Hi, Greg Canavan here.
Dan Denning informed us over the weekend that he has gone ‘walkabout’. I’m not sure how that works in Colorado. But it means you won’t be hearing from Dan today.
Instead, I’ve lined up a cracking essay from publisher James ‘Woody’ Woodburn. It’s about the ‘most important number in finance’.
How did you cope when the world nearly ended?
March 2020: scariest & confusing time to be an investor
March 2020 will likely go down as one of the most brutal, scary and confusing times in history to be an investor.
Barely a week went past when the stock market didn’t go into freefall. After all, markets don’t set prices — they discover them. But how do you ‘discover’ the future value of anything when thousands of people are dying, millions of people are locked down at home, and the world economy is on the brink of a depression?
The answer looks a little something like this:
That vertical drop down, on the right-hand side of the chart, is what happened when the pandemic hit. Perhaps calling that ‘price discovery’ is giving the markets too much credit.
It looks more like raw animal fear to me.
And no wonder. For a while, across the mainstream media, people seemed intent on sharing the most graphic analysis of what the pandemic meant. Take this piece from Forbes, on 31 March:
‘We are on the cusp of a massive economic contraction and a total reset of the global economy.
‘The Coronavirus pandemic has metastasized into a global crisis that experts predict will very likely kill millions and unleash a worldwide economic depression.
‘As economist Nouriel Roubini writes, the sudden shock to the global economy from the COVID-19 pandemic is accelerating a massive collapse that will be more severe than either the 2008 global financial crisis or the Great Depression.’
Pretty vivid stuff. It’s hard to make good decisions with your money when you’re reading stuff like that. In that context, I’ll ask you again:
How did you cope?
I don’t mean how much money did you lose. I mean how did you feel?
If you’re like me, you found yourself equal parts scared, confused and angry. Maybe you even had the odd moment of panic, when the markets were dropping and there seemed to be no end in sight.
The problem is, when it comes to your money, those are exactly the emotions that can lead to terrible decision making. We all know we should be 100% rational. We know that being led by our emotions leads to disaster. But how do you master your emotions? How do you stay rational? How do you keep your head, when all others are losing theirs?
That’s going to be an idea we come back to time and again over the next few days, building up to Tuesday’s event, ‘How you could increase your returns — and cut your risk (without buying any new stocks)’.
As you know, we’re going to be showcasing a powerful investing tool for the very first time here in Australia. I believe it could change the way you buy and sell stocks forever — and make you a lot more money with a lot less stress.
Because it involves a new way of looking at the stocks you own — and helps you avoid making emotional decisions. It helps you stay 100% rational, even when other people are losing their heads. It helps you see exactly what to do with your money with zero guesswork, zero anxiety and complete clarity.
The perfect tool for all market conditions
In other words, it’s the perfect tool for today’s crazy markets.
In fact, I think it’s the perfect tool for all market conditions.
The reason it’s so effective is simple. It helps solve some of the biggest problems all individual investors make (mistakes that cost you money, even if you don’t know it):
- They take on far more risk than they need to without knowing it.
- They hold on to losing stocks for far too long — and sell their winners too early.
- They don’t understand how much money they should allocate to each position in their portfolio — and end up investing far too much in the wrong stocks.
- And they don’t understand how to time their entry into a new position.
Be honest with yourself: Have you ever made one or more of these mistakes?
The good news is, you’re not alone. I’d say most investors make them.
We will reveal our top five ASX-listed dividend stocks with a great chance of maintaining big payouts during and after the crash. Click here to download your free report.
Now, imagine you could cut them out, for good. No matter what’s happening in the markets. Or what you’re investing in. Imagine you knew what to buy, at what moment, with precisely the right amount of money…as well as knowing exactly how to manage your risk…and when it’s best to sell.
That would make you a smarter, better investor, wouldn’t it?
That’s what I’m going to share with you as we build up to Tuesday’s big event.
Not all shares are created equal.
You see, many investors simply don’t realise how much risk they’re taking on when they buy a share.
As a result, they unnecessarily lose money (and miss out on big moves up, as I’ll show you in a second).
Think about it.
When you buy a share, how much time do you spend thinking about the amount of risk you’re taking? Do you have a clear idea of how volatile or risky your investment is? Do you have a plan for what you’ll do if things go wrong? Where’s a safe place to put your stop-loss? Where will you decide to sell if the share drops dramatically?
In my experience, most people can’t answer these questions. And even if they can, they can’t be precise about their plans.
This is a problem. It costs you money. But solving it can be a lot easier than you might think.
