Connect with us

Property & Finance

Conviction is everything

Published

on

0204251_M_O_Connor_1000x600.jpg

 

Last week, one of my close friends mentioned in passing that he had bought Virgin Galactic, the space tourism company owned by Sir Richard Branson.

Since purchasing a few months back, the stock had continued to slip, and he sold his entire position. The following day the stock jumped 39% after the FAA approved its passenger spaceflight license… such is life.

To be honest, the whole conversation blew my mind. While I have no affinity to Virgin Galactic itself, I think it is fair to say that any investment in to a space exploration company is likely to be a volatile, ultra-long-term investment. In fact, I fail to think of a single investment that would require a more forward-looking investment thesis - yet he held for just three months.

As I dug a little deeper, his actions became a lot easier to understand. Having purchased the company off the back of a headline he saw online, he had no problem selling even faster at a loss. As the stock tanked, his defensive wiring kicked in, and, in an effort to protect from further losses, he sold. Seems rational, right? Many of us would have done the same simply because it's difficult to maintain faith in a company you know nothing about.

All this got me thinking; potentially, the biggest reason retail investors struggle with stock selection and even passive investing is a lack of conviction around what they hold.

Narratives are not enough

Many of the most-discussed investments or stock picks are notorious for being surface-level in nature. DIY investors will blurt their two-line quip about a particular company they have invested in, but if you go in search of some more in-depth supportive analysis, you will be left empty-handed.

The truth about modern-day retail investing: Many of the positions are populated by investors whose investment thesis is supported by little more than a tagline they pulled following an 'in-depth' three-minute Google search.

Now, I'm not saying this whimsical investment approach applies to everyone, nor am I saying that searching online for stock tips is inherently a bad thing (I do it all the time). What I will say is, this quick stock tip search needs to be the beginning of your investment research, not the end.

You can borrow someone's idea, but you cannot borrow their conviction. By simply taking another person's stock tip, you’re left with a plethora of unanswered questions; how much should I invest, at what point should I sell, what changes to the company's outlook will change the investment thesis? These are all questions you need to answer on your own.
 

Do your homework

Over your investing lifetime, major corrections will happen. Any number of random short-term events can tank a stock. When that happens, you need something to fall back on to avoid doing something you later regret.

You will never expose yourself to the exponential returns of truly innovative companies if you don't understand why you own the stock in the first place.

Not one of the Mega-Cap companies that dominate the current investing landscape achieved this status without first experiencing multiple bouts of gut-wrenching volatility.

Those who thought Amazon was just an online bookstore lacked the conviction to hold as the stock plummeted over 90% after the dot com crash. However, for those who had the iron stomach and foresight to see the company's true potential, the rewards were life-changing.

This works in the opposite direction as well. Those who thought Netflix was simply a DVD vending machine company sold their shares as the company jumped in value, while those who held their conviction since IPO multiplied their investment by 500 times without even having to lift a finger.

In short, you need to do your own homework if you want to be a successful active investor. Investing in every tip you see online may work over the short run, but without an understanding of what you own and why you own it, you are in for a painstaking investment experience laced with perpetual uncertainty.

To learn how to generate conviction in your investment decisions visit www.theislandinvestor.com.

Continue Reading
Advertisement

News

2023 Market Predictions

By Michael O’Connor, theislandinvestor.com For me, investing is just a potent mix of optimism and paranoia – being optimistic about what the future holds but constantly paranoid about the landmines […]

Published

on

0245212_Mike_Stocks.jpg

By Michael O’Connor, theislandinvestor.com

For me, investing is just a potent mix of optimism and paranoia – being optimistic about what the future holds but constantly paranoid about the landmines that you will undoubtedly trigger along the way.

Finding a balance between the two is key, but I have to admit, going into 2023, paranoia appears to have the upper hand.

Expectation vs Reality

Whether you are waiting on test results, or tentatively hovering over the phone for that all important call back from your potential new employer, it’s the difference between expectation and reality that dictates the severity of your reaction.

Regardless of how bad the reality turns out to be, if your initial expectations were set apocalyptically low, your reaction will probably be positive and vice versa.

