Research Is the Key to “Good Luck” in Investing

Dear Reader,

Welcome to your weekly mailbag edition of The Bleeding Edge. Every Friday, my team and I respond to the questions and concerns you’ve been writing into our mailbag.

So, if you have anything you’d like me to answer in a future edition, write to me by clicking right here. Let’s get started with a question from a reader on how much of success in investing comes down to luck…

I enjoyed your story about early investing. The XPO stock helped you buy a house in the Central Valley, so you were ready to ride the elevator that has been California real estate.

But my question is… how much if your success was just blind luck? I’ve seen plenty of companies with great management and a good business idea, like XPO, which have gone nowhere, or which have actually gone up a bit, then down.

It’s hard for the average investor to keep on top of companies and really know how they are doing, and what the internal machinations may be. This is true especially when one has several issues in a portfolio. I owned a stock of a Hospital company, Tenent, buying in at $15. I watched it rise to nearly $50, thinking “I am such a smart stock picker!” Then it went down to $45, and I thought, “ Ok, long term trend is up, I’ll hang in there and watch it come back.” Then surprising news came out how the doctors were padding the numbers around operations to get more Medicare money than they were entitled to. I watched TEN break support line after support line, hoping for a comeback, but it never happened. I sold after a year, at $15.40, only making about $200 after all that. That round trip was unlucky— and I didn’t have the discipline to sell at a higher price.

I have had other stocks where I knew very little about the company, but due to lucky conditions I had not anticipated, the stock went up, and I made money. So, bottom line, do you agree that, since it is impossible to know what is really going on in a company, “good luck” (i.e., unanticipated fortunate events) plays a major role in successful stock picking? Thanks.

– Cliff G.

Cliff, that’s a great question. And yes, I feel very fortunate to have purchased my home when I did!

There will always be an element of “chance” when investing. Major events like pandemics and wars often happen at unexpected times. And as you said, sometimes we’ll discover something unsavory about a company that was being hidden from investors.

There are always risks in investing. That’s why I often include a “risk” section along with the recommendations I publish. But as the old saying goes, show me an investment with no risk, and I’ll show you an investment with no return potential.

But by and large, we can shift the odds in our favor through research.

That’s why my team and I spend so much time and energy reviewing every company we recommend. We read through SEC filings. Examine the balance sheet. Research the product or service’s market fit. And we speak with customers and other enterprises that deal with these companies. We aren’t just looking for reasons to invest in the company like cutting-edge technology or a moat. We’re looking for red flags like fraud or shady business practices.

We don’t issue a recommendation until we’ve done exhaustive research.

But even then, our job isn’t done. We follow our target price to know when to take profits. And we obey our stop-losses. Those protect us from missing out on gains or staying in a losing position for too long.

These are all measures that tip luck or chance in our favor.

I know that it can be difficult to manage all these activities as a lone investor. That’s why I have a dedicated team to help me stay on top of every position we recommend. And we share the latest news with readers as soon as it’s available – regardless of whether it’s good or bad.

I understand there is a Vision Fund backed by Softbank. I’m interested in an AI ETF, preferably for healthcare specifically… your thoughts?

Thanks.

– Nina C.

Thanks for your question, Nina. SoftBank’s Vision Fund is actually a venture capital fund. That means it’s not a publicly traded investment vehicle. And even if it was, you might not necessarily want to invest. The Vision Fund became notorious for investing in private companies at inflated valuations. In 2022, the fund lost around $27 billion. But all that’s a topic for another day…

As for your question on AI ETFs…

There isn’t a pure-play AI healthcare ETF available yet. For the most part, I don’t recommend buying ETFs. That’s because ETFs are stuffed with dozens of companies that are competing against one another.

Some of these companies will be winners… and others will be losers. The entire reason I spend so much time researching companies, technologies, and markets is to identify who the next winner will be.

When you buy an ETF, you’re buying the winners and the losers. That’s why most investors will only see average returns from an ETF.

Another reason I’m generally not a fan of ETFs is that oftentimes they don’t give investors the diversified exposure they might expect. Case in point is the Robotics & Artificial Intelligence ETF (BOTZ).

We might expect to receive broad exposure to the robotics and artificial intelligence market. But that’s not necessarily the case. When you look under the hood, you see something surprising.

Nvidia makes up 14.5% of the ETF’s net assets. Intuitive Surgical makes up another roughly 9.5%. And the infrastructure technology company ABB makes up another 8.16%.

That means that approximately one-third of the ETF’s holdings are composed of just three companies. These companies aren’t necessarily “bad.” But it means the fund will be leveraged to the success of these three stocks. And it begs the question, why wouldn’t investors just buy the three stocks themselves?

There are a few exceptions to this rule, though. I will occasionally recommend an ETF based on commodities. That’s because it can be difficult for the everyday investor to invest in most commodities. An ETF offers broad and easy exposure.

And in some sectors like biotech, I think an ETF can be okay. That’s because the fate of biotech companies often hinges on the results of a clinical trial. Unless you’re a physician or a researcher with deep experience in a given field, it’s difficult to gain an edge in the biotech sector.

I have been reading your articles as I am subscribing to two of your services. One thing that concerns me is companies that are too “woke.” I feel that when management is overly concerned with virtue signaling this not only goes against my core beliefs but also is bad for long term growth.

Many currently successful companies such as Meta, Nike, Starbucks, and Alphabet are some I would avoid in the long term. This is just a comment I want to make, and I don’t think I am alone in those that are really tired of this wokeness and will try to avoid using and investing in these companies whenever possible.

 – Paul C.

Paul, I totally understand where you’re coming from. Over the past decade, companies have devoted more and more resources to environmental, social, and governance (ESG) – aka “woke” policies.

I don’t buy the hype around ESG investing. The iShares ESG Aware ETF has ExxonMobil, Coca Cola, and 3M among its top holdings. The fact that companies like these could make any ESG list is laughable.

That’s why I don’t pay attention to ESG scores during my research. I look at each company on a case-by-case basis. If I think it’s damaging its own business just to virtue signal, it won’t become a recommendation.

At the same time, I don’t advocate investing in companies that are having an outsized negative impact on the environment or communities it’s involved with. Ultimately, irresponsible behavior becomes a liability.

At a high level, my feeling is that corporate virtue signaling is probably on the downtrend. It’s easy for companies to wade into social issues when stocks are trading near all-time highs. But in a higher-rate environment with more difficult economic conditions, investors start demanding that management gets “back to basics.”

Thank you for the introduction of the subject roadmap by Brownstone Research analyst Phoenix Van Zutphen. I viewed your AI adoption by industry chart with great interest. Am I missing something though? Where are the sports teams represented? Clearly AI will play an increasing role in play selection and player performance metrics. Is there not an investment opportunity here?

Thank you,

– Bob S.

Hi, Bob. It’s a fair question. I asked our analyst to weigh in on your question:

Phoenix here. Thanks for writing in, Bob. I am glad you enjoyed the Road Map.

The role of AI in sports prediction, play selection, and statistical analysis of players is well underway. In fact, a recent Exponential Tech Investor recommendation is doing just that. And they’ve inked deals with the NFL, NBA, CFL, and more. Subscribers can catch up right here.

In terms of the Road Map, sports teams can also adopt AI for marketing and advertising. You also see the sporting sector pop up in both the tech and consulting sectors in the form of analytics data. As AI expands everywhere, we’ll see even more adoption across the sports industry.

That’s all the time we have this week. Thanks to everybody for writing in with your questions.

Regards,

Colin Tedards
Editor, The Bleeding Edge