by Jason Bodner
March 19, 2024
We can want to believe something so much we make it true in our heads… especially when there’s money on the line. I offer you the shocking case of Emmanuel Nwude. In the 1990s, as a former Director of Union Bank of Nigeria, he worked extremely hard to sell a Nigerian airport to Brazil’s Banco Noroeste, based in Sao Paolo. Nelson Sakaguchi, a Director there, orchestrated the purchase for $242 million.
Here’s the rub: The airport didn’t exist! But Nwude sold the idea as he impersonated Paul Ogwuma, then Governor of the Central Bank of Nigeria. Sakaguchi was convinced to invest in the fictitious airport due to the lure of a commission of $10 million. It sounded too good to be true… because it was.
Eventually everyone was apprehended but not before Banco Noroeste collapsed in 2001.
Emmanuel Nwude and his phantom airport (YouTube)
Money can sway our emotions and lead us to do stupid things sometimes. Investors love stories of easy riches and secret methods to elevate them above everyone else. Usually, those stories are just stories, and easy riches? Last time I checked, it’s not so easy to earn a quick buck in any market. This is why I prefer an unemotional approach to risking my hard-earned money. Gut reactions are rarely great in everyday life. Why then, would they suit investing? In other words: Use emotions to love your family and data to invest. My philosophy is that the story should come second to the business health of the company.
The same goes for the market. There are never-ending stories to stoke worry and fear, which could cost the emotionally susceptible investor untold piles of money. For proof, look at a 100-year chart of stocks.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
There are two clear takeaways from the chart:
- Volatility exists. Deep draw-downs happen. The path to glory is not linear. However-
- Stocks have clearly risen since 1900. The Dow Jones has grown over 127,000% since then.
That fact will entice success-hungry investors, but one little-known truth is even more mind-blowing: Only a handful of stocks account for all of that stock market success. The awesome work of Professor Hendrick Bessembinder shows that only 4% of stocks account for all of the net gains of stocks above bonds in the past 100 years, and only 1% of stocks account for 50% of the net gain of stocks over bonds.
Think about that for a moment… it’s a conundrum! Here we have a seemingly sure thing: Invest in stocks, since they go up over time. But digging deeper, we find out that you’re basically treading water with 96% of stocks. In short, while the odds seem incredibly good making money in stocks, to beat the bond market, you must own the top 4%. According to this metric, you have better odds at a slot machine.
How then, do we find those 4%?
THAT is the question I have been asking myself for over 20 years. I devoted an immense amount of time, resources, energy, and money to solve this riddle, so I learned a few things. I boiled it down to three basic requirements. To potentially be a top 4% stock, the company must have all of the following three things:
- Superior Fundamentals. It must grow sales and earnings, meaning it must have positive earnings, make a profit, and manage its debt well, among several other key factors.
- Strong Technicals. The stock should be trending higher, because it is being accumulated (on rising volume) and be leading other stocks in its relevant sector.
- Unusual Buying. Institutions don’t play by the same rules as everyday investors. They deploy massive amounts of money and can disrupt a marketplace for a stock. I seek to buy a stock when they buy massive amounts of that stock.
When these three things align, odds of picking a 4% winner go way higher, historically speaking.
If we extend this thinking to today’s markets, I noticed something interesting that might signal a shift.
Looking at money flows, the Big Money Index (BMI) shows a strong market, despite falling from being overbought. The BMI is not plummeting – rather it is leveling off. The market is strong, but we need to keep our eyes on the fact that earnings season is over, because that’s when volatility typically perks up.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
It is important to note that the BMI has not been falling due to increased selling, at least not yet. In fact, there has only been one day of notable (but not serious) selling – note the arrow, below:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
That’s one part of the shift. The next part is that Technology has been the strongest sector since late 2023.
Late last week, however, Technology was eclipsed by the Energy sector:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Again, this is not due to increased Tech selling. The amount of buying has just calmed down. But in the meantime, Energy stocks saw a notable pickup in buying. Wednesday in particular saw a visible spike in buying of Energy Stocks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I investigated the stocks seeing unusual buying to see if it was a reversion, which is typically marked by poor quality stocks being scooped up. In this case, however, the stocks had an average fundamental score of 74%, which is very solid. In general, they were America’s fossil fuel exploration and production companies. This tells us that, for now, stocks remain strong, but volatility may come due to earnings season concluding. I anticipate the next six weeks to be choppy for stocks, then the rise continues.
Seneca could have told us the same thing, long ago: “We suffer more in our imagination than in reality.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
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A Look Ahead by Louis Navellier
The Common-Sense Electrical Energy Solution (Everyone Ignores)
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Here Comes Another Major Catalyst for the AI-Led Rally
Growth Mail by Gary Alexander
March Madness: Dow 5k Fears (2009) & Bloated Budgets Begin (1964)
Global Mail by Ivan Martchev
The Rotation into the Broad Market Accelerates
Sector Spotlight by Jason Bodner
The Easy Road (After Hard Study) to Riches
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Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT
Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner
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