Having an investing thesis before buying (or selling) a stock is critical to making a sound decision. Simply buying a stock because it, “is bound to go up” may work a couple times, but isn’t something to rely on for a portfolio. Developing a solid thesis will fare you much better in picking better stocks, and will also help you understand when to sell. There are many forms to developing an investing thesis, but two methods I favor are blood in the streets investing, and inference investing.
Blood in the Streets Investing
The seemingly alarming name of this thesis is fairly warranted for the situations it looks to profit off of. When is someone is using a “blood in the streets” mindset, something particularly bad has happened to the stock or the sector it is in. This results in a huge downturn for the stock, hence, plenty of red, or blood. An event like this could come about from a company receiving a lawsuit, repeated earnings miss, or the CEO does something catastrophic in the public eye. It can be any assortment of terrible events, or one extremely terrible one. However it occurs, the stock has come down significantly, more than 40, 50, or 60% in record times.
This causes Wall Street, or the “street” to be particularly scared of the stock, wondering if it could go even lower, and refusing to buy it. Now, this does not mean you simply have to buy the stock just because it is down 60%. Believe it or not, it can very well go lower. Although, it is time for you to assess what the issue is for the company, and decide if it is enough to bankrupt the company. When you decide it isn’t and that there has been an overreaction by the street, it is time to swing the bat. Times where blood in the streets investing have proven effective are when cigarette companies got hit with tons of lawsuits in the late 1990’s, and stocks trading at over $100 dollars were not trading for a couple bucks. The revenue that is generated for the U.S. from cigarettes will never let it go away, and those who bought in saw the insane recovery that came about while others were losing money in the dotcom bubble.
For those who are more observant, inference investing should be their bestfriend. This form of investing consists of observing subtle trends around you, and investing in the companies that can benefit from these trends. It is important to find a trend you truly believe Wall Street has not detected yet and is a significant portion of the company’s business. A trend could essentially be anything, a hypothetical scenario is given below:
While visiting NYC this weekend, Bart noticed a lot of people riding around on electric scooters, they were a bright pink color that you couldn’t miss. He was in the city for the 1 day and saw more than 25 people riding the scooters around. Bart searched up the company and all he could find was that they were trading for $15 and they had just successfully fought a lawsuit. All Bart could find when digging deeper in financial news was financial analysts still discussing the lawsuit and the possible outcomes for company depending on the verdict. Bart also learned that last year, the electric scooters accounted for 25% of the company’s revenue, and that number had grown every year for 3 years.
Bart seems to have found a gem that no one else was talking about yet, and is ready to buy shares of this company on Monday.
Yes, keeping an investment diary can prove to be highly beneficial. When you write down why you initially bought a stock, you can continue to reference this thesis whenever you consider selling. If the original investing thesis you had is still a legitimate reason to buy the stock, then you probably shouldn’t sell. However, if what originally motivated you is no longer true, it might be time to take some profit. Selling can be very hard for people, especially selling when they have to admit they were wrong.
With how low the market has turned over the past few months, now is a time where many investors are scared to make a rash decision. Take advantage of a perfect time develop theses and generate gains!