Call Me Nuts… I Don’t Care
A guy wrote me recently, saying he used to work at Vanguard, the mutual fund company.
And he told me that people at Vanguard refer to Michael Covel as nuts.
I remember thinking: “that’s awesome. Thanks.”
As you know Vanguard is the biggest proponent of the “buy and hold” strategy. So when they call me nuts… that’s like getting a gold star from your favorite teacher.
It’s the ultimate confirmation I’m in the right path.
If you have any doubts “buy and hold” is a crappy strategy, just take a look at what’s going on in the tech sector… especially with some social media stocks.
Tech Bust Version 2.0?
My proprietary system has just triggered a sell signal on the entire technology sector. But some tech stocks are doing much worse.
Today, I’m going to zero in on LinkedIn.
It provides a perfect example of why the conventional wisdom of “buy low, sell high” doesn’t work.
So let’s go back in time…
In February 2015, a popular financial website published an article saying:
“Based on projections for Q1 2015 and the full year, continued revenue growth appears to be in the cards. LinkedIn is making positive strides, and that should continue in the foreseeable future.
“Based on both past results and expectations for the remainder of the year, LinkedIn is clearly on the right path. The investments LinkedIn is making today will pay dividends for years to come, which should be music to the ears of long-term growth investors.”
Sounds good, right?
Well, at the time of this article, shares of LinkedIn were trading around $260.
Shortly after that, the stock tumbled to $190….a drop of 27%.
And that’s when this story got really interesting…
Follow this Strategy and You’ll End up in the Poor House
In September 2015, with the stock trading around $190, the same financial website published another article on LinkedIn.
Remember, the stock had just tumbled 27%.
Did they tell investors to watch their stop loss and protect their capital?
They told investors to double down.
If LinkedIn looked good at $260… at $190 is certainly a bargain. At least, that was the logic of the article.
“The cheaper it gets, the more LinkedIn stock I’m planning to buy,” said the author.
The author went on and on saying how this pullback was such a no-brainer buying opportunity. He wrote:
“Believing the decline was presenting an opportunity, I added to my LinkedIn position a couple of weeks ago. With practically no relevant competition in its main business, the company is the undisputed global leader in professional contacts and online recruiting.
“Short-term uncertainty usually creates opportunities for long-term investors, and this seems to be clearly the case when it comes to LinkedIn. For this reason, I'm planning to hold on to LinkedIn for years to come, and I may even continue adding to my position if weak stock prices provide additional opportunities down the road.”
Well, the market just handed this guy a great opportunity to double down even more.
Take a look at the chart below. After reporting disappointing results, shares of LinkedIn plunged 44% last Friday. Yes, that happened in just one day.
Why am I telling you this story?
I’m certainly not picking on this poor guy who just lost 50% of his investment.
Heck, he may even turn out to be right “in the long-term”… whatever that means.
But this type of “buy low, sell high” mentality is very dangerous, especially in the current market environment.
Doubling down on a stock that’s crashing makes absolutely no sense.
That’s how you go broke.
Follow that strategy, and you’ll end up on a cat food diet in retirement.
Here’s What You Should be Doing Instead
Instead of trying to catch a falling knife with a “buy low, sell high” strategy, you should be buying high, and selling higher.
Meaning, you should buy things that are already moving higher, things with momentum.
You might say, “but Mike, everything seems to be crashing. There’s nothing moving higher.”
Well, that’s not true.
While most stocks are heading lower, some defensive assets have been making new recent highs.
Based on my proprietary profit system, for example, both Treasury bonds and the Japanese yen are in “buy” mode.
In this difficulty market environment, it’s not time to be brave and gamble your retirement money. Focus on things that are already moving higher. Follow the trend.
Please send me your comments to firstname.lastname@example.org. I’d love to hear your thoughts.
Editor, Covel Uncensored