Trading Places with Tom Bowley

One Obstacle Every Investor Must Overcome To Enjoy Stock Market Success

 | 

The demon lies within. Listen, I know because I've had to overcome this demon. Stock market success - true, sound, market-beating success - didn't occur until I realized one thing. The stock market, collectively, is smarter than me. When I began constructing our stock portfolios at EarningsBeats.com in Q4 2018, I felt there were two very important themes and I needed to consistently apply both.

Marry Fundamentals with Technicals

It seems simple enough and sounds awesome, right? Nearly everyone I've followed over the years has been one or the other - either a technician or a staunch fundamentalist. I used to lean much more heavily towards fundamentals. My background was in public accounting. I practiced as a CPA, specializing on the audit side, for two decades. So if you said "PE Ratio", you were speaking my language. One of the biggest mistakes of my stock market life was never buying into the Amazon "hype", if you will. How could anyone buy a company that kept losing money - and tons of it? Valuations were off-the-chart ridiculous based on every type of fundamental metric I'd ever considered. 20 years ago, AMZN traded as low as 5.51. Today it's 3,200. Check out AMZN's 20-year monthly chart and tell me.....who's the fool?

David Keller, Chief Market Strategist here at StockCharts.com and a very good friend of mine, talks quite a bit about biases in the market and it's so true. I had a preconceived notion that AMZN was always overvalued and that a day of reckoning was coming. Earnings drive valuations and this company had NONE for many years. Despite that, value was building in AMZN shares and only technicians could see it. Fundamentalists like me had no clue. I read article after article that talked about AMZN's crazy valuation and it fed my preconceived notion. What a BIG, BIG mistake. Fortunately, I learned from that and I can share that experience and many others with our EarningsBeats.com community. My stock market tuition was fully paid with AMZN.

Throughout my public accounting career, however, I was always fascinated with charting and technical analysis. And it was lessons like AMZN that truly inspired me, along with John Murphy's eye-opening books. If you want to really begin to understand how the stock market works, I'd highly recommend John's work. Like I said, it was eye-opening for me. Outside of John's influence on my work, I'm primarily a self-taught technician. If something doesn't make good common sense, I don't buy into it. You'll never hear me say "buy this stock because this line crossed that line". That's truly a fool's game, in my opinion. I needed to know what those two lines meant. If it didn't make sense, I threw it out.

I do believe that, in the end, earnings and the potential for future earnings, create the value in a company. What it took me awhile to understand, though, is that Wall Street firms have many MBAs evaluating the things that I never could grasp, see, feel, or touch. That's when the light bulb went off for me. So now I research earnings reports every quarter AND look at the technical picture. If both line up, a stock is added to our flagship Strong Earnings ChartList and this ChartList becomes the heart and soul of our portfolios. Technical analysis is the missing link for fundamentalists. The charts tell us the things we don't understand. When you believe that you know more than the market, that's when you're in very big trouble. Wall Street will steamroll you. Wall Street isn't "crooked", we simply need to understand that we have biases and we cannot let those biases cloud the REAL view of the stock market. This leads me to my second theme.....

Leaders Only Please

This seems so simple now. And I cannot tell you how many members at EarningsBeats.com have written to me and said how simplistic our approach is. I take that as a HUGE compliment. I LOVE the emails where members tell me they've learned so much. I still read John Murphy's Market Message just about every day. Why? Because he has a wealth of knowledge and I never know when I'll pick up something that will again improve my approach to the stock market. I view my role at EarningsBeats.com as a way of paying it forward. Don't get me wrong, I love to hear that members are doing better than they ever have financially, but it's the education that you can take with you and continue to apply.

I wish I could list below all the emails I've received over the past year that have questioned our Tesla (TSLA) selection in our portfolios. Listen, I agree with many of you that have stated that the valuation makes no sense based on the fundamentals. I get it (see my AMZN discussion above). But THIS time, I'm trusting the Wall Street MBAs because they know a LOT more about the true valuation of TSLA than I'll ever know based on their PE ratio. But we're now in our fourth consecutive quarter with TSLA in our Model Portfolio. The relative strength doesn't lie. Automobiles ($DJUSAU) have been THE best industry group over the past year and TSLA and NIO have been CRUSHING it. We're riding the wave. When the charts turn, we'll exit. In the meantime, these two stocks have led our portfolios to ridiculously positive results. Here are the two charts:

TSLA:

NIO:

The blue-dotted vertical lines represent the approximate date that each was added to our portfolios. Better-than-expected earnings earned both of these a spot on our Strong Earnings ChartList (SECL), and their tremendous relative strength and the relative strength of their industry group earned them a key spot in our portfolios. We're seeing tremendous results AGAIN this quarter in our portfolios as you can see from the summary below:

"This Quarter" represents the period from November 19, 2020 (the date of our last portfolio selections, or "Draft" as I like to call it) through Thursday's close and our numbers are phenomenal. The Model Portfolio has now gained 219% in 2 years 1 1/2 months. Our Strong AD Portfolio is up 85.5% in less than 8 months! Granted, it's been a great period for stocks, but how many analysts were bullish back in May like we were? Hindsight's a beautiful thing, but doing it in real-time is quite another.

The Future

I'm so bullish as we move into 2021. The pandemic has obviously strained our health care system and it's been the biggest health crisis of my lifetime, but let's not confuse a pandemic with a bear market. That was the mistake nearly everyone made in the spring. As I pointed out months ago, the 1918 pandemic resulted in........a GAIN in the Dow Jones during both 1918 and 1919. The stock market initially reacted bearishly as the virus spread then, but just like this year, we rallied strongly to set new highs.

We're in a secular bull market. The market will withstand everything that's thrown at it. You can rely on your preconceived biases of overvaluation or you can listen to Wall Street's MBAs and recognize the rotation of capital into equity markets around the globe.

FREE Saturday Event

I understand that many investors don't like to invest in individual stocks. They prefer ETFs. Well, here's a bit of ground-breaking news. ETFs invest in stocks. So technically, you still own stocks. We are hosting an event on Saturday, January 9th at 10:00am EST to help you work through a myriad of ETFs (there are so many choices!). We'll be unveiling our EB ETF Analyzer, a spreadsheet (members will be able to download) that will help you understand EXACTLY what you own, so that you can make informed decisions about your financial future. We started our Model ETF Portfolio on October 19, 2020 (up nearly 15% vs. 11% on S&P 500) and we'll be "drafting" a new slate of ETFs on January 19th that will serve as our Model ETF Portfolio for the subsequent 3 months. The purpose of this event is to show everyone how you can structure an ETF portfolio that's designed to beat the S&P 500 in a secular bull market. Don't settle.

We will send out room instructions to everyone in our EB Digest community Saturday morning. To become part of our community, you can provide your name and email address and we'll add you to our free EB Digest newsletter HERE. There is no credit card required and you may unsubscribe at any time. Or you can return to this article after 9:00am EST Saturday morning (the room will open at 9:00am EST, while the event will begin at 10:00am EST) and click the following link:

https://us02web.zoom.us/j/82362976312

All of those joining us by using the room link above will be added to our EB Digest newsletter. Again, it's free and you may unsubscribe at any time.

Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market. Learn More
Subscribe to Trading Places with Tom Bowley to be notified whenever a new post is added to this blog!
comments powered by Disqus