Forget about market indicators–picking up on secular trends is a much better way to spot top stocks

Investors sometimes ask how I learned about investing and the stock market. The answer is that I started early, read a lot, and learned how to write so that readers understand what I’m saying.

I got started as a teenager, with a part-time job for an investment writer. My job was to gather and organize information on public companies and the economy. This called for a lot of reading, but I was always an avid reader.

Learning how to write easy-to-read material is also a plus. After all, you have to understand information to be able to explain it to others.

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During my first full-time decade in the investing business, I learned that many factors influence market trends. Naturally, I tried to learn about or create market indicators that could tell me how these factors could help my investing. Gradually it dawned on me that most market indicators turn out to reflect the fact that random events tend to occur in bunches.

Some of these bunches are big enough and last long enough that you can mistake them for sure signs that the market is headed in a particular direction.

The four-year U.S. Presidential Election indicator is different. It’s the most valuable market indicator I know of because it takes advantage of recurring cycles in the U.S. Presidential Election cycle. It’s still far from perfect. However, you might say that every few years, it gives investors a helpful nudge in the right direction.

The four-year rule is of little interest to many investors, particularly those who are new to the game. They lack the patience for it. Over the years, I’ve talked to many young investors who seem more interested in short-term trading than in our long-term Successful Investor approach.

From their point of view, they don’t need to obsess about risk because they don’t have enough investment capital to worry about losses. They say they’ll switch to our approach when they’ve made a windfall in something that works out as they hoped. When they have more money to risk, they’ll be more careful with it.

The trouble is that since they disregard risk, they may never acquire the gains they hope for. All too often, they get sucked into one bad investment after another. These include short-term trading (particularly in so-called meme stocks), dabbling in stock options or IPOs or SPACs or cryptocurrencies or NFTs. Dabblers fail to see that the big gains in these opportunities go to those who sell them to the investing public.

Secular trends beat market indicators

In the 1980s, I lost interest in market indicators and began to focus on secular trends. These are economic trends that last longer (sometimes much longer) than the typical prosperity/recession cycle.

Back then, for instance, goldbugs were sure that federal deficit spending was responsible for the high inflation of the period. It seemed to me that they were paying too little attention to the economic changes going on, particularly the impact of the baby boomers’ entry into the workforce. When employers hired boomers, it raised costs, since these newcomers needed training (particularly women who were going to work in higher numbers than previously).

More important, the boomers were also forming families and bidding up real-estate prices and mortgage rates.

Inflation, like a lot of investment issues, is complicated and involves much more than a single factor.

In the 1990s and on into the 2000s, our Successful Investor group stayed bullish due to three key economic energizers we focused on: the worldwide move toward free enterprise that followed the 1991 Soviet collapse; the maturing of the baby boomers, who were headed into the economic prime of their lives; and the ballooning economic payoff of computers and telecommunications technology.

Reading widely over a long period has paid off for me. For one thing, it gave me an idea of the poor record of predictions on all sorts of investment issues—earnings trends, economic growth and so on. Instead, we paid attention to the factors that foster growth in earnings and the economy. It takes patience to invest this way, but it pays off in lower risk and bigger long-term gains.

We didn’t try to predict what would happen or when. But we repeatedly told our readers and portfolio management clients that investors generally were under rating the market’s potential. We stayed bullish and never advised “going into cash.” This has paid off for those who followed our advice.

What is something you have learned along your investing journey has become a rule of investing for you like watching secular trends has been for me?