What Can We Learn about Trading from Warren Buffett and Jeff Bezos

At the beginning of his career, Warren Buffett was a value investor. At some point, he realized value investing cannot scale after certain capital size is reached. Then, he started to buy great businesses at a reasonable price.

I like businesses I can understand. It is not an easy business for competitors to enter. I look for a competitive advantage – cost, brand; share of mind is priceless and better than market share. How much could anyone hurt them if they had a billion or 10 billion dollars. If they can’t make a dent, I am in.

I want to know what a business will look like 10 years from now. If I can’t see them where they will be 10 years from now, I don’t buy them. We are buying a piece of a business. You will do well if the business does well if you didn’t pay too high of a price.

The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.

Jeff Bezos manages Amazon the way Buffett invests nowadays. He asks the question what is not likely to change ten years from now and builds his operations on those principles.

I very frequently get the question: ‘What’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one. I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time. … [I]n our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection. It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff I love Amazon; I just wish the prices were a little higher,’ [or] ‘I love Amazon; I just wish you’d deliver a little more slowly.’ Impossible. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.

Both Buffett and Bezos look for long-term sustainable competitive advantages that are very likely to pass the test of time.

Is your trading system developed on principles that are not likely to change ten years from now?

Is your approach based on an understanding that the market is constantly changing and different markets need to be approached with different setups? This requires having a portfolio of different setups and knowing when to use them.

Do you have methods that will find big future winners on a regular basis? The names of future winners will be different than the ones today, but they will have something in common.

Do you have a clearly defined plan to Take advantage of the inevitable market corrections, sector rotations, institutions’ buy and sell decisions, price trends, momentum, volume and price range expansions?

Do you realize that correlations and volatility spike during market corrections and no amount of plain vanilla asset diversification will save your portfolio from a deep drawdown? Are you prepared to stomach 20%, 30%, 50% drawdowns or do you have a way to make them a lot smaller?

Check out my book: Top 10 Trading Setups – How to find them, When to trade them, How to Make Money with them

Five Stocks Doubled in the Past Three Months. What Did They Have In Common?

Here are five of the best-performing stocks for the past 3 months:

AKAO +347%

CALA +254%

ESPR +196%

TELL +189%

AAOI +115%

What did they have in common?

  1. All of them started their move with a huge volume range expansion. We are talking a 8% price gain on at least 10X their average daily trading volume.
  2. All of them offered several secondary entry points – after their big range expansion, they had one or more periods of range contraction, followed by another range expansion.

Position traders look for big 50% to 200% multi-week moves. Swing traders look for hundreds of 5% to 20% short-term moves in a year – those moves typically last between one and 15 trading days.

If you are a position trader, you should be looking for huge volume range expansions in bull markets.

If you are a swing trader, you should be looking for range contractions in stocks with an already established price momentum; stocks that started their ascent with a big-volume breakout and kept going higher.

Some patterns tend to repeat over and over again but they don’t work all the time. Not working all the time is a prerequisite to being profitable over time. The trick is to know when they are more likely not to work.

I talk in more detail about the above-mentioned setups in my book:

Top 10 Trading Setups: How to Find them, When to Trade them, How to Make Money with them

 

The Best-performing Stocks for the Past Ten Years

29 stocks went up more than 1000% in the past decade. One of them is an airline. I guess going to Hawaii has been really popular. Seven of the top ten performers are Internet stocks. The other three are biotech companies. It was the decade of Internet and drugs.

What do all of the above stocks have in common, other than being able to grow their earnings and sales in an impressive manner? They spend a lot of time on the 52-week highs list and set up multiple times.

The U.S. stock market indexes bottomed on March 9th, 2009. A couple days later, two stocks broke out to new all-time highs. Both of them went up more than 10x after their breakouts. One was Green Mountain Coffee Roasters, which was acquired in 2015. The other one was Netflix. Netflix went up 44X in the past decade and today it is a 62-billion dollar company. In 2000, Blockbuster refused to buy Netflix for $50 million, because “it was a very small niche business”.

How to Turn 5k into 30 Million

Home Depot (HD) closed at all-time highs today. $5000 invested in Home Depot when it went public in 1981 is worth about $30 million today.

Turning 5k into 30 million for 35 years means that HD compounded at an average annual rate of 28%.

28% annual appreciation for 35 years is very, very rare. To compare to some of the best-performing stocks of all time: 5k invested in Microsoft in 1986 is worth about $4.85 million today. 5k invested in Walmart in 1975 is worth about 29 million today. 5k invested in Applied Materials (AMAT) in 1975 is worth about 22 million today.

Finding a stock that has the potential to compound at 28% annually for 35 years is close to impossible and probably, it won’t be repeated ever again. Holding such a stock for 35 years might be even harder.

What if instead of finding a stock that can compound annually at 28% for 35 years, you find a stock that can go up 28% this year? And then you repeat the exercise every year for 35 years, one stock at a time? It won’t be easy, but it is also a lot more manageable. Compounding can be magical.

1562 stocks went up more than 30% in the past 12 months. 334 went up more than 100% for the same period.

Check out my newest book: Top 10 Trading Setups – How to find them, when to trade them, how to make money with them.

2016 from a 10,000-Foot View

SMH – Semiconductors had their best year since 2009.

KRE – Regional banks finally above their 2007 highs.

DX – Another strong year for the U.S. Dollar

IBB – first negative year for biotechs in 8 years.

EWZ – Brazil had its first positive year in the last 6.

IWM – big comeback for small caps after a 26% drawdown in late 20015/early 2016.

XIV – betting against short-term volatility worked out again.

QQQ – 8th consecutive positive year for large cap tech.

What year had the big six tech innovators? – AMZN, AAPL, GOOGL, FB, MSFT, TSLA.

Check out my newest book: Top 10 Trading Setups – How to find them, When to trade them, How to make money with them.