HX Weekly: June 2 - June 6, 2025

Hello reader, welcome to the latest issue of HX Weekly!

Each Friday, we bring you a new edition of HX Weekly that includes three distinct sections.

In the first section, Thoughts on the Market, we'll offer insights into current economic and market news.

In the second section, HX Daily Redux, we'll revisit investing concepts, tactics, and more from past issues of HX Daily.

And in the third section, Market Wizard’s Wisdom, we’ll share thoughts, quotes, and theories from the greatest investing minds of all time.

Now, let's dive in!

I: Thoughts on the Market – The Failure of Modern Money Managers

One of the core underpinnings of our investing philosophy here at HX Research is that the modern money management system is flawed.

Perhaps “broken” is a better word to describe it as “flawed” implies that it ever worked in the first place.

You see, the truth is that professional money managers are in the business of using your money to make themselves rich. They use your money to advance their personnel interests over yours.

On the contrary, we are in the business of making our members money. In fact, our business model only works if our members are happy and pay to keep their subscriptions active.

Thus, our core purpose for existing, is to make you, our valued members, money. Our interests are aligned 100% with yours. This is the core tenant of our business.

Now, back to those professional money managers again. Why are we so certain that they don’t prioritize your interests?

Take a look at the SPIVA diagram below from the S&P Global website.

For your reference, SPIVA (S&P Indices Versus Active) is a research project from S&P Dow Jones Indices that compares the performance of actively managed funds against their benchmarks, according to S&P Global. The goal is to assess whether active fund managers can consistently outperform passive, index-based investment strategies.

As you can you in the diagram, an astounding 89.5% of funds have underperformed the S&P 500 over a 15-year period.

Another way to say this is that the passively managed S&P 500 index crushes the performance of 9 out of 10 actively managed funds.

And let’s be clear that when they say “funds” they mean professionally managed “funds”, run by professional money managers.

So, not only do professional money managers charge investors high fees to join their funds, but they also underperform the S&P 500 almost 90% of the time.

That’s crazy when you really think about it!

Don’t take our word for it though. You can visit the S&P Global website yourself to check out their SPIVA model. We love playing around with this site and think you will as well.

One thing we’ll note, is that no matter what timeframe you choose, or country you choose, the results are always similar. That is the majority of “professional” money managers always underperform their respective indices.

How is it though, that these professionals fail so often when they have so many advantages?

The simplest explanation is that they live in a world of investing theory vs. the world of stock trading. Their interests are not aligned with those their investors.

You see, the fund managers don’t invest their own money. They’ve probably never met or spoken to their investors. And most importantly, most of them have never had to go out and make money trading stocks.

Fund managers are also human. They often prioritize job security over bold decisions. If they make risky choices that fail, they risk being fired. So, they stick to safe trades, which rarely lead to outperformance.

This is the opposite of how we do things at HX Research.

As we’ve mentioned before, legendary investor William O’Neil has had an outsized influence on our investment philosophy.

When he began his career, O’Neil set out to look at what characteristics the best stocks of all time had in common. Instead of hypothesizing, he went to the real-world data and figured out what REALLY worked.

He then created a system to identify those kinds of stocks. And then he went out and followed his system, known as “CANSLIM” to make he and investors a lot of money.

We have developed our own system based on our over 30 years of experience trading stocks professionally. We utilize our system to identify and recommend the best investment opportunities for our members.

We believe in investing in stocks, not companies. We believe in buying stocks when they are cheap. We believe in buying growth, not value.

And most importantly, we believe in making you, our members, money.

In short, our interests are aligned with yours.

II: HX Daily Redux – We’re Buying Stocks, Not Companies

Today, we’ll revisit an HX Daily post from January 2024 titled "We’re Buying Stocks, Not Companies.”

Recently, as market volatility has decreased, daily market conversations focus more on stocks and less on politics and tariffs.

With this in mind, this week we’re sharing a piece that discusses the differences between companies and their stocks. It’s crucial for traders to understand what they’re actually investing in when they buy stocks. Enjoy!

Watch the financial news media and listen to the “smart” money and you will hear them talking about the “fundamentals” all the time.

What does “fundamentals” mean?

In finance terms it means the underlying financial metrics and news around a company. How much it is earning, the state of the balance sheet, the valuation of the companies stock, etc.

The accepted view of almost all market pundits is that the fundamentals are the most important thing to understand with a stock.

Well – the “smart” money is dead wrong.

The vast majority of the time fundamentals really don’t matter for stock prices.

Now, this likely flies in the face of everything that investors are taught… but it’s the reality.

It’s important to understand the difference between a company and a stock. In the real world, an investor would buy a company. For instance, you might buy a gas station. Now that you own the gas station, you have access to the cash flow that the business generates and you can do whatever you want with it. You could choose to simply keep the cash in the bank… transfer it to your own bank account… or use it to invest more in the business.

The owner, though, owns these cash flows… and they have real value.

Stocks, on the other hand, represent public equity ownership in a company… But when it comes down to it, they’re just pieces of paper. When you buy a stock, you don’t contractually have access to the business’ cash flow.

A publicly traded company can choose to pay out cash flows as dividends. It can also use cash flows to buy back stock and reduce the total number of shares outstanding. Or it can use these cash flows to pay out management and make good or bad investments.

While company boards and managements have a fiduciary duty and a legal obligation to protect investors, these are seldom really put into play.

