Yesterday morning, I saw that the top holding in the Palm Beach Trader portfolio was going to open down 5%. (By the close of trading, it was down over 8%.)
To most everyday investors – and even a lot of experienced ones – a 5% down move in a single trading session can seem like trouble. It’s natural to want to cash out when you see a move like that.
I get that. In fact, my editor even messaged me that morning, asking if we should be concerned. If we should take our gains off the table.
But reacting that way is reacting with emotions. And like I’ve shown you in these pages, I don’t let my emotions guide my investment decisions. I use data.
So today, I want to show you a tool that helps you keep your head when stocks make big swings. Understanding this tool is the difference between panicking out of a big winner that has far more room to run, and being rewarded for holding on.
Watch This to Make Sense of Big Stock Moves
The stock in question was longtime Palm Beach Trader portfolio holding The Trade Desk (TTD), which, even after yesterday’s move, is up nearly 600% since we entered it. (My subscribers sold half their position once it reached 100%, so they’re now riding the position risk-free. And I don’t recommend buying it now, at these levels.)
TTD is what’s known as a “high beta” stock. “Beta” is a characteristic of individual stocks that shows how volatile they are compared to the market. A value of 1 means that the stock correlates near-identically to broad market moves. If the value is less than 1, then it means the stock tends to move less than the broad market. And vice versa.
Since TTD has high beta, it tends to move magnitudes higher and lower than the pace of the market. Specifically, TTD has a beta of 2.43 – indicating over a 2x multiple on the move of the broad market. Compare that to a stock like Apple (AAPL), which tends to move in near tandem with the market, and its beta of 1.3. Or a stable stock like Johnson & Johnson (JNJ), with a beta of 0.69.
We’ve seen evidence of TTD’s high beta especially in the last few weeks. On days where the market was up 2%, TTD was up 6%. Conversely, with the Nasdaq down 1.5% yesterday, TTD fell 8%.
Also, we have to keep in mind that TTD has been on a phenomenal run recently. In less than a month, the stock rose nearly 50%. A cooling-off period was more than justified.
So, when I saw yesterday’s move, I didn’t panic. In fact, as dramatic as it seemed, I knew this was a typical down move for this high-beta stock with the market waking up on the wrong side of the bed.
Let the Tree Bear Its Fruit
Big red numbers can be scary. They’re an instant, clear representation of how much the stock you own has fallen in value.
Our instinct is to protect what we’ve earned and sell. But that goes against both parts of my core investing tenet: patience and process.
Imagine you planted an apple tree, years and years ago. One particularly dry summer, you notice the leaves have started to wither. Chopping down the apple tree now will preserve the wood, sure. But then you’ll never get the apple… the reason why you planted it in the first place.
When you have the process to identify the level of beta in your stock, you understand if a dramatic move is justified or not. And once you follow that up with the patience for your idea to bear fruit, you’re rewarded in time.
Patience and process!
Editor, Palm Beach Insider
P.S. I’ll admit, there was another reason why yesterday’s move in TTD didn’t bother me…
I used my unbeatable stock-picking system to find it.
This system, built and refined over years of hard work, helps me identify where the big money moves on Wall Street. And it’s led my subscribers to triple-digit winners time and time again.
My next pick comes out next Thursday. If you want the chance to be one of the first in on it, just click here.