One Simple Investing Rule that Could Save You Thousands

In yesterday’s Rum Rebellion, I discussed the stretched valuations on Australia’s tech stocks. Later in the day, I was looking through this website when I noted the top three performers in the ASX 200 all came from the tech group I discussed yesterday.

In the year to 28 March, Afterpay Touch Group [ASX:APT] was up 200%, Appen [ASX:APX] was up 138% and Wisetech Global Ltd [ASX:WTC] had advanced 128%. Altium [ASX:ALU] came in at number 15 with a 52% rise over the past 12 months, while Xero [ASX:XRO] was just outside the top 20 with a 41% rise.

I check this site out from time to time and sort by annual return to get a sense of where the money is flowing. Looking at the top 10/20 gainers and the top 10/20 losers gives you a good idea of that.

Sometimes there are themes, and sometimes there are just random stocks that make the list. But there is always important information to extract.

Free Report: ‘The Top Three Gold Stocks on the ASX’.

The theme of current top performers

The theme of the top performers is that tech stocks dominate right now. That’s not surprising, tech is hot around the world. But as I showed yesterday, these stocks have a lot of future growth priced in. They don’t want to disappoint, otherwise their share prices will cop it.

The worst performers were also interesting to note. Looking at this list is a reminder that ‘reversion to the mean’ is one of the iron laws of the market. That is, it reminds you that the popular stock doesn’t always remain so.

In particular, I’m referring to two lithium stocks, Orocobre [ASX:ORE] and Galaxy Resources [ASX:GXY]. Lithium, as well as other metals/minerals like cobalt, went through a boom a few years ago. You probably remember. You may have even dabbled in the boom.

Of course, it was all due to the electric battery revolution. And while this ‘revolution’ is still intact, the speculation has come out of the miners digging for the raw materials the batteries require.

Let’s start with Orocobre’s chart…

Orocobre Limited 28-03-19

Source: Optuma

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Since peaking in 2018 it’s down around 50%. It’s a similar story for Galaxy Resources. Its share price is down 60% since the peak…

Galaxy Resources 28-03-19

Source: Optuma

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When it’s easy and obvious, it’s in the price

In late 2017/early 2018 there was a lot of hype around the ‘electric car battery revolution’. Investing in these stocks was easy. You didn’t feel stupid telling people you owned this type of company. After all, it’s future was assured. China, and every other country, was going to buy lithium for years to fuel its shift to a low emissions transport economy.

But investing doesn’t work that way. When it’s easy and obvious, it’s in the price. When ‘everyone’ knows something, there is no one left to buy into the story. And when there is no one left to buy, it’s hard for the share price to keep rising.

Investing is counter intuitive, always remember that.

But it’s not as easy as just buying what everyone hates, either. To show you what I mean, let’s have a look at the third worst performer in the ASX 200 over the past year, AMP Ltd [ASX:AMP]. It’s down nearly 60% in the 12 months to 28 March.

Not bad for a supposed ‘blue chip’. Have a look at the chart…

AMP LTD (ASX) 28-03-19

Source: Optuma

[Click to open in a new window]

I know fund managers who bought into this stock after the first leg down in October last year. That’s when the Royal Commission revealed just how bad things were at AMP.

The price is now trading at a new, all-time low…

Yesterday, I said investing was about assessing probabilities. This isn’t a particularly difficult exercise. In relation to the tech stocks I mentioned, you just have to look at the valuations. In the case of AMP (and ORE and GXY) you simply have to look at the chart.

The charts in all these instances are trending lower. That’s reflected in the moving averages (MAs). As a rough proxy, when the 50-day MA (blue line) is below the 100-day MA (red line) you can say a stock is in a downtrend.

That’s quite clear in all the above charts. My simple investing rule here is that buying into a downtrend is a low probability play. You simply don’t know how far the trend will continue. Avoid stocks in a downtrend.

Those buying AMP following the October crash were no doubt following the ‘buy when there’s blood in the streets’ rule. That’s a way of saying ‘buy at the point of maximum bearishness.

I get it. Buying when everyone dumps a stock is a classic contrarian strategy. But it’s a low probability strategy. That’s because you simply don’t know if the worst is over. ‘Everyone’ is dumping the stock for a reason. It may take years to recover. Do you have the patience to wait it out?

Your best bet is to wait for the trend to turn higher again. Doing this means you won’t buy at the lows, but who cares? No one can do that consistently.

Tomorrow’s big gainers can often be found in today’s worst performers list. But it’s not as simple as just buying and hoping. And while the above three stocks may be candidates for future strong performance, they are showing no signs of that yet.


Greg Canavan,
Editor, The Rum Rebellion

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Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates.

Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.

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