I used to tell my analysts that the value of a company and a stock only converged in two scenarios. If Company A buys Company B, then Company B is worth what Company A was willing to pay for it. Or if it goes bankrupt, it’s worth nothing.

The rest of the time, the value of the stock is simply a matter of opinion. Dividends and buybacks may influence this opinion, but the stock is ultimately worth whatever the next buyer is willing to pay for it.

This is one of the biggest disconnects – and frustrations – that “smart” investors have with stocks. They determine a value for the underlying company and its cash flows and then expect the stock price to (eventually) match up with that analysis.

The reality, however, is that this is seldom the case. Instead, the analogy I often used with my analysts is to think of stocks as pieces of art.

Fundamentally, these items don’t really have any economic value… yet buyers may pay exorbitant amounts of money to buy them. They can also go up and down in price quite a bit.

So then what are the drivers of their “value” and these price movements?

The primary driver is simply supply and demand. If more people want to buy than sell, then the price of the asset has to move up until the sellers are willing to sell it.

Investors’ “opinions” of many factors determine this demand – including the scarcity and “quality” of the artwork. Potential future demand for the piece of art also sets these expectations.

Note that all of these factors are impossible to prove.

In some ways, the same can be said of the factors that are used when investors set their opinions on the value of stocks. They may have views on a company’s future revenue growth, cash flows, or merger and acquisition potential, but these can be difficult to prove.

What we would argue, though, is that in many ways they almost don’t even matter because the stockholders will not see any of these cash flows anyway.

The reason the stocks really go up is when more buyers than sellers have an increasingly positive view of these factors and therefore, are willing to pay more. They are opinions, not facts.

Does this mean that no relationship exists between fundamentals and stock prices?

Not at all… In addition to the binary outcomes we mentioned (buyout or bankruptcy), for the most part, market opinions closely align with the development of fundamentals. But this is because investors choose for this to be the case. It’s not being forced by any specific equation.

This is perhaps the most important concept in stock investing. It’s also the most frustrating one for many investors to understand.

The accepted view is that valuation and fundamentals are the drivers of share prices, but they are really just factors that can drive opinions about the underlying companies. Since they’re only opinions, this means that you can see stocks “de-couple” from these factors tremendously.

If an investor thinks that stocks should closely reflect the value and value creation of the underlying companies, then this doesn’t make sense to him.

The most important thing for a stock investor to do is have a firm grasp of the factors that are driving the opinions of the buyers and sellers of an individual stock. These very well may be the factors of valuation and cash flow, but sometimes they could be something completely unrelated to anything having to do with these.

Keep this in mind when buying stocks (since we aren’t actually buying the companies)… and you can avoid a lot of frustration.

At HX Research we focus on the stock and making you money!

III: Market Wizard’s Wisdom - Richard Dennis

As the market returns to an uptrend, we’re focused on trading.

Mr. Dennis is considered one of the best traders of all time and believed that you could teach anyone to be a successful trader. We’re sure you can learn something from this market wizard’s wisdom.

One of our favorite stories about trading is the story of Richard Dennis.

Dennis was born in Chicago and, at an early age, became an order runner on the trading floor of the Chicago Mercantile Exchange. He began trading before he was legally allowed to (at age 21) by hiring his father to trade for him.

Starting with just a borrowed $1600 in the early 1970s, he built it to a $350 million fortune over the next few decades.

The story is that Dennis believed that successful trading could be taught. To settle a debate with a friend and fellow trader (William Eckhart), he decided to take two groups of novice traders (he called them “Turtles”) and teach them to trade in just two weeks. (Trading Places anyone?)

After the two weeks of training, he gave them a one-month trial trading period using his capital. Eventually, he seeded them with stakes ranging from $250,000 to $2 million of his own money.

The story says that five years later, they had parlayed those stakes into an aggregate profit of $175 million!

Who knows if the exact numbers of the story are accurate, but it is an excellent testimony that great trading CAN be taught.

That is one of our goals here at HX Research. Taking our experience and helping you – our reader – become a great trader.

It also helps to have a brilliant trader mentor you, and today, in HX Weekly, we are going to share some of Dennis’ wisdom.

This is one of the most important lessons for new traders.

It is very easy to extrapolate quick gains (or losses) and decide what you are doing is (or isn't) working.

The reality is that any good trading system needs weeks (or months) to play out.

Be patient and develop a process that churns out returns over time.

The entire quote is valuable, but we really like the second part.

We always emphasize the importance of SELECTIVITY.

Remember that you don’t HAVE TO trade. You don’t have to do anything with your hard-earned capital.

You should only put down bets when you know the odds are in your favor.

This is another quote where we want to emphasize the second part.

With a strategy – and in particular with an individual stock or position – it is often valuable to take a step back and NOT trade anymore. It is also one of the most challenging things for a trader to do.

We see this happen with the traders using the moving averages very often.

If a stock is trading toward a moving average, it almost always trades THROUGH that moving average.

This is because unsophisticated traders put their stops AT the moving averages. Experienced traders understand to look at a range around the moving averages.

This reminds us of one of our favorite Warren Buffett quotes – “Investing is simple, but not easy. The key is to have patience and discipline.”

What works in investing also works in trading.

It is not just about knowing the right moves but putting yourself in a psychological position to execute them when the market moves against you.

Plan the Trade and Trade the Plan.

We hope that you’ve enjoyed this week’s issue of HX Weekly…

Do you have any thoughts, questions, or feedback? Tell us more in the comment section or at [email protected].