As everyone knows, the correct way to invest is to buy and hold. You know this, because everyone tells you this. Well, not everyone. But a lot of people. Well, not a lot of people. Some people.
Mainly one group of people.
You know, the people that want you to buy assets, park those assets in their coffers, and never touch them? All the while paying them an itsy-bitsy percentage of those assets’ value?
A whole mythology has been constructed and promoted around this business model. Some of the basic mythemes touted as facts include:
“You can’t time the market”
“The best thing to do is a Dividend Re-Investment Program”
“The best time horizon is forever”
“You should just keep buying regularly so you dollar-cost-average your holdings”
These little neurolinguistic programs - tiny executables running processes in your mind’s runtime, processes that try as you might you cannot quit - if only you had Task Manager for the wetware! - are, as with everything in investing, brought to you by the words Opposite and Day.
The logic is most certainly sound for the asset manager themselves. But the only investor for which those statements are universally true is the investor who (1) won’t ever die (2) won’t ever need or want to realize an income or capital gain from their investments (3) doesn’t like to spend money except on stonks and bonds (4) believes themselves incapable of understanding when a price is low and when a price is high (5) has no desire to spend any time whatsoever looking after all the money they earned selling their labor most of their life.
Now, no doubt that authentic forever-investor is out there somewhere. We have yet to meet him or her, but we’ve met a lot of people that have chosen to identify as a Forever Investor and maybe one day hope to chemically and surgically transition themselves to become a full-time donor of management fees to poverized asset managers everywhere.
Wake up, eat a meager breakfast of vegan granola, wire money to Big Money, drink a little tapwater, try to get your cellphone provider to cut your tariff, watch some money-saving tips on YouTube, a little three-day-old salad for lunch - who needs crispy leaves? - then some meditation in the afternoon followed by a little check on your portfolio in the evening. Then bed by 9pm. Up with the larks at 5am. Rinse and repeat. (Don’t use too much hot water when you’re rinsing).
Of course your asset manager wants you to live like this. It’s the modern incarnation of the Lutheran Work Ethic, and we’re not talking about MLK here. Put the work in now, defer the spoils until after your short, brutish and miserable life endeth. The better for your soul! Also, your family won’t know how much money is supposed to be in your account, so when X (expected) turns out to be maybe 0.67 * X (expected) because of, you know, management fees, performance fees, administration fees, market data fees, carbon-neutral credits, plant-a-tree fees, etc, there’s no-one to say …. wtf? Because you already shuffled off this mortal coil and your family are just glad to get something out of the whole estate planning process where they are being told that the best thing to do with all the money is to leave it with the asset manager. Forever. Again. In order to get 0.67 * Y (expected).
Buy and hold forever? You might as well say, through asceticism, find transcendence and self-realization. And then go read some German dialectical philosophy. That you borrowed from the lending library. Because you can’t buy a book. Because all your money is invested forever and if you take it out you get with ohhh so many different kinds of fees. With all new kinds of names.
Lookit, it’s not that hard to spot when stocks are moving up and how far they might move up before they move down again. It might have been hard one day, before you could get free stock information and charting tools and valuations and stuff off of the Internet. But it’s not hard now. It might be hard the first day you do it, but like any skill, practice improves performance. If you only drive one day per year, you’ll probably hit a tree when it rains. Drive every day? Probably not. And would you put all your spare money to work like this? Not if you’re sensible. But are you capable of making some money yourself using some of your money to make money? Sure you are. Like any game - and a game is what it is - there are rules and tools.
Big Money moves stocks around to its own rhythm, and once you learn to spot some of those rhythms, you can learn to play just a little bit ahead of the tune.
There’s a big game playing out right now with a technology stock goes by the name of Cloudflare ($NET). Buy and hold? Sure. If you manage to buy at a low of some kind and you’re buying with money you don’t need. In staff personal accounts here at Cestrian we use our long-term accounts this way. Buy positions in stocks we think have truly long-run capital appreciation potential, with a view to liquidating them in a decade, maybe 15 years, not quite whilst we’re already walking through a tunnel towards the bright light, but not tomorrow either. Write about them in our various services. Rinse in pleasantly warm water, and repeat.
The thing is, you still want to try to buy low. So you still need to understand what low looks like. And for stocks of companies that have truly long lifespans, companies like Cloudflare which might, just might, form a core element of tomorrow’s Internet the way Amazon AWS does today, trying to buy them at a low p/e or something doesn’t work. Not least because, to the great consternation of old fellas everywhere, it doesn’t have any dang e.
But you can still spot when it’s cheap. Because a very old fella left you some tools to do so. Thankyou, Mr Fibonacci, thankyou.
Cloudflare began a huge run up early in 2020. It peaked around $220 late last year. From around $120, maybe $150, Joe P Retail had gotten all excited about the stock and was piling in for all s/he was worth.
Oops. Cue the Rug Pull. If you did a little homework, just a little, and knew what a 1.618 extension was and you could chart it for free on Trading View? Then around $195 you would be getting worried, thinking, time to get the heck outta Dodge. Many of our subscribers did exactly this, banking major gains. The stock ran up a few dollars more for a few days but then decided to swan dive into the abyss. Everyone said this is “because inflation” but that’s not really true. The stock came down because it had run up so far so fast and scared everyone.
It fell to exactly the range that Mr Fibonacci would have predicted, if you’d asked him in Pisa all those years ago. Between the 0.618 and the 0.786 retracement (% decline from high) of that big ol run up. So if you knew the rules and tools, you would probably start to buy a little below that 0.618 level - around $95/share - and you’d keep adding as the stock moved down towards the 0.786 at $60ish. Thus far the stock looks like it bottomed in January at around $75. There’s your Wave One Up and your Wave Two Down, right there.
It’s now in a Wave Three Up. Reported earnings after the bell today, all good. Inflation is on everyone’s lips and in everyone’s gas tank, hasn’t cratered the stock, yet. The thing will probably get a bunch of upgrades tomorrow because revenue growth accelerated and cashflow margins improved or, at any rate, got less negative, and once the 10-K comes out we expect to see a big ol bump in remaining performance obligations aka. the forward contract book. The stock’s at $122 or thereabouts. At $75 nobody wanted to buy it because, the end of the world etc. But if you knew your retracement levels? You’d have been buying it.
Lenny Fibs’ toolkit tells us that $NET could run to maybe $283 from here - that’s about 2.3x your money from today’s price. We think it can get there in a year, maybe a year and a half. And then we think it will go down again, according to the immutable patterns of nature assigned by Big Money. Here’s our chart below (full page version, here