Are you an “emotional” investor?
I’m not talking about whooping it up when you just made a lot of money or cursing up a storm when you lose.
I’m talking about making investing decisions – whether to buy or sell – based more on emotions than data.
I don’t say that to be critical. We can’t help it. We’re human. We react emotionally to everything – especially price movements.
If a stock we want to buy is moving higher, we might become afraid we’ll miss out or that we’ll buy right before it turns lower. We can do all the research in the world, but there’s still something inside of us that impacts our thinking.
This tug-of-war between facts and emotions has always fascinated the trader in me. It used to plague my investing is well, which is what inspired me to create a quantitative investing system that eliminates emotion in favor of facts.
Data keeps you on a winning path – even when emotion promises to lead you astray.
Want an example? Answer this question …
How’d you feel about the first quarter?
If you’re like most investors, your first instinct would be to say: “Gee Jason, it wasn’t so hot.”
Given all the economic and financial messes we seem to be navigating, that’s an understandable response.
But it’s also an emotional one. The “facts” – the data – tell a different story.
That’s a strong first quarter, except for the Dow. Check out at that scorching 17% surge in the Nasdaq.
But… a lot of people missed out. They weren’t “feeling” it.
According to the AAII Sentiment Survey on March 15 – just a couple of weeks from the end of the quarter – only 19.5% of American investors were bullish. That’s basically half the long-term average of 37.5%.
Some of these investors might be more comfortable if they tried “trade-vesting.”
That’s my term for the quant-based moneymaking approach I like to use. And it’s tailor made for the current environment.
As the made-up term implies, it’s a hybrid approach between investing – traditionally viewed as long term – and trading – traditionally viewed as short term.
I identify stocks using an “investing mindset” – based on exceptional fundamentals, powerful technicals, and Big Money flowing in.
Then, I think a little more like a trader.
Not a day trader, mind you. That works for some but not for me. Can you imagine the emotional ups and downs following every price tick throughout the trading day?
I’m talking about managing risk – keeping the occasional loss small – and banking profits in the short to medium term, and then moving on to the next opportunity. Stack your wins atop each other and grow your wealth.
Own the Best
For this to work, I firmly believe that we’re best served removing emotion from investing and following an analytical approach that allows you to own the best stocks with the highest probability of making you money. That’s where our Quantum Edge system is such a powerful asset. It helps us identify the best stocks to own and the best moments to own them.
My system retrieves and analyzes mountains of data every single trading day. That data spotlights those exceptional fundamentals, strong technicals, and Big Money flowing in.
Why? Because those are the three best predictors of higher prices.
I built this whole system because I learned early on to not use “my gut.” Trust me, that’s much better suited for lunch than investing.
I avoid emotion, mood swings, euphoria, fear, anxiety, sadness, guilt, greed, love, or any other feeling to pick stocks. There’s too much of all that going around right now – and all the time, frankly.
When you can buy shares in a growing business that are trading well and getting scooped up by Big Money, you hit the trifecta. All of my data analysis and backtesting show those are the stocks most likely to continue rising.
And that’s regardless of Russia, the Federal Reserve, COVID, inflation, political scandal, or just about anything else in the headlines. There are winners in any environment, and Big Money usually illuminates where they are. In fact, Big Money can be the main reason winners win. All that buying pressure pushes stocks higher.
The heart of our Quantum Edge method is the Quantum Score – all the essential fundamental and technical traits wrapped up into one easy-to-use number. The higher the Quantum Score, the better the stock to own – with one important exception to know about.
It is possible to have a Quantum Score be too high. If a stock scores a perfect 100, it can only go down from there due to the technical component: all stocks get extended from time to time and we don’t want to buy at illogically high momentum. In analyzing 32 years of data in our system, I’ve found the ideal score for buying a stock is between 70 and 85 when expecting short- to mid-term gains.
Now Is the Perfect Time
Looking at our Quantum Edge data, you can clearly see below that selling has dried up significantly from a rough middle of March. (Big Money sells are the red bars). Buying (green bars) has picked up some, but not as much as earlier in the year.
Qualitatively, we have the Fed guaranteeing deposits at the banks that have failed, and we have further clarity on interest rates. Add it all up and I see the market setting up for its next leg higher.
Buyers need a catalyst, and we could get one soon as the next earnings reporting season gets rolling next week. If those reports are stronger than expected, which has been the trend, I expect them to entice more buyers and spark some momentum.
Buyers could also step back in leading up to or right after the next Fed announcement on interest rates, which will be May 3. I believe the Fed will raise rates a quarter of a point and then hit the “pause” button, which should be good for stocks.
I think the second quarter could stay somewhat choppy, but I also think we will enjoy a much stronger market and lower volatility in the second half of the year.
While we wait for the next rally, you don’t have to wait to make money. Try “trade-vesting” – invest in the cream-of-the-crop stocks, bank those nice profits in the following weeks or months, and keep stacking those wins.
It feels good. And that’s one investing emotion I’m okay with.
Editor, Jason Bodner’s Power Trends
P.S. Just a reminder that the markets are closed tomorrow, Good Friday. Our TradeSmith offices are closed as well. We’ll be back at it on Monday. I wish you a happy Passover, Easter, Spring Break, and long weekend.