If there was a fight on the street between two strangers would you join in?
That’s the analogy that traders would consider when there is high drama in a particular stock or sector. Right now it’s software stocks as their being slammed lower on fears that AI will disrupt the sector.
Unless you already had a position, there is no need to get involved. Yes, there might be opportunities but once it’s a battleground the volatility gets intense and things overshoot. If you want to wade it, positions should be small and nimble.
To my way of thinking, it’s impossible to find the conviction in a battleground stock unless you’re intimately familiar with the company, the sector and have a solid view on the macro. That’s exceedingly rare and timelines are usually longer than you think. Once a stock becomes a battleground, it takes a long time for the smoke to clear.
I can think of a time when it worked in the months after oil prices went negative. Jumping right in away was too tough as oil prices were moving 20% regularly on covid headlines, economic worries and uncertainty around demand. For me, the real buy signal wasn’t until autumn 2020 when it was clear that covid wasn’t going to destroy the world and oil was still in the $20s.
On the other hand, I can think of an abundance of times when it was a wise course of action to sit out. Think of the meme stocks or sectors hit by uncertainty. One was banking in the aftermath of the Silicon Valley Bank collapse. A number of regional banks were getting wrecked and there were analysts, bulls and bears screaming about who was holding losses. Banking is naturally opaque and executives can’t be trusted so it was impossible to know they were safe.
Ultimately, most were and the share prices rebounded in a big way. It’s natural to regret missing a move like that but in the trenches of the battle it’s not an easy call.
More importantly, it’s not a necessary one. Like Warren Buffett said in 199, there are no called strikes in investing.
“The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, ‘Swing, you bum!’, ignore them.”
Instead, the opportunity is usually in researching deeper into the places in the market that aren’t on the front pages, slowly developing knowledge of different economies and waiting for a great pitch.
The S&P 500 is trading at 23x forward earnings against the 30-year average of 17.1x.
There aren’t many fat pitches out there right now and that’s why more and more market participants are looking at international equities.
This article was written by Adam Button at investinglive.com.