The 3 Times Pro’s Buy. How to avoid buying at the wrong time.
Today I will cover:
When do the pros buy?
What are markets facing today?
What will be hot in the next upturn?
1. When do the pros buy?
You know that saying when good news is bad news? Or when bad news is good news? Yes? No?
Bad News => Good News when we have had so much bad news in a row that the next piece of bad news is not only expected, but not as bad as feared.
Good News => Bad News when we have had so much good news in a row that the next piece of good news is not only expected, but better be WAAY better than the last piece of good news, otherwise, it's taken as bad news.
What does this have to do with professional investing?
Alot (unfortunately).
Investing is placing bets on mass psychology while taking partial ownership in businesses you theoretically believe in.
Here's the 3 times pros buy:
A. Oversold: Trading Buy. Bad news becomes good news.
This is what happened last week. We had been going down for too long. No, the unemployment number wasn't good under the hood, but traders needed an excuse and any would do.
Even if you take the unemployment number as bad news, it works, because it wasn't as bad as feared and the market had gone down for too long without any rallies (oversold technically).
B. Cheap: Value buy. News is irrelevant. Fire sale is on!
Last downturn (2008), I ran a huge spreadsheet (starting in 2006), that had 200 tech names with their growth upside (growth rate X premium to growth X sales multiple), and value downside (sales X sales multiple value buyers would pay if everything went to crap).
There was a HUGE GAP between when stocks lose momentum and growth investors exit and where value investors are willing to buy.
For instance, in 2000, CSCO hit that gap, going from $80 to $3.
That's what drove NASDAQ down 80%+ in the dot com bust.
That's what's driven the Work-From-Home darling stocks like Zoom down 70%+ so far.
This gap between value and growth prices is what drives bear markets (because underlying economics are going to crap and there's only one buyer of last resort... the value buyer... in that situation)
Where are we on that gap? Zoom is down. Are we close?
Nope, we are not there yet. Unfortunately, the work-from-home stocks are too narrow a grouping of stocks to have affected overall market valuations enough.
Another tricky thing that happens in downturns is companies earn less, sell less, so as their multiples decline so do the sales and earnings that they are getting a multiple on.
WAS: Market Cap = 20 X Sales (where Sales $2B) = $40B
NOW: Market Cap = 2 X Sales (where sales $1.5B) = $3B
Double whammy to the downside!
C. Technical: Momentum buy. Good news keeps getting better.
We are NOT there yet... but the third reason pros buy is we are in a bull market and news keeps getting better, so they add to their winners. We are far away from this situation today...
Here's how to avoid the biggest market traps:
You may think it is overly simplistic, but this discipline helps you avoid catching falling knives, chasing dead cat bounces, and reacting to false charges. If you missed it, I covered how to spot all 3 in this blog post .
You will notice those who are saying a recession is coming.
They will tell you that every day. That's all they say. They say it when the market goes up and when the market goes down.
We are here to make money in the markets, not to be right.
Keep your eye on the prize.
Yes, the bad news is still swirling around, but we need to be ready for oversold conditions to turn into 25-45% bear market rallies. We don't need to berate the rally saying people just don't see the recession. They do.
It's just that the oversold condition turned bad news into good news temporarily (ie it's good news that the bad news isn't worse).
My favorite saying for these times?
"I love what is, not because I'm religious, but because not doing so causes me to suffer." - Byron Katie
Avoid the biggest market traps by asking yourself:
Right now, what is?
2. What are the markets facing today?
Is it a time a pro would buy (technically oversold, value buy, or momentum buy). Right here, right now in this bear market, only one of those 3 is possible (technical buy), and then you need to decide if you have the time and personality to trade actively enough to buy for technically oversold bear market rallies.
We are oversold and may see a rally, though it could be short-lived as Q1 is seasonally weak and we will hear more layoffs and negative preannouncements. This doesn't guarantee markets will go down, because it depends if the news is worse than feared.
Under the covers is where the real work needs to be done.
US dollar has been incredibly strong as traders "de-risked" by moving money into dollars through 2022. This trade seems to be rolling over, which bears watching as that will impact global currencies, commodity costs, imports, profits, etc.
It's much easier to manage against a trend (strong dollar), vs erratic movement (dollar losing leadership), so expect more unexpected unpleasant surprises.
Bond markets are far larger than equity markets, and the bond/credit space is telling us to worry:
Tuomas Malinen
3. What will be hot in the future?
Well, if I had a crystal ball... HA!
What's worked for me in decades of investing in technology is the following. Science and breakthroughs start in universities and government labs. Then they make it into startups. And some become companies and industries.
And the pitfalls to avoid: naming a big category too early.
In 1999, we had 30+ search companies in the US and in China. Our hedge fund was short China's #23 search engine. Search was an industry. Out of it came Yahoo and Google. So investors asked what was next.
Email was the obvious answer.
But that was an application. People named the next industry from the top down. That's not how it works.
It starts organically, from the ground up, with startups and building, and then you realize that an industry has formed.
Now, today, 2023, the WRONG answer is AI.
AI is artificial intelligence or better yet, augmented intelligence, which uses math algorithms as "rules" and lots of data and computers to "learn". Math formulas take decades to develop a new breakthrough. AI gets better with more data and faster computers.
AI has been around since the 1950s and 1960s.
Most AI investments by VCs have NOT reached unicorn status.
Yes, this time might be different, but it won't be because we say this is the year of AI. AI has had more than 50 years... It will be because BUILDERS have built GPT3 and ChatGPT, and people will build companies off these great advances.
Then we will see if an industry of unicorns emerges!
How can you be ready?
Start using ChatGPT for anything and everything you can think of. Research the best tricks to make it work. Research companies that are using GPT3. Stay in the know.
One crazy thing happened.
OpenAI released ChatGPT, but they have been licensing the underlying AI (GPT3) to a bunch of startups. One reached unicorn status. Its business was AI copywriting. ChatGPT came out and was free and was better.
Goodbye unicorn - overnight! And this was a customer of OpenAI. Brutal.
So, it's not all rainbows and unicorns out there in startup land... (couldn't resist)
As an investor, use ChatGPT and stay up on what is happening. Keep pondering who will win and who will lose. To get you started, I collected a few pieces on ChatGPT for you (click on any of them for the full thread, if desired):
Our relationship with algorithms is about to change. Right now creators are at the whims of social algos (Twitter, LinkedIn, YouTube) to decide how far to distribute our creations.
See what Li Jin thinks is coming now:
Here's Codie's view on how ChatGPT can hurt/help industries:
If you want help making the best ChatGPT prompts, try this:
https://heynikhila.gumroad.com/l/Mastering-chatGPT-Prompts
(you can take it for free or leave him a tip)
Marc Andreessen, VC and OpenAI investor, showing what can be done with ChatGPT if you know how to give it the right prompts.
pic.twitter.com/0U91wOBQIR twitter.com/pmarca/status/…
pic.twitter.com/anKWhBmi8G twitter.com/pmarca/status/…
pic.twitter.com/CmQi1VPwUw twitter.com/pmarca/status/…
Go play with ChatGPT and let me know what you think!
What if you play and go down the rabbit hole, and no new investment ideas emerge? You will emerge smarter and better able to navigate the tech space either way!
Here's to staying young and always learning.