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Tags: outperformed | s&p | 500 | 2018

How I Outperformed S&P 500 by 30 Points in 2018

economic and stock market success concept showing man jumping from coins to cash

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By    |   Thursday, 03 January 2019 05:41 PM EST

Who’s afraid of the big, bad bear market? Hopefully not you, dear reader.

Despite the worst performance in the stock market in a decade, the S&P 500 declined a modest 6 percent from where it started 2018. Sure, from the late September peak it briefly hit a 20 percent pullback, making for an official bear market. But overall, this bear could have had a worse swipe.

And of course, averages don’t tell the whole story. Thanks to two big rallies in 2018, being a nimble investor throughout the year ended up making the year pretty profitable. At least that’s how it unfolded for myself and my subscribers.

For instance, in the Financial Braintrust, we closed 19 trades in 2018. 17 were winners. One was a loss. One involved being put shares, so if this were baseball that one would have an asterisk next to it. That’s still an 89 percent win rate.

Some of those returns were pretty phenomenal, too. Like our 201 percent gain on Home Depot (HD) calls. Or our 153.8 percent profit on JetBlue (JBLU) calls. Or the 175 percent we made in Petrobras (PBR) calls. All very different companies across very different sectors, and at different parts in the year.

This wasn’t a fluke. In Insider Trade Alert, my other trading service, we closed 25 positions in 2018. 21 were winners, and a mere 4 were losers. And our average gain was 27.62 percent. That’s about 30 percent better than the average investor who simply bought an index fund and went along for a very volatile ride last year.

In that service, we racked up smaller percentage wins, but more of them. Examples include CenturyLink (CTL), where we made a 47.6 percent over three months. And by buying tech names like Square (SQ), Facebook (FB) and Snap (SNAP) back in the March-May selloff in markets, we made 32.9 percent, 95.2 percent and 58.4 percent respectively. We even managed to make 57.9 percent on one of the ultimate blue chips, Philip Morris (PM), far from the wild swings of the tech space.

In hindsight, my favorite has to be the 23 percent profit going long on shares of in-flight Wi-Fi provider GoGo (GOGO). That’s because we caught a profit on the long side during a narrow window. Shares started 2018 over $11 and closed the year under $3, a loss of nearly 75 percent!

This wasn’t a freak year, either. We saw these kinds of returns in 2017 as well in both these investment services. And I’m betting we will continue to do so indefinitely, even as the markets look and feel ugly right now.

So what’s the secret to my success?

There’s no secret. It really and truly does come down to a few basic principles.

Those principles balance the science of investing (the stodgy financial statement-reading part that puts many to sleep) with the art of investing (the part that often gets people overly invested emotionally where they make big, dumb mistakes).

My first principle is simple: I’m all about an unrelenting search for value.

I’m not necessarily looking for extreme value, where I can buy a company with $1 per share in cash for $0.50. But I’m always on the lookout for good prices on great companies. Great prices on mediocre companies may sound more attractive, but it’s harder to consistently make money that way rather than buying great companies and waiting for the market to see things in a better light.

That’s what drove me to trades back in April and May in some familiar companies like Home Depot (HD). While not the most exciting company, it’s a powerful brand and one of the few retailers likely to survive an industry increasingly dominated by Amazon (AMZN). And while the valuation wasn’t extreme, the selloff in early 2018 led to its best relative valuation in years.

Second, patience.

Most of the buying activity in 2018 occurred in two bursts: In the March-May period, and in the October-December period. Most of the rest of the year involved waiting for opportunities instead. But you can make your best returns while waiting—either by holding and collecting dividends and selling covered call options, or by avoiding major declines.

While our patience hasn’t quite been rewarded yet with some of the latest trades added in the waning days of 2018, particularly in the tech space, that’s where patience on the long side will come into play in 2019. The market’s memory is surprisingly short.

Third, and somewhat counter-intuitively to the second point, is a willingness to take profits.

That’s true on options trades, where you’re really just “renting” shares of a company. Even if a stock goes your way, an options trade can easily bleed out on you over time and result in a loss. It’s better to take profits quickly with options as a result.

While optimal for shorter-term moves, these profits can be deployed into longer-term investments where patience will pay off. Investing isn’t a one-size-fits-all approach. Some trades are short-term, and taking profits quickly, particularly in a volatile market, means locking in profits rather than watching them slip away later.

Fourth and finally, it pays to concentrate.

While many newsletter writers may be in favor of throwing out a trade every week (or more often) like throwing a dog a bone, I don’t want to make any trade that I wouldn’t make myself or for the friends and family who count on me for rational, independent financial advice.

Rather than throw out 50 trades a year where maybe half will be profitable, it’s better to wait until there’s a great prospect with a high likelihood of making a decent profit.

Concentrating a portfolio into the best investment ideas reduces the chance for error and improves on the successes you’re going to have. Although nobody bats a thousand, winning on nearly 9 out of 10 trades leaves the average investor far better off than winning 25 out of 50. What’s more, concentrated investment portfolios are the only way to ensure a great return relative to a passive “buy everything” approach that has surged in recent years.

All four of these factors give us an idea of when to embrace risk as investors, and when to avoid it or take profits.

At the end of the day, the market is constantly evolving. And while the IRS cares about the change in the calendar year, I’ll just stick to the principles that work to find the best short and long-term opportunities to grow my wealth. I hope you do too.

Happy New Year, and happy trading!

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.

© 2023 Newsmax Finance. All rights reserved.

Who’s afraid of the big, bad bear market? Hopefully not you, dear reader.
outperformed, s&p, 500, 2018
Thursday, 03 January 2019 05:41 PM
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