The Cloud, Netflix, and Michael Jordan

You see a stock spiking 10% on some seemingly game-changing news, and you think, “Oh my god, this is happening right now. I have to buy shares right away. This company is never looking back!”

Then, the next day, the stock sells off some, goes below your purchase price, and you roll your eyes to the heavens and think, “Great, I did it again.”

Lemme tell you, getting sucked in by a powerful rally and jumping too soon — these are among the most common frustrations of any investor. It doesn’t matter how experienced you may be; this exact scenario has happened to every single one of us and probably more than once. I’ve done it enough that I’ve even given it a name: premature allocation.

The truth is breakaway gaps happen. There are countless examples of companies that really do take off and don’t look back. We recommended telehealth company Teladoc (NYSE: TDOC) at $59 a share in my Wealth Advisory newsletter back in August 2019. There was no coronavirus then, we were simply projecting long-term trends, and telehealth — moving some medical services to the cloud — is a fairly obvious extension. 

On Monday, January 13, Teladoc gapped higher, from around $85, to an intraday high of $98, and then settled at $95. This was still pretty early in the coronavirus’ assault on the world. There was no indication at that time the U.S. would go into lockdown and those cloud trends would be so dramatically pushed forward…

So, what if you aren’t a Wealth Advisory subscriber *gasp* and bought those January 13 highs at $98, thinking you had a tiger by the tail, only to watch the stock retrench and drop below your entry the very next day? Would you have thought, “No prob. This stock is a winner”? Or, would you have thought, “Great, I just did it again”?

Drinking the Kool-Aid

This scenario is exactly why investing will challenge each of us on such a fundamental level. I don’t care how much research you do — I mean, I do care, more research is always good — the reality is there will always be things you don’t know about a company, the product/service, the economy, whatever. It is simply not possible to know everything. Which means, at some point, you will have to take a leap of faith. How do you go forth with confidence? 

As usual, I have some thoughts that might help…

I’ve been watching the Michael Jordan/Chicago Bulls documentary Last Dance on Netflix. It is really good. In one of the final episodes, some journalist pontificates on what made Jordan different. Obviously talent and work ethic, but also fear. This guy observed that most athletes carry the memory of failure with them. “Oh, I missed this shot once” or “If I don’t make this free throw, we will lose and everyone will hate me.” It’s the fear of failure. We all have it. And that fear can be crippling for an investor.

If you carry that fear of failure and it seeps into your decision-making process, well, CLANG! Your shot is likely to go careening off the rim, and, as you stand there wondering how you could miss again, you’ll probably miss the chance to play some solid defense on the other end.

The antidote is do the research, do the extra work, and then trust your subconscious.

One of the most important things I’ve learned in my 23 years in this biz is that my subconscious is an amazing supercomputing black box. I have no idea how it works. But I know that I shovel a huge amount of stuff into that black box. Statistics, earnings numbers, analyst and CEO comments, charts, news reports, product reviews, Fed comments, stuff my kids say — it’s all swirling around in there. Then, when I push the button, DING! Good answers tend to just pop right out. 

One thing about this process: Don’t judge the info you take in. If you read something about Tesla for instance, and you think, “Well, that’s stupid,” it’s the same thing as discarding it. You’re not taking it in, so you’re messing with the black box’s formula. Don’t do that. Leave your biases at the door and take it all in. There is a fair amount of misinformation out there. Unethical investors will absolutely put out so-called “research” articles on companies to try and take advantage of individual investors and manipulate the share price.

If some information seems too good to be true, or too bad to be true, it’s a sign that more research is needed. 

Patience Grasshopper 

Funny thing, I started this article to talk about Intel because, holy crap, what a disaster that Thursday evening earnings call was. I’m not gonna roll out the blow by blow (though I have tossed every bit of it into the ol’ black box), but the gist was, “We have screwed up big time.”

Ever since Intel abandoned 5G 18 months ago or so, I’ve had it on my “do not buy” list. It’s been my experience that mistakes compound. I don’t know how a chip company bails on the biggest chip catalyst in a decade before it really gets rolling. But I do know that such a decision is probably emblematic of a flawed process, which is why a little over ago, I wrote a Wealth Daily article sneakily titled “Sell Intel!” (I know, my idea of sneaking up on you is stomping through a huge pile of leaves and sticks with giant boots on.)

My timing on that article wasn’t perfect. The stock was around $50 at the time. You could’ve totally ignored me and made ~35% over the last year. But if you did ignore me (that Ryle’s an idiot!), and you got even a little complacent, well then you were still holding on Thursday night. Now your gains are gone, and doubt is creeping into your black box. Not good. 

The point here is about momentum and patience. Momentum — as in the idea that things will keep moving in one direction until acted upon by an outside force. Maybe that’s actually inertia. Doesn’t matter. You get the point, and I like the word “momentum” better, so we have an accord.

Every trend has momentum. And trends tend to go on longer than investors think they will. That is why “buy and hold” works, patience to let the trend play out…

Revisiting that Teladoc investment, we picked a good spot to recommend that stock, right around $60. But if you look at the chart, it was under $50 just a month or so earlier. Why not wait for the stock to revisit those lows? Why not exercise some patience and get a better price? 

Honestly, the answer has more to do with the cloud trend than the particulars of Teladoc. I’m always on the lookout for good companies that are helping the move online trend. When you find a good company that fits a trend you like, you square up and take your shot. 

In fact, I’m putting the finishing touches on a new presentation about a terrific cloud stock that is the brains behind a critical aspect of Netflix’s business, which has been one of the huge winners as the coronavirus accelerates its subscriber growth trend. Netflix now has 183 million subscribers around the world, and a few analysts are whispering that it will eventually have 1 billion paying subscribers. In other words, the Netflix trend has a loooong way to go… you’ll get a notice in your email Thursday when my presentation is available. 

As for Intel, I think it is a trend that will take a while to play out. It’s staying on my “do not buy” list because I don’t think it’s done falling.

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.