Step Trading BL2TL Stocks

If making money in the market is about buying when the balance of probability is in your favour, in individual stocks, then your odds are always going to better if you 'play' in stocks that are moving from bottom left to top right (BL2TR) on a chart, not top left to bottom right (TL2BR). This is where "quality" comes in.

To improve our odds you need to focus on quality. Yes, every stock will have moments, even the TL2BR stocks will have moments when they go up for a while, but it's not going to be as often. "Swim with the tide" is the motto, so you want BL2TR stocks, quality stocks. That is the first filter. That's where fundamental analysis works.

Then, where so many investors go wrong, is that they stop there. They identify quality, value quality, buy it because it's undervalued, and then sit there forever (buy and hold).

A better approach is, once you have identified as best you can some BL2TR quality stocks, to trade them individually, not hold them forever. Selling CSL is impossible for some people. "It's a quality stock" they'll tell you, but the reality is that the stock market is for making money and CSL will have periods when it goes down, and you will make more money if you trade it, than if you make one decision that it's a BL2TR stock, buy it and never sell it.

Here are some BL2TR stocks:

And some that aren't:

Where would you rather play?

Selling a BL2TR stock like CSL is not a declaration that it isn't a quality stock any more, it's an attempt to make money. It is still a BL2TR stock, but it is only a stock, a price, a vehicle for making money – even the best stocks fall over sometimes, often with the market, not for a company specific reason. You don't have to sit in it just because its 'quality'.

If you think investing is about 'owning part of a company', turning up at the AGM, voting, having a say, being an owner…good luck. That's puritanical out of date hogs wash. The only people doing that must enjoy AGMs, like free sandwiches or make a hobby of being a busy body because it's not going to make you richer. I thank the shareholders that do keep management honest, but we've got a job to do here. Anything other than identifying the right stocks and trading their share prices burns a lot of time, and is of marginal benefit to our investors and our performance because, I hate to tell some of you, but the stock market is for making money not pretending you are a business owner. Of CSL? BHP? Really? You're a momentary passenger on a price. Make any more of it than that, and you are delusional, or you just enjoy thinking you are and enjoy getting out and about to AGMs. Nothing wrong with that.

So excuse me if we leave the free sandwiches and the boring AGM speeches to someone else. We're here to make money.

• Step one is to identify BL2TR stocks, medium and long term, where the probability of making money is better.
• Step two is to then 'step' trade those stocks. As we have been with the funds we run and the market. Catching as many of the good bits as you can and, attempting to avoid the hopefully somewhat rarer, bad bits.

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FINDING BL2TR STOCKS IN A VIRUS RIDDLED WORLD

Despite a more muted relapse risk than we thought, the virus is still going to impact stock selection, possibly for years, perhaps forever. And the impact, whilst it may be geographic for some companies (Brazilian iron ore for instance), it is also going to have a more general, non-geographic, not hotspot related, broad impact on some industries, and going forward this will be one of the keys to tipping the odds in our favour in the stock market.

This is where I repeat the line about swimming with the tide. This is where we try and identify BL2TR sectors and industries.

Industries affected negatively include:

• Energy. Years of damage but still probably some value there.
• International Travel. Years of damage.
• Tourism. International focused tourist attractions hurt most and longest.
• Airlines. Permanent damage.
• Housing. Should recover. But job support and mortgage holidays will come off.
• Auto. Should recover. Domestic travel will grow. Carsales reported higher activity.
• Consumer discretionary. Floating on Jobkeeper money but that will end leaving a lot of Afterpay debts to pay off. Higher levels of unemployment a negative.
• Banks and financials. Economic damage, low interest rates, higher bad loan provisions, passed dividends (lower yields long term), tiny margins, risk of capital raisings.
• Education in Australia.
• Office-related industries.
• Employment agencies. SEK.
• REITs (Office and bricks & mortar retail – shopping centres). Permanent damage but it may be in the price. It's all about price.
• Cafes & Restaurants.
• Hotels. International focused hotels and accommodation will hurt longer than domestic.
• Casinos. Will recover quickly when the doors open.
• Sport-related businesses.

We have had a great recovery trade in these sectors after the market lost its head in March, but that moment of 'panic valuation' is past and we now have to assess these sectors for more medium-term industry prospects. International travel has been killed, potentially for years. Interstate travel in Australia will be permanently dented by the population adopting technology for meetings instead of the traditional face to face meeting. Auto and housing got killed, but is likely to recover again.

Industries positively affected include:

• Technology generally.
• E-commerce.
• Internet. Increased data usage. Telcos.
• Payment systems. BNPL.
• Saas. Software as a service.
• Renovations. Homebuilder grant – good numbers from Nick Scali and Harvey Norman show a 'bloom' that will presumably die off again. Residential tradies very busy. Lots of home improvement being done in lockdown.
• Logistics. Moving parcels.
• Online retailing.
• Healthcare.  
• Domestic travel. SUL.

Unaffected industries:

• Stock market stocks.
• Insurance.
• Infrastructure.
• Utilities.