Financial markets work the same way. As I have said before, investing is never about things being objectively good or bad. The narrative is always based around better or worse. If the outlook for markets is exceptionally high and the performance falls even slightly below these expectations, prices will fall as a result. The fact that performance and growth is still strong in absolute terms is irrelevant if expectation were not met. With this in mind, in order to understand how markets will react in 2023, we must first analyse the market’s expectations.

The Year Ahead

On the equity side, 12-month forward earnings projections for the S&P 500 are set at 5%. In other words, analysts predict American companies will grow their profits by 5% next year.

While this represents a significant slowdown in growth relative to what we have experienced since the pandemic pullback in early 2020, I view this as optimistic, given the considerable change in monetary and fiscal policy in 2022.

Q3 2022 earnings season looks likely to finish at 2% year-over-year growth, the weakest since the height of the pandemic. Ex-energy, performance becomes weaker still.

Looking ahead to Q4 2022, analysts are now predicting the first negative quarter since 2020, with profit growth falling to -2%. These Q4 earnings predications from the same analysts were as high as +9% as recently as June.

While expectations for ‘23 are still at plus 5% earnings growth, I wouldn’t be surprised to see 2023 earnings forecasts suffer the same faith as the Q4 2022 forecast.

In short, markets are a bit like the Irish weather, never believe the forecast.

As leading indicators continue to point towards a slowdown in economic activity, a base case of positive 2023 earnings growth becomes difficult to justify. In my view, this will result in some negative earnings surprises in the second half of 2023.

In Fixed Income markets, the Fed has reiterated its plan to hold rates higher for longer, and this expectation is reflected in markets. According to the market-implied Fed Funds Rate, investors are now expecting US short term interest rates to peak at 4.9% in six months and remain well above 4% into 2024.

In my view, the probability of the Fed maintaining a long pause as we enter more economically uncertain times is not as high as the market is predicting. I believe a pivot is likely before 2024 as earnings and labour markets weaken.

Summary

While the lows for multiples may already be in, a mild earnings recession in the second half of 2023 may result in a slow grind lower for the stock market.

This pullback in earnings and labour will prompt a pivot from the Fed, forcing them to cut rates in an attempt to avoid the re-emergence of the disinflationary forces that provoked a decade of QE through the 2010s.

While it is impossible to know the exogenous shocks that lie ahead, buying up short-term Treasuries and maintaining a tilt toward value-based equity will protect if the current economic slowdown persists.

For more tips on how to beat the market in 2023, simply go to www.theislandinvestor.com.

Attachments

Continue Reading

News

How to prevent oil escaping

By John Healy of Healy Insurances These tips will help you to prevent the loss of oil around your household. Plastic oil tanks should be regularly checked and replaced immediately […]

Published

on

0245079_shutterstock1768615634.jpg

By John Healy of Healy Insurances

These tips will help you to prevent the loss of oil around your household.

Plastic oil tanks should be regularly checked and replaced immediately when any defects are identified.

This is especially important after periods of extreme hot or cold weather as tanks that are outside and exposed to the elements may have been damaged.

Regardless of the oil tank’s age, you should check your tank at least twice a year for signs of cracking and/or failure. This damage is often a result of weathering or poor installation.

If an oil tank is installed without full horizontal support, it can cause the tank to become warped over time and eventually lead to cracks and leakage. If in doubt refer to the manufacturer’s installation instructions.

In the event that defects are discovered, the tank should be immediately replaced to prevent any further oil from escaping. If an escape of oil occurs it may cause damage to the environment, which can result in your property being uninhabitable, and you may require temporary accommodation.

An oil tank should be refilled before it runs completely empty. This is because they accumulate grit over time. Refilling the tank early causes the grit to become diluted, meaning that it won’t create low grade fuel which will cause damage to your home’s supply piping.

Oil levels can be monitored easily by simply using a long stick.

More advanced methods of calculating how much oil is left in a fuel tank such as a Watchman System will not only tell you how much oil remains in the tank itself, but will signal you with an alarm when it is time for you to refill it.

When purchasing oil, always be sure to do so from a reputable and trustworthy source as this will ensure that you are getting quality fuel. Fuel purchased from unlicensed sources may be of very poor quality, and not necessarily be what it is labelled as, so could potentially do more harm than good to your piping and fuel supply system.

Continue Reading

Trending