The No. 1 Way to Master Trading
“The only way to make sure you own winners is to buy winners.”
It’s pretty simple advice — absurdly simple, maybe — but it’s really as good as gold.
I first heard that phrase years ago from Frank Teixeira, a fund manager who launched one of the first technical analysis-focused mutual funds.
Great Advice From a Legendary Trader
While other fund managers toil away trying to figure out how a bunch of potentially unconnected fundamental factors (like earnings and capital expenditures) might work their way into a stock’s share price, Frank only uses one input — the price action — to make buy and sell decisions for hundreds of millions of dollars in investor assets.
A couple years after the dot-com bubble burst in the early 2000s, Frank was walking down a hallway at his firm when he bumped into one of his fundamental colleagues.
This guy was scratching his head over Apple’s newest device, the iPod.
After suffering alongside the rest of the tech sector for a year or two, Apple was finally going on a tear again — all thanks to the popularity of this little white box that could put 1,000 songs in your pocket…
While Apple climbed, Frank had been adding more to his fund’s Apple position. And the fundamental investor couldn’t figure out why.
“I really can’t see a justification to own Apple anymore. This iPod thing is just a fad,” sighed the fundamental portfolio manager.
“You think the iPod’s a fad? I hope you’re right!” Frank shot back.
Sure enough, it was the beginning of a colossal multiyear trend that sent shares of Apple rocketing more than 2,000% in the five years that followed.
As investors, we want to own the fad stocks!
Price Action Is King
We don’t necessarily care what’s driving the price action — we only care that the price action is trending. To paraphrase one successful investor we know, “The market doesn’t pay you extra to explain why. It only cares about the what. Just identify what’s working and you’re off to a good start.”
And that brings us to Frank’s quote a moment ago — the only way to make sure you own winners is to buy winners.
In other words, markets trend.
Strength often begets strength.
That jives with the research I shared with you last month, showing that markets that double are actually twice as likely to double again as they are to fall back down to breakeven.
Like most pieces of simple but powerful investment advice, buying winners is easy to understand and hard to pull off…
If you picked 10 investors off the street and asked them whether they’d be willing to buy a stock after it had just doubled, most would think you were nuts for even asking the question.
Fact is, buying winners is often hard to stomach.
But you don’t need to take it quite to that extreme to be successful in this market.
One of the most effective exercises you can do for your own portfolio is to ask whether a stock is “working in this market” before you decide to buy it or judge whether you should continue to hold it.
As markets press their way to new record highs this summer, stocks that aren’t working right now shouldn’t have a place in your portfolio.
Meanwhile, don’t fear fads!
For Technology Profits Daily,
Chief Quantitative Expert