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Conviction is everything

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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.

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Property & Finance

How long can it last?

Equity Wobble US stock markets extended their recovery following a sharp sell-off at the start of the week. Mounting concerns over the spread of the Delta variant and its ability to interrupt a strong reopening and economic recovery resulted in the worst day for global stocks in some months on Monday. Since then, a string […]

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Equity Wobble

US stock markets extended their recovery following a sharp sell-off at the start of the week. Mounting concerns over the spread of the Delta variant and its ability to interrupt a strong reopening and economic recovery resulted in the worst day for global stocks in some months on Monday.

Since then, a string of upbeat earnings reports and some aggressive ‘buying the dip’ strategies revived market optimism.

Double Your Money

The S&P 500 has now doubled in value in just 15 months following the March 2020 Pullback: The second fastest double in history, second only to the 1932 reversal after the infamous 80%+ crash of the great depression.

It is worth noting that the cumulative earnings for companies within the S&P 500 is set to double over the same period.

The market hasn’t doubled for no reason despite what some market heretics proclaim.

A Closer Look

After a brief respite due to strong market rotation dynamics, the narrow breadth of the S&P 500 is back in focus. The S&P 500 is up 4% since June 3, but ~80% of that move can be attributed to just the largest five stocks. This concentration in returns is one to watch as narrowing breadth is a sign of internal weakness and can sometimes precede pullback periods.

Market Outlook

As we focus on the second half of the year, investors will undoubtedly be haunted by fleeting bouts of uncertainty. Echoes of ‘this surely can’t last forever’ screech louder and louder as markets continue to notch up all-time highs. This uncertainty and doubt is an inherent part of the human condition that even the most steadfast investor must grapple with.

Lately, market participants are constantly worrying about, well, everything. Their concerns range from inflation and the Delta variant to tech regulation and tensions with China. None of these fears are irrational, but they are part and parcel of any investment. While all these concerns could negatively impact markets over the near term, there is no reward without risk, and historically, it hasn’t paid to be a pessimist.

While the outlook is broadly positive, uncertainties remain, as mentioned above. Economic statistics have been consistently positive in recent times, but this positive news stream is now simply functioning to maintain the current levels of market exuberance.

As we advance, it won’t be enough to say that businesses are recovering, and earnings are increasing. The market will need to hear about a stable recovery and more robust future earnings to come. As a result, market participants will be far more sensitive to any negative news, fuelling the fragility and volatility in the most exposed sectors of the market.

My overarching view is that economic recovery will persist, and upside remains, fuelled by higher earnings, fiscal stimulus, and low interest rates. With that said, pullbacks and market rotations are likely, and any deviation away from this base case scenario will create a painful environment for those holding the most speculative names.

As always, caution and patience are the order of the day.

For investing tips, go to www.theislandinvestor.com.

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Property & Finance

Tips to manage your home in the heatwave

By Ted Healy of DNG TED HEALY Our recent spell of good weather is certainly welcome but it does lead to some practical problems in the home. With the mercury rising to 30 degrees in some areas and night time temperatures ‘dropping’ to only 19 degrees, we find ourselves doing everything in our power to try and […]

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By Ted Healy of DNG TED HEALY

Our recent spell of good weather is certainly welcome but it does lead to some practical problems in the home.

With the mercury rising to 30 degrees in some areas and night time temperatures ‘dropping’ to only 19 degrees, we find ourselves doing everything in our power to try and stay cool.

With weather advisory warnings in place for high temperatures, we have all found our homes are heating up!
While we are quite happy to fork out our well-earned Euro for that foreign trip to the sun to bake in the Mediterranean heat, we now find ourselves in the unusual position of the good weather visiting us for a change!

While it is easy to enjoy the sunshine from the swimming pool in Portugal or the beach in Spain it is a different story when walking into your hot house at home.

Unfortunately, the large majority of us don’t have the luxury of air-conditioned homes as much of the new building technologies we have experienced revolve around heating our homes. We now find ourselves looking for ways to cool them down!

While the natural reaction is to open the windows, it is recommended to keep windows, blinds and curtains closed as this will keep the hot air out. If opening them, make sure to do so at opposite ends of the house to create an airflow throughout.

To circulate cool air inside, fill up some bowls with water and ice and place them in different areas of the house – in front of a fan works best if you have one.

Another simple but effective option is to cook outside. Use the BBQ as the oven generates heat inside the house.

Trying to get to sleep at night can be particularly difficult in soaring temperatures. Here is a novel tip to help you catch those z’s; consider freezing your bedcovers before going to bed!

It may sound daft but give it a try; strip the sheets, place in a bag and pop them in the freezer. When it is time to hit the pillow, simply put them back on and they will be nice and cool!

Also, try taking a cold shower before bed.

Any halogen light bulbs in the house will also create additional heat, so consider replacing with LED lights.

Open the attic hatch to keep the house as ventilated as possible, allowing heat to escape through the roof.

And finally turn off any appliances, like the TV, when not in use. Electrical appliances can give off a surprising quantity of heat, particularly while charging.

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