The world of stocks, even in the best of times, is anything but quiet and relaxing. There are always unexpected events that impact the market. And individual stocks are subject to any number of factors that can push their value up or down. From earnings to competition to scandals, you simply can’t predict what the future has in store.
This has been especially true over the past several months, as we’ve gone from market highs to historic drops to nauseating volatility. We’ve seen stable stocks crash and burn, and we’ve seen surprisingly steady climbs from newcomers. This has been, to say the least, a learning experience even for those of us who study the market for a living.
After months of analyzing and reporting on the bumper car/roller coaster/haunted house of a market, it was time for a family vacation. We packed our bags and drove from Massachusetts to North Carolina, stopping in Chapel Hill for a few days, before galloping over to the Outer Banks for a week.
With a refreshed outlook, I went back to work and noticed a common theme in my emails, especially as some stocks have begun to gyrate or shake out after earnings.
The question has to do with my thoughts on XYZ stock and whether “it should be good for the long term.” I actually have pretty strong opinions on this topic of long-term stock winners, so why not share them here?
How to Find Market Leaders No Matter What’s Happening in the Market
Listen, we all want to buy a true market leader and hold it for a couple of years or longer as it changes the world, pushing our portfolio to dizzying heights. But for that to happen you have to do two things.
The first is to aim for that ahead of time, before you buy the stock, by looking for stocks with characteristics of past long-term stock winners — sales and earnings growth, a big idea and a chart that tells us big investors are getting in—and have some rules set up to allow for the stock to work its way higher.
In my experience, too many people get in for a short-term trade—say, because of the chart or because they heard something somewhere—and if the stock doesn’t work out, they say to themselves, “Hey, it’s still a good long-term story, so I’ll hold on!” We call these involuntary investors and they usually end up being the weak hands that throw in the towel at the wrong time.
The second piece of the pie to getting a long-term winner is following what the stock is saying. We’ve been fortunate enough to latch onto many star performers, but we didn’t say, “Hey, you know what—DocuSign(DOCU) is going to be huge, probably going to triple in a year, so we’ll just hang on no matter what.” No! The stock proved itself through its own action and told us week by week that it had potential to keep going. So we held it, and it’s up big since our original buy.
The moral of the story is to just follow the plan—it’s important to aim to develop bigger winners. I’m a big believer in that, but you can’t prejudge it or make excuses for your stocks, either. The way you know a stock will be a huge performer is if it proves itself over time.
2 Examples of Winning Long-Term Stocks
One of my favorite simple chart patterns to buy off of are early-stage pullbacks. The first pullback after a breakout usually is a high-odds entry point. Alibaba (BABA) is a decent example, as the stock exploded out of a two-year-ish consolidation before setting up again. Now shares are beginning to reassert themselves. Let’s see if they continue.
Meanwhile, big, liquid stocks with great stories and earnings estimates are still being rewarded. The example here is Qualcomm (QCOM), which thanks to a solid quarterly report and (even more so) a big deal with Huawei, has exploded to new highs on huge trading volume. That isn’t your neighbor buying 50 or 100 shares—those are big, institutional investors plowing in because they think Qualcomm’s earnings power in the years ahead is going to be massive (analysts see the bottom line up more than 60% next year!).
Of course, all of this can change at any time—and, to be fair, we have begun to see some selling on good news in stocks that have had huge runs. As always, if the facts change, then we will, too, but at this point it’s clear the buyers are still in control.
It does take a little work to find these long-term winners, but it’s well worth the effort as you watch your retirement fund grow substantially over the years. And if you buy carefully, patience is one of your biggest strategic advantages in making big gains.