Editor's note: This Weekend Edition, we're taking a break from our usual fare. In this essay, Marc Chaikin, founder of our corporate affiliate Chaikin Analytics, explains the core mindset behind his investment philosophy... and how it helped him create a unique tool for looking at the markets.
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 opponents' weaknesses.
But amateurs don't possess the skills to win that way... They tend to win by simply not losing. They try to keep the ball in play long enough that their opponent makes 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 defeating this mindset is a core component of my investment philosophy – and the Power Gauge system we use at Chaikin Analytics. 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 enemies 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 it sports an iconic name like Apple (AAPL) or Berkshire Hathaway (BRK-B)... or 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.
The important thing is to have a system. Then, your emotions won't drive your decisions.
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 have described my approach as "quantamental" because it's an amalgam of quantitative and fundamental market factors. And I've based it 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.
You need to cut your losses and let your winners ride. 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.
Good investing,
Marc Chaikin
Editor's note: The Wall Street legend who predicted both the 2020 and 2022 market crashes... warned about 21 stocks that have since crashed up to 81%... and whose research pointed to the 20 best stocks of 2022... is issuing his newest warning. What Marc sees on the horizon could cause folks to rush out of cash and popular stocks... and into an opportunity with the potential to double, triple, or even quadruple your money. You can't afford to miss his latest message. Click here for more details.
