In basketball, players and coaches will often talk about the “hot hand.” This refers to the expectation that someone who has made several baskets in a row has a greater chance of making the next one.
But that’s a fallacy. Even if Lebron James is having a terrific game and just made six shots in a row…the odds that he or any other player will make their next shot remains the same (regardless of how many baskets they have made previously).
The belief in the “hot hand” is a well-studied example of Recency Bias.
And if you don’t know the term, you certainly understand Recency Bias if you’ve seen what’s happened to die-hard Tesla (TSLA) bulls lately. TSLA seemed to be proving the naysayers wrong, time after time, all year – until shortly after the stock broke up through $900. Well, shares have been cut in half since then. Bear markets happen, and when they do, the price action in TSLA is just another example of what I’ve been saying all week: Good stocks bounce. Bad stocks fall like rocks.
Here’s why I bring up Recency Bias now: In my live chat with Platinum Growth Club subscribers Monday, a subscriber named John asked me “What public stocks benefit from the current coronavirus scare?” Obviously, that would be ones like Reckitt Benckiser (RBGLY), the British company that makes Lysol, or Clorox (CLX).
After a -0.4% return in 2019, CLX is now up more than 24% in 2020. (Meanwhile, the S&P 500 is down the same amount!) And it earns a “Buy” rating in my Portfolio Grader primarily because it’s in hot demand on Wall Street right now as a coronavirus “safe haven.” But take a look at the fundamentals:
Clorox’s Sales Growth might be looking a lot better when the current-quarter figures are released: When you walk into a store today, most likely you’ll see all the Clorox wipes are gone.
But what happens to Clorox sales when the COVID-19 pandemic eases up? Will it go back to “D”-graded Sales Growth? This is why I prefer to look at trends…not just what’s happened in the most recent past.
Recency Bias will also keep you from being properly diversified – which is the cornerstone of strategies like my Platinum Growth Club Model Portfolio. I’m proud of the results we’ve had over the years, and they make me confident in expecting 45 double- or triple-digit winners in 2020. Not just because we had that in 2019, a year of all-time highs. But because we had even MORE of them in the 15 years previously.
Based on that experience, here’s my advice: Use a smart, yet very broad strategy. Apply that to the whole market (like I do each Saturday when I run my Portfolio Grader scans on nearly 5,000 stocks). Then, stick with the best of the best stocks– even in corners of the market you wouldn’t normally think to look.
- Elite Dividend Payers, like high-quality real estate investment trusts (REITs)
- Aerospace and defense
- Software for business applications, especially in the “cloud”
- And medical device companies…just to name a few.
Now, remember – we’re in bear-market conditions, so it pays to be highly selective within those themes. And at the moment, I’m not a buyer – or a seller!
If you’d like to follow my lead, then wait for the earnings to come out in April. When volatility eases, the good stocks will get their chance to bounce. If they don’t…then a good earnings report should give you the chance to sell into strength.
I’ll be fine-tuning my Platinum Growth Club Model Portfolio accordingly. So, if you try us out now, you’ll get that hand-picked list, plus invites to my VIP Chats. For those, you can submit your questions directly to me, just like John did when he asked about coronavirus stocks. (I’ve also been recording podcasts every day in this crazy market for subscribers to Platinum Growth Club and ALL my services.)