Sh... Er... Stuff the Market (and My Daughter) Says...

Remember one thing: What is the purpose of a market? Once you know that... you're on your way to investing and trading success. ͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­ Forwarded this email? [Subscribe here]() for more You are a free subscriber to Postcards from the Florida Republic. To upgrade to paid and receive the daily Republic Risk Letter, [subscribe here](. --------------------------------------------------------------- [Sh... Er... Stuff the Market (and My Daughter) Says...]( Remember one thing: What is the purpose of a market? Once you know that... you're on your way to investing and trading success. [Garrett {NAME}](floridarepublic) Aug 30 floridarepublic   [READ IN APP](   Dear Fellow Expat: My daughter, Amelia, was a tour-de-force in her first soccer practice. She hadn’t played organized soccer before but was the tallest and fastest on her team. We didn’t expect this. The kid can run. She can dribble. She just didn’t understand the rules and the game itself. Way to go, Dad. This week, I talked about kids in soccer packs ([and how it relates to markets](. Post-practice, she said something on the way to bed that caught my attention. “Can I steal the ball from the other kids?” she asked as she brushed her teeth. “Yes,” my wife said. “That’s the point. When you play defense, you want to try to take the ball away.” “Oh… I didn’t know I could steal the ball,” she said, rolling her eyes at herself. Watch out, Lutherville Rec-Soccer League. [She’s coming…]( Someone learned how to play defense. Let’s talk about why this simple lesson matters to investors like us… [Upgrade to paid]( The Point of Soccer… and The Markets [I was a goalie in soccer and lacrosse.]( I take a very defensive-minded approach to sports… and the markets. I liked having control over the game. Being able to see the entire field. Both sports are more defensive-minded than offensive-minded… Soccer is more defensive due to the emphasis on maintaining structure, controlling space, and preventing goals. Teams often prioritize solid defensive setups, as scoring opportunities are limited and mistakes are costly. (Does this sound familiar, fellow investor?) Defensive play is strategic, aiming to disrupt the opponent's rhythm and capitalize on counter-attacks. The same goes for lacrosse. And the same goes for the market. I repeat this mantra over and over… but the entire purpose of a stock market isn’t to buy. The purpose of a market is to sell stocks. It’s hard to find people who publicly share this sentiment. Take Jim Cramer. He’s on television screaming, “Buy, buy, buy.” Almost every article on Seeking Alpha or newsletter you purchase tells you what to buy, [but rarely how to think about the company you’re investing your money in.]( Goldman Sachs and other banks always lift their price targets… even when the markets collapse. Historically, roughly 50% to 60% of Wall Street analyst stock ratings are typically “Buy” recommendations. [Despite the Dot-Com crash]( Wall Street buy recommendations were approximately 61% of positions. In 2017, [the Wall Street Journal analyzed FactSet]( and only 6% of stocks were rated as “Sells” or “underweight.” From 2002—post Enron—until 2017, 50% of stocks were rated buys, and just 5% had sell ratings. Yes, that includes the period of the Great Financial Crisis. Today, estimates range around 55% at Buy and 10% at sell, across the board. And what we have here is confirmation bias and a conflict of interest. This range implies that most stocks are good investments, driven by biases like maintaining positive relationships with companies and avoiding investor backlash, which skews the overall market sentiment. Remember the over-the-top metaphor in the movie The Big Short. When depicting the rating agencies that stamped strong ratings on junk mortgage bonds, director Adam McKay literally portrayed the rating agent as a blind woman. As she notes, if her company didn’t assign a good ratings for the mortgage bonds, the issuing company would just take their business elsewhere. This is how we end up with this skew. Access and sales… that’s what drives Wall Street. The Purpose of the Market is to Sell It’s hard to sell a stock with a Buy rating, especially from a prominent Wall Street bank that keeps hiking price targets like a gas station owner changing prices on the sign during a hurricane. But selling is a discipline. Profit-taking is a discipline. It’s necessary not only for investors trying to win but also for the market itself. Why does selling matter? For us, selling is crucial because it allows investors to realize profits, cut losses, and reallocate capital. Think of it as “stealing” profits as you take your gains, skimming off the top and moving on to the next opportunity. For sellers - it’s because they WANT to sell you a stock at the price you’re paying. Why? Because 99 out of 100 times, they set the price. For markets, continuous buying and selling creates market efficiency, price discovery, and opportunities for investors to trade based on their financial goals. You often see wild swings in prices or predictable reversals in the market (more on that in the market update below). Those short-term pops follow selling my algorithms that don’t have emotional ties to the market. They’re buying for a penny and selling for three. We must carry the same “lack of emotion” while celebrating our gains. But first, an important approach is required to do so. Plan Your Exit Remember, don’t enter a position into a stock unless you’ve considered where you want to exit the position. This is why [you want to have specific rules](. For stocks, we tend to focus on companies with 40% to 50% upside… and limit ourselves to 20% downside. We target these names by using a very simple set of rules that set us up on beaten-down stocks with strong reversion upside. Sometimes, the companies can’t hold, but we use technical analysis around the 20-day and 50-day moving averages to understand the optimal entry for a return to momentum. [This is how we found SkyWest in January 2023 at roughly $14.00](. Today, it’s at $76.50. Of course, nothing is fool proof. There have been some losers, names like Arcadium Lithium (ALTM), a lithium producer that fell from $5.00 in March to $2.50 in August. But with proper discipline and tight stops, we can play defense and limit the downside while targeting the upside. A proper stop would put that stock exit at $4.00. But to offset an ALTM loss, there’s a name like Tower Semiconductor (TSEM), which has risen by 45% this year. I’ll release the latest list of September stocks to Republic Risk readers this Monday. I haven’t been satisfied with the names from July, when markets were at a near-term high. I can assure you that Danaos Corporation (DAC) will likely be on the list. But remember… we have very specific exit targets ahead of time. This list will include those targets, so check us out in September. [Upgrade to paid]( It might get bumpy in the next few weeks, but we’re looking for strong bounce-backs in some terrific companies that may benefit from new Chinese stimulus and an expected post-election rally. Stay positive, Garrett {NAME} Secretary of Defense Market Update Woof, the bearish “fractal” appeared this morning. The markets retested their Monday morning highs, only to reject them several times in the first hour. A fractal is a pattern that repeats itself at different scales. It is used as a technical analysis tool to identify potential reversals in market trends. September is coming… Various banks are expecting volatility to pick up. Who can blame them… with China’s economy showing cracks - as we discussed this morning - there’s good reason to worry that new open market operations from the People’s Bank of China might just surprise the world with some inflation come year-end. We’ve seen some weakness on August’s last trading day, but nothing catastrophic. Stay tuned. Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. Under company rules, editors and writers cannot recommend their positions. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.   [Like]( [Comment]( [Restack](   © 2024 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()