It is extremely difficult to correctly time either the market or the purchase of an individual stock. If you are able to time it correctly once, timing it a second time is nearly impossible, requiring that you exit profitably at the top. When you trade stocks, you are trading based usually only on the stock price and the technicals of that price chart, which are prone to mistakes and errors and an infinite number of external “beta” factors that are not calculable (as opposed to investing based on the fundamentals of the underlying company involved, its financial statements, and its performance, which are all measurable and given to us).
You “might” get lucky once or twice, but the majority of the time your “trade” will not pan out and you will lose. If you play Texas Hold’em Poker, it is akin to staying in the hand pre-flop with a 2-7 offsuit hand (the worst hand in poker) and betting your money (chips) on it. Yes, you could get lucky and win the hand, but the chances are very, VERY low (2-7 offsuit is actually the 169th out of 169 worst hands and has only a 4% chance to win against a full table of players).
Alternatively, investing in a company with great fundamentals, fast growth, solid financials, a proven track record and a great management team (usually founder led) does not require precision timing to “win” or make a lot of money. It does require doing your homework, understanding that the company (not the stock price) is fundamentally sound with excellent execution and performance, and then having the conviction to stick with that investment for the long-term (as long as the company continues to execute and perform). I enter into each investment position with the intention of holding the company for 2-5 years (or more) and expect it to at least 3x itself over that time. I use the quarterly earnings release call combined with the most recently released financial statements to analyze and assess that performance of each company before I own it and ongoing each quarter. I listen to every earnings call to hear the excitement or dejection in the CEO/CFO’s voices and hear their pertinent answers to the analyst’s questions.
The high-growth, phenomenal companies in the 12 stock portfolio I hold all just released earnings in the last month. My core and highest conviction companies (CRWD, DDOG, NET and others) all crushed it! Their incredibly high growth either accelerated or at least remained the same across a variety of metrics that I measure and track. In DDOG’s case, I added to my position. In CRWD and NET, I maintained my position, because I already felt I had a large enough position. Then when this drop started due to the overall sector rotation, I started adding more of them, as I felt the baby was being thrown out with the bathwater. Conversely, when OKTA showed significant slowing in both growth and performance this quarter and showed signs of slipping, I reported that I was selling my entire position and I exited it completely after about 300% returns over the past few years (OKTA dropped significantly shortly after earnings and is down from a high of $294 and was as low as $208 since then).
“Investing” in great companies (instead of trying to trade stocks based on price indicators or other technical chart analses) does not require exact timing. Of course, you can consider the stock price technical analysis AFTER you have discovered fundamentally awesome companies like those in the portfolio, but you simply can not consistently and profitably do the reverse (e.g. you should not trade a stock and then only later look at the fundamentals, hoping you got lucky and traded a solid company. Continuing the poker analogy above, that would be akin to betting money on your poker hand BEFORE even looking at your cards, hoping it will be a good hand after already committing your money/chips. I repeat, out of 3000+ possible companies to invest in on the public exchanges, I choose only 12 (give or take a couple)…what I call my “dirty dozen”! Once I have identified those great companies, I might use some technical analysis of the stock price to help determine when I add to my position (not the other way around)… like right now, for example during an obvious sector rotation:
CRWD just finished their Q4 2020 with subscription revenue growth of 77% compared to the prior Q4 and for the entire year they had 82% annual growth. That is on top of annual growth the prior fiscal year of 93%. When a company is almost doubling its growth every year internally, the stock price eventually has no choice but to follow. It may not be today, or even in the two weeks following their phenomenal release, but as long as they continue to perform well as a company, I view the stock price like a spring that is getting more and more tightly coiled as it is pushed down (as it is now with the overall SaaS and technology market sector). It may get beaten down…but I view that as an opportunity. With the conviction of knowing the company is fundamentally sound and growing like crazy, it gives me the absolute conviction to hold my position or even to buy more during these inevitable market corrections (of which we have had five greater than 30% in just the last three years…counting this one…and the first 4 all rebounded to eventually hit an all time high).
Today (and the past three weeks) have been incredibly difficult to observe. Investing (unlike trading) is a marathon, not a sprint. I do not need to try to time it. And I do not need the money I have invested in these companies for at least 2 to 5 years and I therefore have both the time and the conviction to wait for this coiled spring to explode higher, as long as my companies continue to post such incredible results and to show the growth and leadership they have continued to exhibit.
Picking great companies to invest in is hard, but very possible, and extremely profitable long-term. Conversely, successfully trading stocks and timing those trades precisely enough to make money is not just extremely difficult short-term…but nearly impossible long-term. For these reasons, I “invest” in great companies and leave the “stock trading” to the gamblers, gamers and addicts. If I do place a short-term trade, it is almost exclusively on one of my 12 companies and with the knowledge of their superior underlying fundamentals and performance. I want an advantage before I place any bets!
Cheers!
-Poleeko
