Successful investing requires due diligence.
But staring at stock tickers all day or scanning the financial headlines won’t make you a better investor.
Instead, you need to figure out why certain stocks are moving and how you — through the application of fundamental principles — could have seen it coming all along.
Let’s look at a few big moves from last week and what we can take from them. As always, we’ll use the help of the ever-quotable investment legend Warren Buffett.
1. Meme stocks
The meme stock investing bubble had been steadily deflating over the past few months. But earlier this week, shares of several retail trading darlings rebounded massively, suggesting that the short-squeeze trade 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, delivering a $1 billion blow to short-sellers.
That same day, BlackBerry jumped 7%, Robinhood Markets rose 9%, and Clover Health Investments popped 10%, even though there was very little news to trigger the large price jumps.
The lesson? Leave short-selling to experienced and less risk-averse traders. While it might seem obvious that a given stock is in bubble territory, its price can go up faster and for much longer than you expect, making the risk/reward tradeoff of shorting very poor.
“You can’t make big money shorting because the risk of big losses means you can’t make big bets,” Buffett once said. “It’s ruined a lot of people. You can go broke doing it.”
2. Palo Alto Networks
Up until this week, shares of cybersecurity specialist Palo Alto Networks were having a poor summer. Analysts had concerns that the cybersecurity space was facing soft demand, prompting investors to sell Palo Alto ahead of its Q4 earnings announcement.
But Wall Street got it wrong.
On Tuesday, Palo Alto shares soared 19% — their best one-day performance ever — after the company’s quarterly adjusted income jumped 12% year-over-year as revenue spiked 28% to $1.2 billion.
Looking ahead, management now expects fiscal 2021 revenue to increase by as much as 25% while it sees adjusted earnings per share of $7.15 to $7.25.
The takeaway? Don’t let poor short-term volatility scare you out of long-term wealth building. If you sell out of a solid growth stock simply because you’re frustrated with its performance, you run the risk of being on the sidelines when it actually starts to build operating momentum.
Like Buffett recommends, “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
3. Peloton Interactive
Finally, we’ll take a look at fitness technologist Peloton Interactive, whose shares fell 8% on Friday after posting disappointing Q4 earnings.
During the quarter, revenue improved 54% over the year-ago period to $937 million — not too shabby. But Peloton’s net loss of $302 million was far worse than Wall Street had expected.
Not too long ago, Peloton was a high-flying darling stock as pandemic restrictions forced people to exercise at home, returning roughly 350% in 2020 alone.
But with restrictions easing and Peloton needing to lower the price of its flagship Bike model by $400 in order to boost sales, much of that luster has worn off — the stock is now off about 50% from those 2020 highs.
The lesson? Make sure that a company’s sales and earnings trajectory is sustainable before investing in it. While a one-time event can quickly boost a business’ financials, it will only prove temporary without a distinct competitive edge.
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage,” Buffett once said.
Where to take it from here
Buffett’s investment philosphy can be summed up simply: Buy stable assets at good prices, and them hold them for the long haul.
Of course, you don’t have to limit yourself to the stock market in order to heed that advice. One steady asset that Buffett’s good pal Bill Gates is partial to is investing in U.S. farmland.
In fact, Gates is America’s biggest owner of farmland and for good reason: Over the years, agriculture has been shown to offer higher risk-adjusted returns than both stocks and real estate.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
