Today I am going to try and explain the value in being able to pivot focus as a speculator at the small end of the market as it appears to be something that isn’t necessarily natural for most retail investors.
I will preface this discussion by looking at a few different investment styles and how these relate to people.
The first method I am going to discuss is a top-down investment style. The concept behind this method is that you start looking at a market/thematic at the macro level. From there you work down the layers until you select a company. The idea is you are backing a sector first and stock second. In my opinion this is probably the way most retail speculators naturally invest.
The opposite of this is the bottom-up approach. This requires more screening ability as you are starting at a company specific level. You need to know what fundamental criteria you are looking for in a company. The concept behind bottom-up is that the stock you are picking will perform regardless of whether the sector does or doesn’t perform. To be successful at this you have to be a really good stock picker and have a robust screening process.
The third option I am going to include isn’t a real investment style but is relevant for the point of this discussion. The person who develops leads by following SM posts on Hot Copper, Twitter etc. These people are probably defacto top-down investors as they are following the hot sector and then drilling down to a favourite stock.
Li Case Study
Now I am going to use Lithium as my case study. It is a sector that has probably been the most prominent investment theme across retail money for the last 3-4 years and continues to draw plenty of attention. There have been significant amounts of money made and lost in the sector. The thing is outside of some counter trend rallied Li has essentially been trending down for 18 months now as can be seen by the LIT ETF:
I will freely admit that I am someone that held some of my Li stocks too long. I deviated from being a true top-down investor. The sector had clearly cooled and the macro fundamentals were not behind Li anymore so I turned to being a bottom-up investor expecting my stock to outperform the rest of the Li stocks as I thought it was the pick of the bunch. But the chart above clearly shows that it was fighting a losing trend.
So, let’s look at a range of Lithium stocks over the past 12 months. Chart includes A40, AJM, AVZ, GXY, KDR, LTR and PLS
Now you can see from the graph that LTR has performed massively, KDR is up around 20% on the back of it’s takeover offer and the rest are down between 24-66%. If you had a basket of these stocks particularly if they didn’t include KDR or LTR you have performed quite poorly. If you did a good job stock picking you have potentially performed well but this wouldn’t be the vast majority.
Yet despite all this over the last few weeks I have heard many comments along the lines of “the macro hasn’t changed”, “I have held too long to sell now”, “I am down too much to sell now” etc etc.
PLS’ production and sales update today is proof in my opinion that the market is changing and needs time to work through some issues.
This is where mindset becomes critical. The ability to pivot focus is something that will help to make most people more profitable. The idea behind this is to provide yourself with a broader investment universe and the discipline to change between sectors and ideas as necessary. However, you need to be able to do this without losing your edge. There are a lot of people in the ASX speculative end that are resource focussed. So, this might just be learning the ins and outs of a broad range of commodities. For others they might have the capacity of covering resources, tech, bio etc. The broader you can make your investment horizons while retaining what makes you good at what you do the better.
So, let’s take a look at a number of alternative investment sectors over recent times to see how they have performed
5GN, MOB, NET, UWL
Time constrained by UWL IPO inception but it shows that over just 4 months this thematic has provided average gains of approx. 250% across a basket of stocks. If you compare this vs an average basket of Li stocks heading south over that time it makes for a stark contrast.
EVN, NCM, NST, RRL, SAR
Over the past 12 months gold has also performed strongly with a basket of leaders averaging returns of 40%. This is even more stark if you look at just a few months period with 25-30% of those gains coming since mid-April as the macro factors behind gold have vastly improved.
The point of this conversation is that if holders of Li
stocks had pivoted to either of these two ideas (which isn’t an exhaustive
list) they would likely be sitting on a higher portfolio valuation now.
Crystallising losses shouldn’t be a reason not to sell that stock. If that
stock is less likely to claw back your loss than a stock somewhere else then
what is the true basis for holding? There is nothing to say that you can’t come
back to Li if the macro changes and the tide turns.
The more open that one can be to pivoting focus to a sector with more favourable macro the more likely you are to perform well over a long period of time. These case studies also show that using a top down approach can work as a broad strategy for most people as it shows clear trends within sectors. Learn the macro and invest where the tailwinds are. It makes individual stock picking a little less important. It’s easier IMO to get a thematic right than be a gun stock picker.
Thanks for reading everyone and I hope this helps some people in the future.