By Michael Brush
Last year was tumultuous, to say the least. But the good news is that trying times like these test your investment approach.
Here are three key lessons I learned from my struggles, market calls and victories in 2020.
Before you hate me, yes, I made mistakes too. In a second 2020 review, I will review my blunders and lessons learned from them. But first, here are the key lessons from my wins last year.
For my investment column here and in my stock letter Brush Up on Stocks (see the link in bio below), I closely follow insiders every day to get a handle on what stocks look the best. Insiders also give us a read on sector and market trends.
The catch here is that not every large insider purchase is bullish. You need a system that weeds out the best signals. I’ve developed one in two decades of studying insiders. I can’t reveal my entire system. But one example: Look for groups of insiders buying in concert known as “cluster buys.”
You also have to do the hard work of company analysis. This is too complex to explain in a few sentences. At a high level, I look for plausible story lines that point to success — rendered more believable by the insider buying. (All management teams are bullish, so that alone means nothing.) I also look for qualities like financial strength and clean accounting, and I try to get a handle on the quality of the product or service.
Several stock calls from 2020 using my insider-based system confirmed that it worked well. Here are four examples.
Example #1 : Six stocks suggested in the midst of the maelstrom in a March 16 column using this approach advanced 106% by year-end. That was more than twice the 51% return for the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.85% over the same time. It was almost twice the 57% gain in the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.72% , and better than the 87% gain for Nasdaq /zigman2/quotes/210598365/realtime COMP -0.39% .
Example #2 : My approach helped me beat a well-known expert in biotech in an informal faceoff. In a March 24 column , I asked biotech analyst Michael Yee at Jefferies for his favorite names. I also suggested two of my own. By the end of the year, his three were up 1%. Mine were up 123%. Mine also did better than the 48% gain for the iShares Nasdaq Biotechnology ETF /zigman2/quotes/206189322/composite IBB +0.85% and the 90% gain for the SPDR S&P Biotech ETF /zigman2/quotes/205950134/composite XBI +1.91% ).
The names? His three were Amgen /zigman2/quotes/209157011/composite AMGN -0.31% , Gilead Sciences /zigman2/quotes/210293917/composite GILD +0.08% and Vertex Pharmaceuticals /zigman2/quotes/202259802/composite VRTX +2.45% . Mine were Kodiak Sciences /zigman2/quotes/207655028/composite KOD +0.33% and Acadia Pharmaceuticals /zigman2/quotes/205236646/composite ACAD +2.27% . I consider both of these holds now, not buys or sells.
Example #3 : In a May 20 column I used my system to narrow down a Goldman Sachs list of high-quality dividend stocks in technology to find the best ones. The concept was that investing in established tech companies that pay yield would offer income and capital appreciation as the global economy recovered.
My five stocks advanced 40% by the end of the year, compared with an average of 25% for what are considered to be among the best dividend ETFs. My five stocks were: Intel /zigman2/quotes/203649727/composite INTC -0.95% , Texas Instruments /zigman2/quotes/202237907/composite TXN -0.46% , Qualcomm /zigman2/quotes/206679220/composite QCOM -0.43% , Cognizant Technology Solutions /zigman2/quotes/206555936/composite CTSH -1.69% and Analog Devices /zigman2/quotes/201631938/composite ADI -0.18% . The five dividend ETFs I competed against were: Vanguard High Dividend Yield /zigman2/quotes/205740569/composite VYM -0.88% , Vanguard Dividend Appreciation Index Fund /zigman2/quotes/207292160/composite VIG -1.08% , WisdomTree Global ex-US Quality Dividend Growth /zigman2/quotes/202205796/composite DNL -0.69% , SPDR S&P Dividend /zigman2/quotes/206871683/composite SDY -1.39% and iShares Select Dividend /zigman2/quotes/204321812/composite DVY -1.18% .
Example #4 : Contrarian bets based on my system even worked against well-known investing experts like Warren Buffett and his team at Berkshire Hathaway /zigman2/quotes/200060694/composite BRK.B -0.79% . They cleared out of airlines in the first quarter, presumably on Covid-19 fears. But my system favored the group. Seven airline stocks taken from my stock letter for this May 26 MarketWatch column advanced 43.6% by the year end vs. 25.6% for the S&P 500. My airlines portfolio in this column included the ones Buffett sold.
To do better than other investors, you have to be different, especially when they have bunched up in a crowd. This is called contrarianism.
But you can’t just spot a crowd and say they are wrong. That is too simple. You also have to have a solid thesis based on fundamentals. Because not all crowds are wrong. For example, the crowd loved Tesla /zigman2/quotes/203558040/lastsale TSLA +0.80% at $600 in early December. Then it went above $720 by the first day of trading this year. Anyone who was short got creamed. Likewise, the crowd loved technology in 1996. It went on to post phenomenal gains over the next four years.
Being contrarian isn’t easy, because the crowd is always telling you that you are wrong. But it is very rewarding, as you can see examples below. The best thing is that contrarianism will continue to work because it takes advantage of part human nature which is unlikely to change soon. People love to join crowds — and then let groupthink cloud hijack their rationality.
Here are five examples of how contrarianism paid off in 2020.