In his classic essay, “The Loser’s Game,” author Charles D. Ellis compared investing with a game of tennis…
Ellis observed that professional players possess qualities that most amateurs don’t.
The tennis pros have superior speed, strength, athleticism, and shot-making skill. Armed with these assets, they can take aggressive shots to capitalize on their foes’ weaknesses.
But amateurs don’t possess the skills to win that way…
Amateurs tend to win by simply not losing. They try to keep the ball in play long enough that their opponents make the first mistake.
In other words, amateur tennis matches aren’t so much won by the better player as they are lost by the weaker one.
Amateur players tend to be their own worst enemies. They ultimately beat themselves by trying to make a difficult shot when they would be better off playing for a safe, sure opportunity.
Today, I’ll explain why this mindset is a core component of my investment philosophy – and the Power Gauge. It’s critical for surviving bear markets like the one we’re currently facing.
Let’s get into it…
Too many folks become their own worst enemy by ignoring what should be obvious.
They fall in love with a stock they own, perhaps boast about it at cocktail parties, and then fail to realize when it’s time to sell. They fall in love with it because of an iconic name like Apple (AAPL) or Berkshire Hathaway (BRK-B). Or they fall in love with it because of all the time, effort, and ego they’ve invested in learning about it.
The Power Gauge helps us take a more disciplined, dispassionate approach…
When the Power Gauge is green, it’s because the underlying factors signal that the stock is safe to buy or own. But when the Power Gauge turns red, it means the stock is now riskier to own and you should likely sell it.
It’s as simple as that…
In addition to helping us know when to buy, the Power Gauge is our guiding light to know when to sell. By cutting our losses early – when the Power Gauge says we should – we’ll learn to play the long game in investing. And we’ll grow our wealth.
The overall extent of our gains and losses is all that really matters.
By riding our winners as long as possible, we’ll be better investors. And to do that, we’ll take our cues from the Power Gauge. Again, it’s an easy blueprint to follow…
Green (“very bullish” or “bullish”) means the stock is good to own. And red (“very bearish” or “bearish”) means we should avoid the stock – or sell if we already own it.
Yes, it can be that simple.
I’m agnostic when it comes to investment theologies. I believe most standard approaches hold some value. That’s why the Power Gauge incorporates aspects of most of them.
Some associates have described my approach as “quantamental” because it’s an amalgam of quantitative and fundamental market factors. And it’s based on a lot of experience and back-testing.
But this simple approach is a guiding principle. And in today’s market, it’s more important than ever.
It’s a fundamental part of my investment philosophy. That’s why, even though you don’t see it on the surface, it’s a core part of the Power Gauge approach.
Good investing,
Marc Chaikin
Editor’s note: The bear market isn’t over yet. This week, the S&P 500 Index dropped to its lowest level since late 2020. But fortunately, sitting and waiting isn’t the only option…
Right now, you can take a specific step to shield yourself from the worst potential losses – and give yourself a chance to actually profit in the final weeks of 2022.
Marc recently joined forces with Joel Litman from our corporate affiliate Altimetry to help you determine the exact place to move your money. Watch their event replay right here.
