Diversified Bullish

Musings About Investing (Not Financial Advice)

May 11, 2023

Regression to the Sea

A market of stocks reminds me of a school of fish. They swarm in the same general motion, sometimes using their collective to protect each individual fish with natural deception. Some of the fish are stonger than others, use their competitive advantage to survive and help the other fish. But if a fish becomes too weak, it gets eaten. Same with stocks.

In January 2022, the stock market was bubbling up together in a cash injected, inflation-fueled blow-out. Then the direction of the tide shifted. After pulling back strongly into summer, a brief respite in July before getting hammered even more, with a possible bottom reached in late December. Warren Buffett once said, "Only when the tide goes out, do you learn who has been swimming naked." It's the weaker companies burning through cash struggling to survive. They get metaphorically eaten. Thankfully, stocks are starting to bounce back. It's now a "stock picker's market" or so I've heard. If you bought anything in December, you're probably up a decent amount on the investment. In a few cases, my new positions and DCA buys from within the past 6 months are up 80%. Of course, I'm still down 30%-60% or [gasp] more on too many positions. Regardless, I tend to buy and hold with an option to sell at breakeven if I don't like the company's power structure or earnings reports. I can wait a long time and intend to do so with all my stocks. Sidebar: did you know whales can live up to 90 years? They're probably good investors.

Like fish, stocks valuations are loosely tied together, especially at an industry level. If prices go up a lot, they'll probably reverse eventually. If they recently pulled back hard, there is a better chance for growth at a reasonable price. Sometimes you have to load up when a stock is down over 20% in a single day. When all hope is lost, yet another regression but this time upwards after you bought it if you chose well. It's not always going to work out, but lowering your cost average is generally considered a good idea in investing.

Nevertheless, no one really knows what the market will do. The stock market's short-term direction is about as random as a school of fish. When the market regresses to the mean and sells off: buy the fish that is consistently makes the right moves. It has these characteristics: quickly acquires customers and keeps them, protects or grows their product profit margin, survives economic drawdowns, socially responsible and guides earnings appropriately. That's a catch!