A successful investment requires due diligence.
But watching tickers all day or browsing the financial headlines won’t make you a better investor.
Instead, you need to understand why certain stocks are moving and how you, through the application of fundamentals, have been able to see it coming all the way through.
Let’s look at some big moves from the past week and what we can learn from them. As always, we’ll be using help from the always-cited investing legend Warren Buffett.
1. Memes stocks
The stock market investment bubble had steadily deflated in recent months. But earlier this week, stocks of several retail darlings rebounded massively, suggesting short-term trading is back on so-called meme stocks.
Video game retailer GameStop and movie theater operator AMC Entertainment saw their shares jump 29% and 20% respectively on Tuesday, dealing a billion dollar blow to short sellers.
On the same day, BlackBerry jumped 7%, Robinhood Markets rose 9%, and Clover Health Investments rose 10%, although there was very little news to trigger the sharp price hikes.
Lesson? Leave short selling to experienced and less risk averse traders. While it may seem obvious that a given stock is in bubble territory, its price can rise faster and for much longer than expected, making the risk / reward trade-off of a short sale very low.
“You can’t make a lot of money short because the risk of big losses means you can’t make big bets,” Buffett said. “It has ruined a lot of people. You can go bankrupt doing it.”
2. Palo Alto Networks
Until this week, shares of cybersecurity specialist Palo Alto Networks have had a poor summer. Analysts feared the cybersecurity space could face weak demand, which prompted investors to sell Palo Alto ahead of its fourth-quarter earnings announcement.
But Wall Street was wrong.
Palo Alto shares climbed 19% on Tuesday – their best day-to-day performance on record – after the company’s quarterly adjusted income jumped 12% year-over-year as revenues climbed 28% to $ 1.2 billion.
Looking ahead, management now expects revenues for fiscal 2021 to increase by up to 25% as they forecast adjusted earnings per share of $ 7.15 to $ 7.25.
Take-out? Don’t let bad short-term volatility scare you away from building long-term wealth. If you sell a solid growth stock just because you’re frustrated with its performance, you run the risk of being sidelined when it really starts to gain momentum.
As Buffett recommends, “Think of market fluctuations as your friend rather than your enemy; enjoy the madness rather than participate in it ”.
3. Interactive Platoon
Finally, we’ll take a look at fitness technologist Peloton Interactive, whose shares fell 8% on Friday after posting disappointing fourth quarter results.
In the quarter, revenue improved 54% from the period last year to $ 937 million, which isn’t too shabby. But Peloton’s $ 302 million net loss was far worse than Wall Street had expected.
Not so long ago, Peloton was a high-flying darling stock, as pandemic restrictions forced people to exercise at home, falling to around 350% in 2020 alone.
But with the restrictions easing and Peloton having to lower the price of its flagship bike model by $ 400 in order to increase sales, much of that shine has worn off – stock is now around 50% per compared to those 2020 summits.
Lesson? Make sure a company’s sales and profit trajectory is sustainable before investing in it. While a one-time event can quickly improve a company’s finances, it will only prove to be temporary without a distinct competitive advantage.
“The key to investing is not to assess how much an industry will affect the company or how much it will grow, but rather to determine the competitive advantage of a given company and, most importantly, sustainability. of that benefit, ”Buffett said. .
Where to take it from here
Buffett’s investment philosophy can be summed up simply: buy stable assets at good prices and hold them for the long term.
Of course, you don’t have to limit yourself to the stock market to heed these tips. One of the constant strengths of Buffett’s good friend Bill Gates is investing in American farmland.
In fact, Gates is America’s largest farmland owner, and for good reason: Over the years, farming has been shown to offer higher risk-adjusted returns than stocks and real estate.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.