Rampant Over-Exuberance in the Market and...
My System to Picking Stocks, Highest Conviction Stock List, Current Watchlist, and Brief Q&A
Rampant Over-Exuberance
Exuberance makes me worry, and it has reared its overly-excited head in two main areas:
TikTok
Investing is not easy. Market corrections have humbled the best of investors. And yet TikTok investors make it out to be simple… buy when the stock goes up and sell before it starts going down.
In a matter of a 24 hours, the above TikTok video received millions of views. Mind boggling! But this is the antithesis of sound investing in any sense of the word, helping remove people from their money quickly.
And at the same time, the amount of people using margin (taking out loans to invest) has also drastically increased, rising to $778B in December 2020.
Now more than ever it is key to be vigilant in sticking to your system of picking stocks WITH YOUR OWN MONEY! A system helps you find conviction in your stock picks, holding them through the market swings for generational wealth. Staying away from margin makes sure you can hold onto your stocks through the swings without the possibility of a margin call (when a margin call occurs, the investor must choose to either deposit more money in the account or sell some of the assets held in their account). Only professional investors with years of experience should think about using margin, and even then it is risky.
Side note: Don’t invest without a financial plan and an emergency fund in place, having all money needed over the next three years for big purchases (i.e. house, car, etc.) set aside, and making sure that you are making yourself integral at your current workplace.
What does a stock picking system look like?
My system of investing is a work in progress, and will always be, but right now it looks like the following:
Management:
Research Glassdoor ratings (CEO 80%+, overall rating 3.5+)
Google search awards or top company lists
Watch interviews on YouTube (quality answers to questions, forthright)
Read investor earnings call transcripts (checking for where the company is headed)
Financial Strength:
Income statement (Increasing revenue 25%+, High GM% or expanding if they are new, multiple avenues for revenue)
Balance sheet (Strong cash position versus cash from operations, current ratio 1.5+, equity growth)
Statement of cash flow (Increasing free cash flow)
Growth Prospects/Tailwinds:
Total addressable market
Projected growth 25%+
Does the company have a moat, or can they obtain a moat?
Does the company disrupt an industry, or can they disrupt an industry?
What tailwinds does the company have? What headwinds?
Researching a company will also help me discover information on competitors that could lead to a potential investment. For instance, researching XL Fleet (Ticker: XL) led me to research Lightning eMotors (Ticker: GIK / or after the merger ZEV).
If a company has more of these qualities, then it gives me higher conviction and will help me hold through the exuberance, or any potential pullbacks that could occur.
My Highest Conviction Stocks (Alpha Order):
Chewy (Ticker: CHWY)
Crowdstrike (Ticker: CRWD)
DocuSign (Ticker: DOCU)
MercadoLibre (Ticker: MELI)
Pinterest (Ticker: PINS)
Peloton Interactive (Ticker: PTON)
Redfin (Ticker: RDFN)
Sea Limited (Ticker: SE)
Square (Ticker: SQ)
Teladoc (Ticker: TDOC)
The Trade Desk (Ticker: TTD)
Zoom Video (Ticker: ZM)
Watchlist Stocks:
AirbnB (Ticker: ABNB) - a platform for stays and experiences to guests worldwide.
Affirm Holdings Inc (Ticker: AFRM) - financial products for consumers, focused on the idea of buy now, pay later.
Danimer Scientific (Ticker: DNMR) - manufactures and supplies biopolymers used in disposable products.
Jumia Technologies (Ticker: JMIA) - the leading pan-African e-commerce platform that consists of a marketplace, a logistics service, and a payment service.
Porch Group (Ticker: PRCH) - software platform for home service companies.
Upstart Holdings (Ticker: UPST) - cloud- based artificial intelligence (AI) lending platform.
I added larger positions to two of the stocks on my watchlist last month (LGVW and ACUIF), but couldn’t find conviction in the others. After having developed a better understanding of my stock picking system, I have been working diligently to better understand how to manage my portfolio of stocks. This has caused me to drop some watchlist stocks because I find that my current portfolio already addressed something similar.
Biweekly Finance Q&A
Q: What books should I be reading?
For the beginner looking to learn about finance and investing:
I Will Teach You to Be Rich by Ramit Sethi
The Simple Path to Wealth by JL Collins
The Motley Fool Investment Guide by David and Tom Gardner
For the intermediate:
One Up on Wall Street by Peter Lynch
100 Baggers by Christopher Mayer
The Snowball: Warren Buffett and the Business of Life by Alice Schroeder
For the experienced:
How to Make Money in Stocks by William J. O’Neil
Common Stocks and Uncommon Profits by Philip Fisher
These books are a mixture of finance and investing options. Index fund investing. Long term stock picking on fundamentals. Value investing. Growth investing. Technical analysis mixed with fundamentals.
Read them all and find the path that works best for you.
Thank You!
If you’ve made it this far, then you are an amazing human! Let me know what you think by leaving a comment. Or drop me a question. Share it with others who might appreciate this information. Looking forward to sending out the next issue!
**I am not a financial advisor, so please don't buy/sell anything based solely on what you read here and do your own due diligence.