When I buy a stock, I do more than just weigh the pros and cons on a proverbial scale and see which side is heavier. Bullish reasons for a stock purchase aren't enough.
I want to know the conditions that would turn my bet into a loser because, many times, those are a lot easier to see and to track. Don't get blinded by your bullish thesis. It's a sure way to get blindsided by conditions you could've seen coming your way. And if the conditions or factors you have to bet against became more compelling, having that information would make the decision to buy a lot easier — and faster.
(This approach has the added advantage of protecting indecisive investors from second-guessing after they've acted.) Not everyone is suited to take the Rip Van Winkle approach and set their time horizon to 100 years.
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The winning sectors since the November election — defense contractors, large-cap technology companies, financial services, industrial companies and materials — are the most vulnerable to an unwinding of the Trump trade. Conversely, it is these very sectors you'd want to be adding to if you are betting that Trump's policies, especially tax reform, will come to light.
There are plenty of examples unrelated to Trump. My best current example are the stocks of brick-and-mortar retailers.
You've heard about how consumers' tastes have shifted away from buying material things to paying for experiences. It's why stocks such as Marriott International and Carnival have done well while Macy's and Target are trading near their 52-week lows. Then there's the mall traffic decline and shuttered shopping centers all around the country, squashing the stocks and bonds of mall owner/operators.
For investors the message is clear: You can't beat the real-life experience of a cruise, but you could buy your cruise wear on Amazon. It's another litmus test to use before you buy your next stock. There is virtually nothing you can't buy online and easily return if necessary.
I advise investors to avoid attempting to bottom-fish in the retail stocks that are down a lot but look cheap on valuation. They only look cheap because their shrinking profit margins haven't caught up to their P/E ratios yet. But I expect they will soon, and you don't want to get stuck in a value trap.