The One Number That Can Make You a Superhero Investor

Ask yourself this question (and be honest when you answer)... How many times have you bought a stock and then sold it when it stumbled a bit or to pocket a small profit... only to watch as it rallied anew and then soared out of sight? Tell me that your hands weren't "clenched in fists […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The One Number That Can Make You a Superhero Investor By Keith Kaplan --------------------------------------------------------------- [WHITNEY TILSON: 'DID YOU MISS MY LATEST PREDICTION?']( He called the dot-com crash in 2000... the housing crisis in 2008... and even the bottom of the stock market after the COVID crash in 2020. At the time, these calls were all considered controversial. But the day they all actually happened, they became reality. And now, his next controversial call is in. In short, Whitney says an inflation shock that will catch most Americans by complete surprise could strike as soon as June 10th. So DO NOT wait to act... Once this shock becomes a reality, it will be too late. [Click here for the full details](. --------------------------------------------------------------- Ask yourself this question (and be honest when you answer)... How many times have you bought a stock and then sold it when it stumbled a bit or to pocket a small profit... only to watch as it rallied anew and then soared out of sight? Tell me that your hands weren't "clenched in fists of rage." This happens to all of us – maybe a lot. It's happened to me. One day, I came to a tough realization: I was great at buying the right stocks... but I was a terrible investor. Fortunately, I discovered a solution that can help me avoid this frustrating (and wealth-cheating) outcome. And I want to share it with you – so that you never have to experience this frustration again. I'm going to start by elaborating on the [personal story I shared yesterday](... In October 2016, I bought shares of semiconductor company Advanced Micro Devices (AMD). If I don't tell you the rest of my story, you'll think me a genius: AMD moved up as much as 1,000% since the day I bought that stock... Source: TradeSmith But not sharing the rest of my story wouldn't be fair or honest. The reality is that I'm not a genius – because I sold AMD almost immediately after I bought it. In short, I actually lost money on a stock that generated a 10-fold return... Source: TradeSmith I snatched defeat from the jaws of victory for one simple reason... I let emotion get in the way. I trusted my gut – the same gut that helps me tell right from wrong, find the "right" people to be friends with, and identify the best folks to hire at the highly successful company that I run. Truth be told, my "gut" almost always steers me in the right direction – it helps me make the best decisions – but not with stocks. And with good reason. It's easier to trust your gut in decisions that only impact you – or that involve a very small group of other players. But that doesn't work in the financial markets, because you're dealing with millions and millions of other people – other investors – each with different motives, strategies, time frames, and goals. That's why it's so easy to buy the "right" stocks – but still end up being a lousy investor. It's better to have a regimented "process" that excises emotion – and that shows you exactly when to buy a stock, how much to buy, and when to sell it. That's what I have now – and it all starts with this formula below... Source: TradeSmith Before I unpack this for you, let me tell you about the findings of two Nobel Prize winners in behavioral economics... You may have heard about Richard []Thaler and Daniel Kahneman. These guys are superheroes when it comes to understanding investor psychology, which is why they ended up winning the Nobel Prize. And by understanding what they discovered – and combining it with my own discovery – you can become the superhero of your personal investing story. Their first finding was that we are "risk-seeking when we're losing." This is simple... And I bet you've had this happen plenty of times. I call it "rationalizing your decision after you make it." When a stock is falling, you say to yourself: - I'm going to buy this on the dip. - This stock will come back, and my break-even price will be lower. - It's just a paper loss, so it doesn't really matter. Really, what you're doing is adding more risk to your position. You are "seeking out more risk" by buying more or by holding on to a stock that is falling. Momentum is the single most important factor in investing. Index provider MSCI (MSCI) has studied this factor and labeled it one of the most important in reference to a stock's rising or falling. Here's what that means: When a stock has a confirmed uptrend, it is more likely to rise in the short term. When a stock has a confirmed downtrend, it is more likely to fall in the short term. And by buying more of a stock as it's falling, or by "waiting" for that stock to turn around, you are taking on risk and even increasing risk. You are setting yourself up to lose more money. So how do you combat that? You