Getting Back on the Course
Focus on the Process
A New Biotech Leader
I only started swinging a golf club a few years ago, but I love the game of golf. Or rather, I would love it if I was able to hit the course! I’m basically an amateur, and while my wife (who golfed as a kid; her parents are still big into it) and I hit the course a few times each of the past couple of years, our bundle of joy in January basically put a kibosh on anything more than a couple of trips to the driving range this year.
That said, I decided to shake off the rust a couple of weeks ago and hit a bucket of balls; seemed like a nice way to enjoy a nice fall New England afternoon. I got out there, lined up my first shot and focused on the basics-head still, twist the hips, swing through the ball, etc., etc. Well, I did all that and, wouldn’t you know it, I hit that ball straight as an arrow, about 230 yards (good for me), no hook or slice to speak of. I was feeling good!
As I said, I’m a beginner, so after that first good drive to start the afternoon, the next two or three were, as we say in the investment world, “not ideal”-one went very long and very far to the right, the next one was similar, and the third one (naturally) hooked to the left and didn’t go all that far.
After three bad drives in a row, I stepped back and thought about what went wrong. I was lining up a little incorrectly, leading to a bit of an inside-out swing. And sometimes I have a tendency to not twist my hips enough on the backswing, which leads to my hips being out in front of my arms, so to speak. There were a couple of other small things, too-nothing revolutionary, just standard problems for a beginner.
So I got back on the mat and took a couple of practice swings while correcting the prior errors. Then I placed the ball down, took a swing, and … hit it dead straight, but only about 50 yards in the air before it skidded along the course for a bit.
Now, two years ago, I would have kicked myself-the goal isn’t to hit a 100-yard drive, half of which comes on a roll! However, that particular swing felt good; my head came up just a bit, so I ended up topping the ball by a fraction of an inch. But the mechanics were solid, and the ball went straight. No inside-out motion on the swing and my hips twisted as they should.
I tried again, not changing a thing, and sure enough, I launched a great drive with the very next ball (and a few after that, too).
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I think the golf story can help convey the importance of focusing on the process, not necessarily the result-something that I find beneficial, especially during what has been a tough year for trend-following investors. On the drive that went only 50 yards in the air, the result wasn’t good, but the process was solid-not perfect, but solid.
And repeating it led to some good drives the rest of the day.
It’s the same in the stock market-on any one trade (or, really, on any few trades), the investment gods can frown on you. Heck, for most of this year, being a trend-following growth investor hasn’t been fun. Great set-ups have failed. Lots of smaller (5% to 15%) profits have vanished. Earnings reports have generally been met with sellers. It’s enough to make you throw up your hands and significantly alter your methodology-booking small profits, or buying stocks in downtrends, or something like that.
While that can be attractive in the short-term, it’s not going to get you anywhere in the long-term. No system or methodology works in all environments, and (as one trader I know puts it) if you constantly chase rainbows, switching between value and growth and income, etc., you’ll never master anything in the market.
So what’s the solution? The key is deceptively simple: Focus on doing the right thing. Just because a trade went awry (or group of trades hasn’t worked out) doesn’t mean you were “wrong.” You followed a proven system and process, and if you do it consistently, you will come out on top-as opposed to being happy when random luck goes your way.
How do you do this? For starters, when conducting some post-analysis of your trades of the prior month or quarter, put all your trades into one of four categories:
1. Good Process, Good Result: This is obviously what we’re shooting for-following the system, and being rewarded for it by making money.
2. Good Process, Bad Result: Similar to recent weeks, you followed the rules but the market just wasn’t in a giving mood.
3. Bad Process, Good Result: You were lucky-you bought extended, or didn’t cut your loss short, but the stock went higher anyway.
