5 ELEMENTS THAT MAKE FOR A SUCCESSFUL INVESTMENT
You guys know that the bread and butter of my investing strategy comes from the research I do and the long-term positions I take as a result. I take on a few short-term trades each month, but they make up a small fraction of our gains come year end. I'm not a short-term trader. I like doing research. I like taking on large positions. I like concentrating my portfolio. I like hitting home-runs. Believe me, I've attempted to take on large, concentrated positions looking for home-run stocks that are short-term trades way long ago. It's a ticket to a prescription to xanax and a nervous twitch that scares small children. Not my thing...real simple.
He looks so happy
I wanted to take a look at what has been going right recently. Both as a reminder to myself of what I need to be on the lookout for and as an educational experience so that you can search out these opportunities yourself.
PSTR is a good example of an investment that has treated us well since I took the position more than a month ago. There are several important elements at play within PSTR. They do not come around very often. But when they do they make for an explosive combination of drivers for a companies stock price:
1. A restructuring angle. This is so important. Why? It's a catalyst. It has nothing to do with the fact that a company reduced debt on its balance sheet by X amount. It has nothing to do with the fact that there are new members of the board. It has nothing to do with the fact that certain pieces of a business are spun-off or sold. It has everything to do with the fact that it renews interest in the stock. Certain groups of investors (usually the investors you want to be holding hands with) will begin taking positions in companies that have been restructured and other groups will follow. It begins a positive life cycle for the stock, if you want to call it that. It is a way of removing the bad and bringing in the good. It insures that the stock isn't moving sideways for months or even years. It's a catalyst...bottom line.
2. Technical perfection. What is technical perfection? It's a basing pattern that begins blossoming into an uptrend with volume to match. That's my idea of technical perfection. When the right people start becoming involved in a company, it shows in the price action. You see their tracks. It creates a healthy base with which the stock price can appreciate.
3. A value angle. This creates a sense of confidence amongst the investors in a stock. It gives new investors the psychology necessary to make it through the inevitable bumps in the road that will come along every so often. A good value angle brings in yet another group of investors that can create continued and lasting momentum for the stock.
4. A macro-economic angle. PSTR had the natural gas angle working in its favor. It doesn't hurt that crude oil prices are above $105. A macro-economic picture that is shaping up in favor of the stock creates yet another group of investors who create momentum in the stock price. It also enhances the fundamental picture for the company as it improves earnings.
5. The cricket effect. Undiscovered. Under-followed. A hidden gem. I hate it when I am researching a stock and I see a bunch of different traders or investors talking about it. That's a warning sign to me right away. You don't want to invest in a crowded stock, as it creates noise in the stock price that will have you doubting your decision before you receive your trade confirmation for the buy.
The more of these elements that exist in a company that you discover for investment, the better. I see too many investors just rely on one of these angles, while ignoring the rest. You have the value investor who buys into a stock that he feels is not being priced by the market accurately and has a tremendous amount of upside. The investor is probably right, but where is the catalyst? You know how many value investors I have seen get caught in value traps? Basically watching a stock go sideways for 1, 2 or 3 years, while the rest of the market roars. You need a catalyst. A restructuring provides it.
The next time you discover an investment, make sure that more than one investment angle exists. The more you have the better. The angles will provide the stock with a way of making its way from the hands of the technical players, to the value players, to the macro players, to the activist players. All the while, each of these groups will cause the stock you discovered to turn into a home run at bat that leaves you blushing with excitement.
