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

Each week 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!

Thoughts on the Markets

How To Handle a Stock DISASTER

We hope you have never been through what we are about to explain, but if you are an active investor or trader for any period of time – you have.

One of your core holdings reports their earnings and they disappoint.

It could be a “miss” (meaning they beat numbers but something else is wrong) or it could be a MISS (they just don’t hit the numbers!)

It doesn’t seem all that bad to you as their numbers are only moving a few percentage points.

You look at the stock in the aftermarket, though, and it is down over -25%.

What is going on?!?

You wake up the next morning and the pre-market quotes (at 7:30am) look a little better, but still REALLY bad.

As the morning goes on, though, they get MUCH worse.

By the time the stock market opens at 9:30am, the stock is indicated down almost -35%.

It opens, rallies a few points briefly and THEN grinds lower.

By midday, the stock is -50%. CUT IN HALF.

This is on barely any change in the actual numbers.

The stock market is efficient, right?

Obviously a -3% change in guidance means the stock is worth HALF as much as it was the day before!

So, what do you DO with this stock?

The somewhat frustrating answer is – it depends.

It depends on..

• what the company reported

• the overall financial situation of the company

• what your time frame is

• the portfolio strategy in which you hold the stock

As a general rule, if you are dealing with shorter-term TRADING portfolios the answer is you should SELL.

A move of -25% or more in a single day in a stock as a result of some level of disappointment is like a stroke. A minor to a major one.

The stock may recover eventually. A stroke victim can go through rehab and eventually run a marathon.

Similarly, a stock can go back to new highs.

When the damage is THIS bad, though, in a single day – it is going to take time.

For TRADING portfolios, it is simply not worth it. Almost always it is best to move on.

For long-term INVESTING portfolios, it is not exactly the same, but the analysis remains the same.

You may be willing to be patient and most often the stock can see a good recovery within a couple of weeks.

The issue is that this level of damage usually has “echoes.”

Again, it is seldom that a stock in this position recovers its losses quickly.

Remember that a stock that has been cut in half needs to DOUBLE to just get back to where it was before it traded won.

Once you decide to sell – how should you sell it?

Do you sell it all at once at the open? Wait for it to recover?

Again, there is no right answer. It is impossible to predict.

Our experience says that on a FIRST crack, the stock will rally a bit in the first 30 minutes and then trade lower throughout the day.

Here is the intraday chart of BellRing Brands, Inc. (BRBR) from back on May 5^th when the company reported a “noisy” quarter…

The stock was “only” down -19% this day but you can see that it rallied some in the first 15 minutes and then again after about an hour. From there, it drifted lower before collapsing into the close.

Our view is that the best strategy is to sell your position in the first hour.

This can be done all at once (we like 9:45am) as a good point in time.

Another (and even better) strategy is to sell one-fourth every 15 minutes. First, right at the open and then at 9:45am, 10:00am and 10:15am.

This is a version of “dollar cost averaging.”

Why do we feel the majority of the time you should be selling?

Take a look at the chart now going out over rest of that month…

The red circle sells the sell-off and you can see the stock went even LOWER in the next few days. Then the stock began to recover and went up almost +10% from where it bottomed three days after the disappointment.

Even at that level, though, it was STILL below where you could have sold it if you did so at the start of the first day.

Even more importantly, look at the chart of what happened to the stock through the rest of the year…

It was CUT IN HALF!

We think BellRing is a good company and it has great management. Chairman Bill Stiritz is one of the greatest money-makers of all-time.

We think the stock could double, triple or go up even more from current levels.

That being said, we would WAIT.

Most importantly, having a plan for selling the stock in the midst of the disaster would have saved your portfolio.

Remember – Plan the Trade, Trade the Plan!

HX Daily Redux

When Seasonality Meets "Situationality"

Here is an article we shared earlier this week in Enrique’s free daily email at Paradigm Press called Truth & Trends.

We thought it was particularly relevant right now. You can read the original article here.

To most investors, seasonality sounds like voodoo. But there’s nothing mystical about it.

When you look through historical stock performance, the market clearly tends to perform better during certain times of the year.

November is the best month of the year for the market, and December is another seasonally strong month.

Taxes, year-end compensation for money managers, and earnings all play a role. Whatever the reason, stocks often finish the year on a high note.

But there’s another force at work that’s just as important — what I call “situationality.”

This is simply the effect of recent stock market performance on what happens next.

With October in the books, the S&P 500 and Dow have now logged six straight months of gains (seven for the Nasdaq).

So the question now is: how does the market perform heading into year-end when it’s already running hot?

Let’s take a look at what the data says.

A Rare Setup for Year-End Gains

The combination of seasonality and situationality over the next two months is very bullish for the stock market.

Here are some good charts from one of my favorite market strategists, Ryan Detrick from Carson Investment Research.

The first one shows how the stock market performs in November and December when the S&P is up more than 15% year-to-date by the end of October.

On the chart, you can see that November is up 81% of the time, December is up 71% of the time, and the index is up 95% of the time with the two months combined.