cut your losses when a stock is in a confirmed downtrend. Stop the bleeding. But what Thaler and Kahneman found about winning is even more important to understand. They found that when a stock rises, we are "risk-averse when we are winning." --------------------------------------------------------------- Recommended Link: [60 Minutes vet doubles down: 'Buy the metaverse NOW']( Wall Street legend Whitney Tilson is known for breaking huge financial stories (twice) on CBS's 60 Minutes. But today, [he's going public with FIVE ways to buy today's most transformative tech](. --------------------------------------------------------------- Here's what that means, and I'm sure you've been there with me... Typically, when a stock is rising, we get excited. We have a winner, so we decide to sell our stock to "lock in our gains." Folks, that's lowering our risk. That's taking money off the table. But when a stock is rising, and it is in a confirmed uptrend, you are winning. Here is where you want to take some risk, folks! This is the best time to either ride the winner higher or even add more money to the position to take advantage of its short-term rising outlook. And that leads me to our discovery at my company TradeSmith of the single most important number in investing and why it works... This number is the formula I showed you above for the "VQ," which stands for "Volatility Quotient." (That's the "proprietary measurement of volatility" I alluded to yesterday.) And it solves so many problems that individual investors face today. Certainly, for people like me, and likely you as well. It's a measure of historical and recent volatility – or risk – in a stock, fund, or crypto. And that measurement is really focused on the moves a stock, fund, or crypto makes. Here's what it tells you (I'll just refer to stocks, but it covers everything we track at TradeSmith): - When to buy a stock, - How much of a stock to buy, - When to sell a stock, and - How risky that stock is – how much movement you should expect. To show you an example, here are the VQs of some popular stocks:­­­ Source: TradeSmith Let me leave you with a single nugget that may change your investing life forever... It certainly has changed mine. Thaler and Kahneman essentially are saying that the trend is your friend – understand it and take action. If the confirmed trend is up, stay in your stock and ride the winner. If the trend is a confirmed downtrend, cut your losses. Now, different investors use different strategies to help them make these decisions. I use trailing stops, which act as a point at which you sell a stock (or any other fund, crypto, etc.). Whatever strategy you use, the key is to have an exit plan in place before you enter any position – and then follow that plan to remove emotion from the equation. As I said, for me, the best way to get the most out of a winner and cut the loser (and of course, winners become losers at times) is to deploy a trailing stop. When you buy a stock, you specify what your trailing stop is – most people pick a "generic" number like 25%. That means that from the moment you own a stock, there is a stop loss number at which you will then sell the stock, and the trailing stop trails the highs (but not the lows) that the stock makes. If you buy a stock at $100 and it goes down over time by 25% and never makes a new high since you purchased it, you sell at $75. If that stock rises to $200 and never falls 25% from a high, you're still in that position, and your stop out point is $150. So, you ride your winners and cut your losers. But no two stocks, funds, or cryptos are the same. That's why you can use the VQ number for each stock you buy to determine exactly what the right stop loss would be. Looking at the table I posted above with popular VQs, that means your stop loss for Johnson & Johnson (JNJ) would be about 16%. But for Tesla (TSLA), your stop loss would be around 53%. Tesla moves around more than 3 times as much as Johnson & Johnson. Now you know that if you were to buy Tesla, you would have to suffer through a lot of thrashing around, but it may be worth it. On the AMD trade I showed you earlier, if I had followed a 25% trailing stop, I would have made nearly 50% instead of losing 3.5%! But, had I used a VQ-based trailing stop – well, I could have followed the signals and made more than 1,000%. I would have known that AMD is risky and moves around a lot. Source: TradeSmith So... the VQ is important. It sets expectations and gives you a framework for making better decisions. I honestly believe it's the most important number in investing. Regards, Keith Kaplan May 18, 2022 Editor's note: Last night, Empire Financial Research CEO Whitney Tilson hosted a special event to explain a coming "inflation shock" – and how investors need to prepare. As a featured guest, Keith also shared his unique take on how to turn all the volatility we're seeing in 2022 into more money in your pocket. If you missed the event, there's still time to get the details while a replay is available – [watch it here](. If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. 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