Once in a while, I read something that I wish I had said myself.
The drop in growth stocks may be over
or, it may be just getting started.
I don't waste mental energy on predicting market movements
I use all of it to find great companies to buy
— Brian Feroldi (@BrianFeroldi) March 7, 2021
To summarize Brian Feroldi’s tweet, the correction we’ve seen in tech and growth stocks might be finished. Or, for all we know, this may be a lull in the storm with a lot more pain to come.
Feroldi doesn’t waste his energy trying the guess the market’s next move. Instead, he looks for “great companies to buy.”
While our styles are different, that’s what Adam O’Dell and I do in Green Zone Fortunes. Our six-factor rating model is designed to find great companies that rate well based on value, growth, momentum, volatility, quality and size. Our goal is to find companies we’d be comfortable holding no matter what the market throws at us.
It’s a good system. But it is also a humble system. It accepts that we don’t have a crystal ball or perfect foresight.
Keep it Simple When Investing — Avoid Mistakes
You can make a lot of mistakes investing and still do just fine in the end. Even Warren Buffett — the Oracle of Omaha himself — made his share of mistakes.
But there are a couple of mistakes the market won’t forgive. Most stem from one common cause: overconfidence.
Overconfidence makes us do phenomenally stupid things. To list a few examples…
1. Position sizing: The quickest way to turn a great stock into a terrible one is to own too much of it. If a stock makes up 5% of your portfolio and it declines in value by half, the damage to your portfolio is a very manageable 2.5%. You can recover from a loss like that in no time at all. But let’s say you had 25% or 50% of your portfolio in a single stock. That’s a different story. A major loss in an oversized position means a major loss in your portfolio.
2. The illusion of control: Remember, the market does what the market does. It doesn’t know you. It doesn’t care that you “need” it to rise. You and I are passive investors, along for the ride. We can’t control the market any more than King Canute could command the tides. This is why it’s important to stay modest and use rules. You can’t force the market to cooperate, but you can walk away if it isn’t.
3. You are not your trades: This tends to be more of a problem for men, though I’ve seen women do it too. It’s a natural human tendency to project yourself into your investments. They become an extension of your identity. This is wildly dangerous because it causes you to lose objectivity. If you’re wrapped your sense of self-worth into a stock pick, it becomes psychologically impossible to sell it. Ian Cassel had a good tweet on this recently:
Most investor anxiety originates from not being able to keep your mouth shut – over talking your book and constantly letting others know how well you are doing. The market loves to destroy egos. It's why the richest person in the room is usually the quietest in the room.
— Ian Cassel (@iancassel) March 10, 2021
The market loves to destroy egos. And given enough time, it will destroy yours too.
I joked with Adam earlier this year that he trades like a girl.
He knew what I meant, and he took it as a compliment rather than as a playground insult. The Achilles heel for most investors — and particularly male investors — is overconfidence. This is why we build trading rules … and why we stick to them.
Our rules-based approach helped Green Zone Fortunes subscribers lock in average gains of up to 70% in the last six months.
Adam spent years developing the Green Zone Ratings system, and we used it to find each of these recommendations. We used the six-factor system to create our own “rules” for investing. If you’d like to see how to gain access to our model portfolio, monthly stock selections and details on Adam’s Millionaire Master Class, click here.
To safe profits,
Charles Sizemore is the editor of Green Zone Fortunes and specializes in income and retirement topics. Charles is a regular on The Bull & The Bear podcast. He is also a frequent guest on CNBC, Bloomberg and Fox Business.