The S&P 500 is also up by almost 5% on average. Pretty good for just two months!

Here is another one from a technical analyst named Seth Golden.

This table shows the performance of the S&P 500 in November and December, when the period from May to October is up 10% or more.

This has happened 12 times since 1950. And each of those 12 times, the stock market has been higher in the final two months.

Here is another similar analysis from Ryan Detrick. It shows the final two-month performance of the S&P 500 when it’s seen positive performance each month from May to October.

This is only the fourth time this has happened in the last 75 years.

Each of the previous three times this happened, the S&P has been up over the next two months with an average return of 6%.

These analyses are so powerful because they combine the current situationality with strong seasonality.

Where We Go From Here

Here are a few more charts showing the seasonality of year-end stock market performance.

This first shows that last Monday (Oct. 27) is the date when we typically see the final bottom on the S&P 500 before it grinds higher into the end of the year.

Here is another one that shows the performance of the stock market going forward historically based on three-month rolling periods. It shows the period from November to January.

You can see on the chart that this period is by far the best for the stock market, especially the tech-heavy Nasdaq Composite.

And finally, here is one last chart from Ryan Detrick at Carson. This one combines even more about the situationality.

It combines market performance for every year, the past 20 years, this year of a presidential cycle, a year following a +20% year, and a positive January/February.

It then builds a composite to show what happens next.

History would imply we have a great couple of months ahead of us.

The combination of seasonality and situationality has lined up perfectly this year — and history suggests it’s a powerful setup.

So game on!

Market Wizard’s Wisdom

The Mental Master - Charlie Munger

Poor Charlie’s “Mental Models”

Many (most) of the smartest investors are not great at communicating their wisdom. Their quotes are often too complicated or obtuse.

There are few, however, that stand out for the simplicity of their wisdom.

It won’t surprise you to learn that one of those is the great Charlie Munger.

Munger’s ability to generate a pithy – and incredibly insightful – quote is incomparable.

Recently, we read a piece by our colleague Sean Ring of The Rude Awakening, and he introduced me to Munger’s “mental models.”

As Sean says, these are “…guiding principles and ways of thinking that he’s (Munger) curated from a broad spectrum of disciplines. Munger’s approach isn’t about memorizing facts or executing rigid strategies but constructing a ‘latticework of mental models’ that integrate knowledge from psychology, economics, biology, and other fields to make better decisions.”

We loved the mental models Sean shared in his piece, and we are going to share some of them with you today.

By the way, you can sign up for Sean’s great free email newsletter here.

Here are some of Munger’s “mental models” …

1. Inversion

I quickly recognized most of the mental principles that Sean shared. However, when I read the title of this one, I had no idea what he was talking about.

The idea here is that sometimes, the best way to figure something out is to think about it backward. Don't think about what you are trying to do but what you are trying to avoid.

When it comes to investing, instead of thinking about what makes a “good” investor – focus on what makes a “bad investor.” Then work to eliminate those characteristics from your process.

In our three decades as professional investors, we have almost never seen someone run a big fund without a good process for making money. Most of them, however, did NOT outperform the markets.

The reason was because they didn't eliminate their bad habits. Their ideas were good, but their processes around them were poor.

Start by identifying potential failures and working to remove those elements from your strategy. This is probably Munger's most powerful insight.

2. Opportunity Cost

Most investors are familiar with this concept.

The idea is that in addition to the straightforward cost of doing something, there is another cost—the "opportunity cost"—incurred by NOT doing something else.

It is a very well-known concept in economics.

What we think is hugely underappreciated is HOW important this is for your process.

Investors understand it is important but don't make it a priority. We constantly push SELECTIVITY.

Too often, investors focus on making a good return when they could be focused on making a great one. There is only so much time and capital; you should be ruthless in deciding where to allocate them.

3. Circle of Competence

This is a favorite of Munger's and was a big part of his life. The key is knowing both what you DO know and what you DO NOT know.

Figuring out where you don't have the expertise or the ability to have insight is essential to avoid mistakes.

Also, it is crucial to have the humility to go to others with that competence when you need it.

4. Confirmation Bias

In the past, we have often written about different psychological biases that influence (negatively) our TRADING and INVESTING. This is the most powerful one.

We are mentally programmed to seek information that supports what we believe or want to believe. We don't like hearing contradictory information.

This bias is not just in finance but in all areas of life.

One of the keys to success is becoming comfortable with being UNCOMFORTABLE.

Seek out the arguments for why you are wrong. Like the idea of "inversion,” embracing critical and negative feedback is a key to growth.

5. The Lollapalooza Effect

Munger coined this term. It describes a situation in which multiple mental models, tendencies, or biases work together to create extreme outcomes.

These outcomes could be good or bad. These are feedback circles that are built into human psychology.

This concept is also related to George Soros' "reflexivity" concept, which we have written about in the past. You can read that note here.

These human feedback loops are some of the most powerful forces in all of finance and human activity.

In case you are wondering, the word “Lollapalooza” is a 19^th -century American slang word that refers to something unusual, extraordinary, or exceptional.

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].