Editor’s Note: Yesterday I discussed three stocks that helped the 100% Letter advisory service outperform the Russell 2000 Small Cap Index by 43% in 2013. Today, I’ll briefly discuss three lessons learned in 2013 that can help growth investors outperform again in 2014.
It is possible to double your money in 18 months.
This is our goal with every recommendation in the 100% Letter. And I know a lot of people think it’s far-fetched. We’re certainly not going to hit a double with every stock. But we’re showing that by focusing on the right companies, with relatively straight-forward catalysts, we can achieve this lofty goal with several stocks. Five of our seventeen positions are currently doubles, or better.
The current bull market is, of course, making this type of performance far easier than it would be during a bear market. That’s why it’s important to seize the day. Given that I expect 2014 to be another strong year for stocks, I continue to believe investors can double their money by investing in small companies with big growth catalysts.
So in 2014 remember the basic recipe for a stock with double potential; take a relatively small company with identifiable catalysts that’s trading at a reasonable price, and buy it.
When an industry outlook turns bearish there is nowhere to hide. Just get out.
We saw this play out with precious metals in 2013. I was late to recognize how extensive the bearish outlook was and within the 100% Letter we had to book considerable losses on our precious metals positions, including a 32% loss on Fortuna Silver (NYSE:FSM) and a 39% loss on Banro (NYSE:BAA).
While these losses would have turned into bigger losses (50% and 85%, respectively) if we hadn’t excited the positions when we did, that’s still not good enough. I should have recognized the emerging bear market earlier.
The lesson to take into 2014 is that we don’t always need to hold on through a bear market. Take the loss early, and put the money to work in something that has better prospects.
Don’t try to outsmart a bull market. Hold on to stocks that are going up.
One of the most consistently accurate statements about the stock market is beautifully simple: stocks that have been going up are likely to keep going up, and stocks that have been going down are likely to keep going down.
Implicit in this statement is that, generally speaking, companies that are doing well see their shares go up. And conversely, companies that are not doing well see their shares fall. These patterns tend to persist until there is some change in the underlying business.
It’s hard to hold onto stocks that have already made great gains. I don’t know anybody that is great at holding. But when you have great stocks in your portfolio you always need to consider what you’ll do with the money if you sell.
If you don’t have a better idea, you’re likely better off simply holding these positions.
I recommended selling several stocks in 2012 and 2013 that would have generated far greater returns if they had just been held. For instance, we booked a 50% gain on Manitex (NASDAQ:MNTX) but had we simply held we’d now be sitting on a 180% gain.
Our 63% gain on Inventure Foods (NASDAQ:SNAK) would now be a 215% gain.
And our 26% gain on NIC (NASDAQ:EGOV) would now be a 100% gain.
This all comes back to maintaining conviction in your own investment thesis. I’m not going to be too hard on myself for taking gains, but as the results above show, we could still have done better. In the second half of 2013, I elected to hold onto stocks for much longer. The results are paying off now.
As you look ahead to 2014, make sure you keep things simple. Identify specific catalysts supporting your investment thesis in each stock you own. Stick with stocks for the long haul. And avoid industries for which the bad news is likely to continue.
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