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As an investor, one of the most important determinants of success is to always keep busy learning new investment lessons.
But the most important success factor, in my view, is outlining a strategy, and remaining disciplined in executing it, even when it’s most difficult to do so. And that means, simply, keeping an open mind, and searching for stock market profit opportunities that may be out of your comfort zone.
In my work, I follow a disciplined approach — picking stocks that are deemed worthy of investment through the lens of an award-winning, tried and true, conservative-leaning quantitative model — the Weiss Ratings Model. It’s a system I place a lot of faith in for achieving long-term gains that best the market over time.
But using it in day-to-day investing is not as simple as merely buying all the buy-rated stocks and shorting all sell-rated ones. I typically advise individuals to avoid shorting individual stocks, because it can be a dangerous game, and the odds are stacked against you in a number of ways. However, I do avoid the model’s lowest-rated stocks, because my strategy is a relatively conservative one.
The Ratings Model changes every day, with the addition of incremental information having an influence on individual stocks’ ratings, and on the result set as a whole. One of the best ways to catch rising stars — those stocks that are systematically upgraded over time — is to monitor not only the highest-rated ones, but to watch as stocks work their ways up through the ranks.
As an example, near the end of 2011, when the market was looking particularly iffy, I noticed that many financial services stocks were moving up the ranks, from sell, through hold, and eventually reaching the buy threshold. Since this phenomenon seemed to have some fundamental backing (numbers were improving) and some nascent momentum in the view of the market, I decided to overweight the sector, and I was not displeased with the results.
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| There has been a resurgence in certain areas of the technology sector, particularly emerging biotechs. |
Now by rule, I need to wait until stocks reach the buy level before I can consider adding them to the Weiss Ratings Portfolio (remember, discipline is often most valuable to your investing at exactly those times when it seems most difficult to maintain).
But that doesn’t mean that I cannot see stocks working their ways up through the ranks. So I keep a close eye on those up-and-comers, so that as soon as possible I can consider adding them to the Portfolio. And applying this anticipatory approach to using the Ratings has paid dividends (literally and figuratively).
Don’t get me wrong; it can be frustrating sometimes to watch as low-rated stocks, which I know are on the way to improving fundamentals, languish for a time in the sell or hold categories, even while their stock prices take off to breakout moves. These can sometimes be cyclical company shares where cyclical bottoms have been reached (and thus we can expect a significant upturn in the near future in terms of fundamentals) or they can merely be situations where stock sell-offs are severe enough to knock stocks out of buy-rated contention, but where the down moves were clearly overdone. I’m typically a patient investor, and I know how important discipline is to long-term success, but I always keep my eyes out for what is coming down the pike.
I know that my approach is not the same one every investor is comfortable following. Many successful investors I’ve worked with in the past and present are more geared toward shorter trading time horizons, and they focus more on emerging businesses that may not yet be on anyone’s radar.
I should add at this point that one important factor in making a rating using the Weiss Model is that the company must have a minimum amount of time as a public company. This is so the model can analyze financial results and balance sheets over time, and so that it can assess the strength and volatility of the firms’ stock price movement. This makes the model a terrific tool for investors like me who are focused on conservative, long-term growth. But it also means that newer firms (such as those with less than 13 months of stock price activity — i.e. recent IPOs) are excluded from consideration altogether until the minimum amount of source data is available. So, no matter how convinced I am, or the market is, that newer firms are on their way to explosive stock price growth, they remain outside of my universe of investable options.
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Meet Money and Markets’ new technology stock specialist,
Jon began his career as editor, investment columnist and investigative reporter at the Los Angeles Times. As news editor, his staffs won Pulitzer Prizes for spot-news reporting in 1992 and 1994. In 1997, Microsoft recruited Jon to help launch MSN’s finance channel, where he served as Managing Editor. In that capacity, Markman became the co-inventor on two Microsoft patents. From 2002 to 2005, Jon served as portfolio manager and senior investment strategist at a multi-strategy hedge fund. Since 2005, Mr. Markman has specialized in helping everyday investors buy tomorrow’s technology superstars BEFORE they skyrocket. Mr. Markman is the author of five best-selling books, including Reminiscences of a Stock Operator: Annotated Edition; New Day Trader’s Advantage, Swing Trading and Online Investing. |
That’s why I’m so excited about our newest arrival to the Money and Market team — Jon Markman. Jon is a well-known journalist, money manager and investment adviser who is bringing a new service focused on identifying not only new entries to the marketplace (recent IPOs), but in using his own research and analysis to offer investors alternatives that I need to shy away from recommending for the various reasons stated above. Jon’s first Money and Markets article is here , in case you missed it.
I’ve recently noticed that there seems to be a resurgence in certain areas of the technology sector, and that’s where this new arrival’s story gets even more exciting. Jon focuses on this sector, as well as on emerging biotechs — companies the Ratings Model usually hates because their recent and current fundamentals don’t look good to the algorithms. For instance, many of the most exciting biotechs make financial accounting losses during their development periods. All the model sees is the losses, without the logic that the individual firms’ science could produce the next blockbuster drug to the marketplace, quickly turning those accounting losses into real economic gains that last for decades into the future.
Best,
Don Lucek
P.S. Whether you own tech stocks or are just now contemplating getting your feet wet, we have expert help for you on the Money and Markets blog.
Our new technology stock specialist — Jon Markman — is standing by to answer your questions! Here’s your chance to ask one of the world’s greatest tech stock experts anything you like about technology stocks: Simply click this link to jump over to the Money and Markets blog. Jon will check in during the day to answer your questions.
