Investing Caffeine

You Can’t Kiss Every Pretty Girl (…or Handsome Boy)

April 26, 2014 at 10:25 am Leave a comment

There are a lot of pretty girls in the world, and there are a lot of sexy stocks in the stock market, but not even the most eligible bachelor (or bachelorettes) are able to kiss all the beautiful people in the world. The same principle applies to the stock market. The most successful investors have a disciplined process of waiting for the perfect mate to cross their path, rather than chasing every tempting mistress.

Happily married to my current portfolio, I continually bump into attractive candidates that try to seduce me into buying. For me, these sexy equities typically come in the shape of high P/E ratios (Price/Earnings) and rapid sales growth rates. It’s fun to date (or rent) these sexy stocks, but the novelty often wears off quickly and the euphoric sensation can disappear rapidly – just like real-world dating. Case in point is the reality dating shows, the Bachelor and Bachelorette. Over 27 combined seasons, of which I sheepishly admit seeing a few, only five of the couples remain together today.  While it may be enjoyable to vicariously watch bevies of beautiful people hook-up, the harsh reality is that the success rate is abysmal, similar to the results in chasing darling stocks (see also Riding the Wave).

Well-known strategist and investor Barton Biggs once said, “A bull market is like sex. It feels best just before it ends.” The same goes with chasing pricey momentum stocks – what looks pretty in the short-run can turn ugly in a blink of the eye. For example, if you purchased the following basket of top 10 performing stocks of 2012 (+118% average return excluding dividends), you would have underperformed the market by -16% if you owned until today.

Warren Buffett understands hunting for short-term relationships may be thrilling, but this strategy often leads to tears and heartbreak. Buffett summarized the importance of selectivity here:

“I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”

Rather than hungering for the spiciest stocks, it’s best to find a beauty before she becomes Miss America, because at that point, everybody wants to date her and the price is usually way too expensive. If you stay selective and patient while realizing you can’t kiss every pretty girl, then you can prevent the stock market from breaking your heart.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold long positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in PHM, MHO, CVI, EXPE, HFS, DDS, LEN, MPC. TSO, GPS, BRKA/B, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

Entry filed under: Financial Markets, Stocks, Themes - Trends, Trading. Tags: Bachelor, Bachelorette, momentum investing, momentum stocks, P/E ratios, Warren Bufett.