Good Stories Get Better, Bad Stories Get Worse

Bear markets grind you down. You get sharp rallies that make you think maybe it’s over, maybe you won’t lose more money. And then, inevitably, that glimmer of hope gets crushed like a bag of kittens on a rush-hour interstate. It’s horrible. The losses mount. You start thinking you must be an idiot to have ever thought you could survive this, much less come out a winner. 

As we watch the coronavirus swirl around the world like fans doing “the wave” at a football game, I sure hope the U.S. can manage to keep the recovery going.

We really got off on the wrong foot back in February. Hubris was no match for the virus. Infections and deaths went exponential, and the U.S. was forced to follow Italy and Spain’s lead and shut it all down. 

Come May, the lockdown proved effective, and numbers started to improve — and not just here in the U.S. Hard-hit countries like Peru, India, and Ethiopia looked like they were turning a corner. Americans started going back to work, and we let our guard down. I guess we should’ve expected a surge in infections and deaths. By mid-July or so, the COVID-19 bear was back.

The Big Ten and Pac-12 cancelled football for 2020. The St. Louis Cardinals shut down for a week. School districts started announcing plans for all-online curriculums. Mayors enacted their own face mask requirements. And once again, the numbers started to improve in the U.S. — just as Peru was posting the worst death rates for any country with a population greater than 10 million. 

It’s maddening.

The COVID-19 wave may have left our section of the stadium… for now. But is there any doubt it will be back? This would be the third wave, and I don’t find the prospect of a third go-round charming in the least.

The Third Wave? 

I mean, kids are going back to school. My daughter is starting her third week of classes at Tulane, where students are getting tested weekly. My son has his first classes at University of Maryland today. He had to get tested before moving into his dorm, but I don’t know what the testing protocol is once he’s there, and that’s a bit worrisome. 

Over the weekend, I heard that the Big Ten is reconsidering its decision to cancel football for 2020. And some NFL teams are even talking about letting some fans into stadiums later this year. 

Now, I have to say, I was completely wrong about how COVID-19 would affect professional sports leagues. I figured a week or two in, we’d see a mass outbreak, and sports would shut back down. I also thought that this resurgence of the COVID-19 bear would unleash the stock market bear as the reality of just how difficult it is to live with the coronavirus is clearly demonstrated. 

Pretty tight theory, I thought. PRO TIP: It is always a good idea to do some critical thinking and articulate your expectations of the stock market, the economy, etc. It’s like a muscle — exercise it and it gets stronger. However, if your expectations are that stocks will head lower, it is typically not a good idea to bet on that until a truly viable catalyst emerges. Bearish investors have been getting steamrolled for five months now…

But despite some early problems for baseball, the NBA has made it into the playoffs and the NFL made it through training camp. Amazing. 

I suspect it is this success that has the Big Ten thinking about playing football again. You see the dynamic at play here, right? 

We get a little good news, let our guard down, take on more risk and then — holy moly! — a spike in infections!

Your Investment Lesson for Today 

It’s remarkable how often that “good news = lowered guard = more risk = WHAM!” dynamic plays out in our lives. 

I’m not sure how much I can help you manage this seemingly innate human mandate to push limits until everything blows up in your face. But I will say this: You should rethink whatever it is you’re doing and whoever you’re doing it with the minute you hear the words “hold my beer.”

Now, when it comes to investing, I have some thoughts. And for my first thought, I get to use one of my favorite expressions: When you hear hoof beats, think horses, not zebras. 

Some investors will bend over backwards to convince you (and themselves) that it’s finally time for some wacky story stock to hit the big time. I remember doing this early in my career. I thought the successful investors had to uncover things that no one else knew about. I’ve since learned that the best investments are the companies that have products and services that people like, want, and are willing to pay for. Simple. 

In fact, that’s the basic concept behind my Wealth Advisory newsletter. My co-editor Jason Williams and I have 33 stocks in the portfolio. Twenty-seven are winners, and the average gain for all 33 — winners and losers — is 104%. 

My final thought for today is: Have some rules to keep you from taking on too much risk and dropping your guard when times are good. They don’t have to be complicated rules. I’m a big fan of “the trend is your friend.” Doesn’t sound like a rule, I know. But the point is buy stocks and sectors that are trending higher. Trends tend to continue. Like, I started buying cloud/tech five years ago because the trend was strong. And guess what — it’s still strong today. 

Don’t buy weak stocks because you think they should reverse. Good stories get better, bad stories get worse. 

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.