Futures are lower to start the week. But the story’s the same…
Investors are spooked. They think the market has risen too far, too fast. This is the end of the Trump Bump, the financial media declares. Time for a sharp pullback!
Should any of this babble scare you?
Of course not.
Even during sharp rallies, we’re going to see plenty of pullbacks. And there’s more to investing that pounding the buy button. Your preparation on days the market isn’t rocketing higher can be the difference between profitability and selling all your furniture on Craigslist to make rent.
One of the ways you can get your act together is by curating a long-term buy list. Today, I’m giving you 3 rules of thumb to help you assemble a list of ideal candidates.
But first, I want you to pull up a long-term chart of your favorite stock that’s posted impressive returns over the past few years.
Looking back, you might think it was a flawless run higher.
But you know that’s not true. The long-term trend leads you to ignore the big pullbacks that shook out so many investors along the way.
Hindsight’s a bias you can’t escape. We think it’s easy to cash in on the trends pictured on the charts we pull up on our screens every day. And that’s where we run into big trouble.
In fact, if you pull up any long-term chart of a home run stock, you’ll find more than one huge drawdown that accompanied the rise that delivered massive returns.
Just look at the 10-year performance of Apple Inc. (NASDAQ:AAPL). Apple has been one of the best stocks to own this century. Since early 2006, it has returned more than 1,100%.
But it faced some nasty dips along the way…
The financial crisis pelted Apple with a 60% loss in about 12 months. Another big drawdown cost investors a cool 45% in 2012-2013. After posting new highs in early 2015, it took Apple nearly two years to recover from a choppy bear market. Don’t tell me you would have held Apple stock through these drawdowns without breaking a sweat. I don’t believe you…
But you’d be crazy to ignore a long-term winner like Apple because it didn’t jet higher in a perfectly straight line. That’s why you must make sure to enter these plays with the correct mindset. If not, you could end up with poorly-timed sells that cause you to either miss out on a much larger run or give back hard-fought gains.
To help combat your emotions and get you into the right stocks when the big, long-term opportunities arise, here are some thoughts to keep in mind when tracking your own trades:
Pick a viral theme.
Large, well-known stocks in popular or upcoming industries work best for longer-term ideas. Your trade needs to be easy to understand. You should even give it a solid barstool pitch before it passes the test. If you can’t convince a buddy at a bar that the idea makes sense, you should scrap it. (Just make sure you’re both relatively sober).
Define your exit strategy before you buy.
Don’t get hung up on selling your trade at the perfect moment. It’s never going to happen. All you need is a pre-defined exit signal to keep you from second-guessing yourself or making an emotional trade. And yes, that might mean you’ll have to endure a little pain along the way.
Don’t pinch pennies when the market dips.
Don’t be such a wimp when stocks sneak into the red. Stocks can zoom off their lows in a heartbeat during a strong bull market like we’re experiencing right now. Get over it and hit the buy button if a potential long-term play bounces off support.
If you have a system in place, it shouldn’t bother you if a longer-term trade isn’t in the green right away.
That should get you started. Use these tips to plan your next long-term conviction trade.
This story originally appeared in the Daily Reckoning
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