4. Bad Process, Bad Result: The source of most of our losses … we make mistakes and the market punishes them.
All you really need to categorize your trades is to jot down some very brief notes (explaining your reasoning) when you buy or sell a stock. The goal is to get as many trades into categories 1 and 2 and to have as few as possible in 3 and 4. That’s right-even if you lose money in a month, if you found that all (or nearly all) your trades were ones and twos, you should throw yourself a bone; take the spouse out to a nice steakhouse or line up a round of golf at that fancy, expensive course you rarely visit.
The reason is that, if you followed a sound methodology, doing the right thing is going to pay off over time. It’s not much different than at a golf course. Can you have a bad swing but bounce the ball off a tree and back into the fairway? Or, conversely, have a good swing that results in a “ground ball?” Of course! But over your next 100 swings, your results are going to be a lot better if you have good swings.
Moral of the story: Obviously, results are important-it’s what we’re here for! But, especially during choppy times, it’s more important than ever to emphasize the process, not necessarily the result. Doing so will always pay off eventually.
As for the market environment, I’ve become increasingly concerned during the past couple of weeks that the market might be etching a meaningful top. Actually, for a lot of the broad market, there’s little doubt the sellers have been in control-the Russell 2000 (small caps) has already fallen 10% from its peak and is down a few percent for the year, and every day I’m seeing well over 100 stocks hit new 52-week lows, even as the Dow and S&P 500 are within a few percent of new high ground!
If you want predictions of what’s to come, you’re looking at the wrong guy-you can turn on the TV or click on any number of links online to find predictions about where the market’s headed.
What I’m more focused on is the evidence, which tells us that the broad market is sick, and some stocks and sectors (especially anything commodity-related) are in awful shape, but many growth stocks-which have been consolidating for more than seven months now-are still holding up well.
Thus, I’m advising my subscribers to hold plenty of cash and limit most new buying, but to have their shopping lists ready in case the market produces a traditional October bottom. If that bullish scenario plays out, I do believe growth stocks will lead.
One of my favorite watch list ideas right now is Medivation (MDVN), a little-known biotech firm that has a blockbuster drug that’s just starting to take market share. Here’s what I wrote about the company in Cabot Top Ten Trader last week:
“Medivation’s blockbuster anti-prostate cancer drug Xtandi is about to take the company’s revenue outlook to the next level. The drug is currently approved to treat post-chemotherapy patients, and is competing directly with Johnson & Johnson’s Zytiga. Sales have remained strong, despite the competition, but analysts believe that Xtandi is about to overtake Zytiga in a big way. On September 10, Xtandi received FDA approval for pre-chemo treatment, opening up a huge market for Medivation. According to analysts at Canaccord Genuity, the pre-chemo market could reach $2.7 billion. With forecast fiscal 2014 revenue arriving at $640 million for Medivation, the company has considerable room for growth. Why Xtandi over Zytiga? Because Medivation’s drug offers improved progression-free survival rates, delaying the need for chemo by 17 months, compared to just 8.4 months with Zytiga. That’s huge! Additionally, Xtandi also delays sketetal problems from cancer that spreads to bones and does not require an additional corticosteroid. Overall, Zytiga raked in $1.7 billion in 2013 and $1.07 billion in the first half of 2014. With Xtandi arriving as an arguably superior treatment, Medivation’s potential is gigantic.”
Analysts see the company’s earnings moving from a loss last year to $2.44 per share this year, and growing another 42% to $3.46 in 2015. Frankly, I think next year’s figure could be very conservative; estimates have been moving up rapidly, especially with the new approval.
The stock has been in a strong uptrend since breaking out in August, and nibbling on dips toward the mid-90s isn’t a bad idea. For my part, though, I’m just watching, thinking that the longer it holds up, the greater the chance of a huge move should the market get going.
For more updates on MDVN and additional 10 momentum stocks each week, take a risk-free subscription to Cabot Top Ten Trader. This year, we grabbed many double and triple-digit winners, including 303% gains in VipShop Holdings, 126% gains in Canadian Solar, 133% gains in Netflix, and we see many more strong stocks that have the possibility to be the next year’s winners.
Chief Analyst, Cabot Market Letter and Cabot Top Ten Trader