Editor’s note: The deep dive into our investment approach continues today…
So far, Chaikin Analytics founder Marc Chaikin has talked about how the most important lesson of his career and the “magic key” he got from a co-worker in the 1980s both played pivotal roles in the Power Gauge’s creation.
Over the next two days, Marc will focus specifically on his “Industry Monitor” approach…
Marc uses this strategy to help Power Gauge Investor subscribers uncover the “best of the best of the best” opportunities in the markets. And so far, it’s working well…
The S&P 500 Index is down significantly this year. And yet, folks who followed our advice in Power Gauge Investor have booked several double-digit winners over that period.
Today’s essay first appeared in the Chaikin PowerFeed on April 1. As Marc explains, we shouldn’t worry about whether “the market” does “good” or “bad” today (or any day)…
Many investors began worrying about a market crash at the start of this year…
And Russia’s invasion of Ukraine in late February amplified those fears.
The S&P 500 Index lost as much as 13% from the beginning of 2022 through early March. That put the benchmark index in “correction” territory for the first time since the early days of the COVID-19 pandemic. And from there, things only got worse.
It makes sense…
Folks typically start to panic when the “overall market” falls. They ignore all the tidbits of news along the way. And they don’t react until the declines start to make headline news.
In other words, they’re looking at what they consider the “big picture” in stocks.
That’s how most regular investors and the mainstream media think and talk about the stock market. They’ll say that “stocks are up” or “the market is down” as if it’s all one big entity.
You’ll notice that many folks swing from euphoria to panic depending on whether “the market” has a good or bad day, week, or month. They’re wrapped up in their emotions as if it were a sporting event.
But that’s simply not the best way to invest. It’s not the way most professional investors see the market. And it isn’t how I’ve seen the market during my 50-year career, either…
Plain and simple, the stock market isn’t just one big thing. It’s actually a multitude of different, smaller things.
The market is made up of things like energy, materials, industrials, utilities, health care, financials, consumer discretionary, consumer staples, information technology, communications services, and real estate.
And you can break these things into even smaller groups, too.
The problem is that this breakdown creates a lot of moving pieces. That’s why many regular investors just completely ignore the idea.
Instead, they’ll think of “the market” in terms of the S&P 500. And a lot of folks keep track of how the Nasdaq Composite Index is doing to know what’s happening with “tech stocks.”
This mindset is also how most folks invest. They just buy stocks. They’re more focused on individual company metrics like earnings reports, growth projections, and stuff like that.
That’s actually a big mistake.
You see, investors could set themselves up for greater success if they followed a different approach…
Studies have proven that 50% of a stock’s performance can be attributed to its industry.
50%!
That means choosing the right industry is literally half the battle when deciding which stocks to buy and which stocks not to buy. If investors know which industries are doing well and which ones are struggling, they can get a head start on finding the best opportunities.
This mindset directed nearly all of my buying and selling decisions while I was on Wall Street.
Whoever could see the biggest threats and opportunities in the market first – and correctly determine how they would ripple through specific industries – had a huge advantage.
This was how billionaire investor George Soros looked at the market when I worked with him…
He passed it down to the great Stanley Druckenmiller, who also worked with Soros before starting his own hedge fund. Even Bill Gross, the former manager of the biggest bond fund in the world, uses this approach.
The famed Medallion fund does this as well. It’s one of the most successful hedge funds of all time – if not the most successful.
The Medallion fund has reportedly generated average annualized returns of roughly 66% before fees since 1998, delivering nearly seven times better returns than the overall market.
What’s Medallion’s secret? The fund’s managers don’t pay attention to specific stock stories.
Instead, they search for elusive patterns across specialized groups that regular investors simply aren’t looking for. Medallion is pretty open about this secret to its success.
My point is…
This approach is how I learned to invest throughout my five decades in the business. And it’s how I manage my own investments to this day.
For the most part, I don’t worry much about the overall market. I don’t watch every move of the Dow Jones Industrial Average or the S&P 500. I almost exclusively track industries.
But most investors are left in the dark when it comes to this approach…
They’re simply too focused on the hot stock pick of the day. And they’ve fallen into the “big picture” trap.
Tomorrow, I’ll explain how a specific set of tools helps me beat that trap.
Good investing,
Marc Chaikin
