P 500 didn’t make a dent in index fund performance last year. Big Tech simply cast too big a shadow. The moral I take from that: don’t let obvious dead money crowd the sweet spots off your portfolio.

I’m not stopping you from buying META or TSLA because you like their long-term prospects. But you have to be prepared to hold them for that long term, and you have to recognize that there’s no guarantee that Mark Zuckerberg or Elon Musk will ever hit the finish line in one piece.

Likewise, XOM and CVX drifted to irrelevance in the big indices because oil was unpopular when Silicon Valley was printing money as fast as the Fed. Smaller energy companies completely get lost on the S&P 500. It’s like they aren’t even there.

But your portfolio can focus on the little companies. It’s what we do in GameChangers. It’s definitely what happens in IPO Edge, where some of these stocks are so small they don’t even really have operations to speak of.

Under the right conditions, one of those minuscule daydream corporations can soar 30% in one week. Yes, we owned Magic Empire (MEGL) in IPO Edge. It was a wild ride but with adroit handling, we made money there.

And that’s the second thing buy-and-hold-forever types need to understand. We wouldn’t have made money on MEGL if we hadn’t bought and sold in the right place. When you’re content to simply hold, any day is a good day to buy . . . and in theory, you’ll never sell.

We encounter this resistance all the time in the options market, where you need to sell within a certain timeline or you’ll end up owning a stock you never wanted. There’s a ticking clock. When you open a trade, you need to close it out before expiration.

I’m pleased to say that ticking clock is great for discipline. You don’t get greedy. When you’ve made 10-30%, it’s usually time to cash out and get ready for the next trade.

After all, it’s pretty easy to avoid obvious dead money. Some stocks are simply not going to recover from their recent declines without a lot of hard work behind the scenes and a fair amount of time for shareholders to heal.

Those are the stocks you can comfortably underweight or even ignore entirely until they come back to life. Others are more vibrant. This is why earnings season used to be important before it became a ritual event: the quarterly reports told people who actually read them which companies are doing well and which are struggling to simply keep up.

Plenty of companies are doing well right now. The airlines are literally flying. Apple (AAPL) is holding up. And Netflix (NFLX) finally looks ready to come in from the cold.

I don’t put a single stock in my portfolios unless I really like something about what it does and its role in the market. Really, it boils down to whether the stock is cheap or the company is growing fast.

If a stock doesn’t meet either criterion, why do you own it? The index can’t help owning it. Once it buys a stock, it has to hold it until its managers decide that the company no longer fits. You’re not an index.

Or if you want to be an index, I urge you not to weight your portfolio by market cap. Big companies got that way over time, growing out of small companies. Their growth is in the past.

Small companies tend to grow faster. It’s just how numbers work. If you owned every company in the S&P 500 last year but at equal weights, you would have only lost 10% . . . the bear market at the top of the food chain was only a correction after all.

It’s why I’m so leery on Big Tech right now. Face it: AMZN can’t make money right now. Microsoft (MSFT) and Alphabet (GOOG) are cutting the workers that fed their growth agendas. META is a mess.

These companies have been a great ride. But we can’t invest the past. We can only look to the future.