See, the cornerstone of the tool we’re going to share with you on Tuesday night is something called the Volatility Quotient, or VQ. Don’t worry if you’ve never heard of that before. It’s only available if you have access to a proprietary algorithm. You won’t find it on Bloomberg or packaged up with your brokerage account.
The good news is, the CEO of the company behind the VQ will join us as a special guest on Tuesday.
To explain how it works, let’s look at what happened to the market through February and March…
More or less every stock in the world got whacked by the panic selling. But not everything fell by the same amount. I’ll give you two examples to show you what I mean.
Australia and New Zealand Banking Group (ANZ) fell by 48%. Gold miner Alkane Resources fell by 51%.
But here’s an important point that most people don’t understand: There is a HUGE difference between ANZ dropping 48% and Alkane Resources dropping 51%.
They may appear like similar losses…but they’re not. Not all shares are created equal. Not all shares are equally volatile.
Let me repeat that: Not all shares are equally volatile.
Understanding this is one of the most important ideas you’ll ever come across in finance. It can literally save (and make) you tens of thousands of dollars.
That’s because every share has a different Volatility Quotient. Think of the VQ like a ‘normality zone’ — it shows you how much a share moves around as part of normal trading.
For instance, ANZ had a VQ of 20.29% (at the time of writing). It’s a medium-risk stock. That means a 20% fall from peak to trough is ‘normal’. The theory goes that when your share is trading in the ‘normality zone’, it’s unlikely something disastrous is about to happen. Anything inside the range is just market noise. You can ignore it.
A stock like Alkane Resources, on the other hand, is MUCH more volatile. At the time of writing, it had a VQ of 55%. That means it can fall 55% from peak to trough just as part of regular trading. For Alkane, swings like that are in its ‘normality zone’ as measured by the VQ.
This is vital. It helps you understand which shares are truly distressed, and which are still well within their normality zone.
Zero guesswork investing: When to buy, when to sell, when to hold.
That gives you several advantages. One, it allows you to place a stop-loss based on the actual volatility of each individual stock, rather than going on your gut feeling. That means you’re unlikely to be stopped out of volatile stocks unless they reach the very limit of their normality zone.
By the way, a stop-loss, or a trailing stop, is a type of order you place with your broker. Or you may prefer to keep it to yourself in your head. Either way, it’s designed to manage your risk in each stock you own. How?
In the case of a stop-loss, by specifying exactly what price or percentage you’ll cut your losses at and sell a losing stock or investment position. In the case of a trailing stop, by specifying what percentage you’ll allow a winning position to fall before you’ll sell it and lock in your gains.
In both cases, it’s a risk management tool. One is about cutting losses. The other is about locking in gains. The VQ is designed to help you set smarter stop-losses and trailing stops so your losses are smaller and your gains are bigger.
But if you don’t use stop-losses, the VQ is valuable. Why?
Because it helps you avoid making emotionally charged decisions to sell investments at exactly the wrong moment.
Take the maths away and it’s all about managing your emotions. Take Alkane as an example. It’s a highly volatile stock. Trading or investing in it without knowing that it’s volatile is what makes it riskier.
When it dropped in March, it would have been easy to panic. It was a chaotic and emotional day.
That is the absolute worst time to be making a financial decision.
It’s a nightmare scenario. You’re highly likely to make a bad decision when you’re emotional. And bad decision making can cost thousands of dollars.
See, if you’d panicked and sold out of Alkane…you’d have missed out on the rally that followed. The stock is now back almost where it was before the crash. The drop was just ‘noise’. You could have ignored it — simply by understanding that Alkane has a VQ of 55%.
Compare that to ANZ, on the other hand. It has a VQ of just 20%. That means a 48% drop is well out of the ordinary. Had you sold when it dropped through its VQ stop loss, you’d have cut your losses short.
And true enough, the stock hasn’t recovered. It’s still trading around 30% below its February highs. You were better off getting out and standing aside.
The point is: Both stocks fell by roughly the same amount.
But those moves meant very different things. And they required very different actions on your part. That’s the whole point of the VQ score. It gives you clarity. There’s no guesswork. There’s no emotional decision making. Not only does it help you make better decisions, it enables you to sleep a lot better at night.
That’s one use of the VQ score.
But it’s not the only one. As you’ll see if you sign up to a special free stock market masterclass we are putting on tomorrow night, it’s also possible to use the VQ to define exactly how much money to invest in any given stock.
If that sounds dull or boring, then you’re in for the shock of your life when you see the impact it could have on your investment returns. But for that, you’ll have to get your name down here.