Simple Words of Wisdom From a Market Wizard

Throughout my time on Wall Street, I've often been asked what to do to learn about investing.

My response has always been the same: Read and learn from the best.

Martin Zweig is one of the "Market Wizards" most influential in my trading and investing.

Zweig was a famed investor who, like me, attended the Wharton School at the University of Pennsylvania. He's widely known as a contributor to Barron's. But he's considered one of the greatest investors on Wall Street ever.

I recently came across a quote from him that stuck out to me.

"The trend is your friend. Big money is made in the stock market by being on the right side of the major moves. The idea is to get in harmony with the market."

If you've been with me for long, you'll recognize this as one of the core philosophies behind my approach to trading and investing.

The first place to start when thinking about his quote is that to make real money, you need real moves in a stock price.

A stock that goes back and forth and trades in a narrow range can be a great trading vehicle, but it's hard to make outsized returns. However, significant trends can last longer and go further than anyone ever expects.

The second thing to consider is taking advantage of the opportunities the market is giving you, not the ones you want it to provide.

I wrote about the analogies between baseball and trading a few weeks ago. Another way to think about this idea is that you should "hit the ball where it's pitched." In reality, you have no choice but to hit a ball where it is pitched.

In other words, to make money in stocks, you need to find stocks that are moving.

In HX Trader, we primarily focus on two groups of trends. One of those is outside the scope of Zweig's comment. That's what I call "operational" trends. That is, keeping an eye on a company's operations across revenues, earnings, or other relevant metrics that investors pay attention to.

I like to find companies with consistent track records of growing these metrics and exceeding investor expectations. In my experience, this combination – growth and beating expectations – produces superior stock performance.

Management teams with long track records of outperformance are also likely to continue to outperform.

We combine this focus on operational trends with a view toward a stock's trend.

As a rule, we avoid trading stocks in a confirmed downtrend. We don't necessarily need to know why the stock is in a downtrend and to be honest; we don't care.

A downtrend indicates that for whatever reason, the stock market, in the aggregate, is not seeing enthusiastic demand for the shares—the reason why is irrelevant.

With thousands of liquid, publicly traded stocks out there, you should always be able to find tons in a confirmed uptrend. The uptrend tells us that the stock market is interested in the company and its stock, and typically, that interest is likely to continue.

Who is your favorite "Market Wizard"? Tell us more in the comments section below.

Here's one last concept to think about with Zweig's quote: On the face of it, it sounds like a trading strategy. The reality is that following the trend is the best way to invest.

For investing strategies, we focus on stocks that we think can go up a lot. I don't mean 50% or 100%, but rather 300%... 500%... even 1,000%. You need to find stocks in major long-term uptrends to get those kinds of returns.

Like with trading, with longer-term investing, I'm focusing on stocks in uptrends and operational momentum. The best way to find a stock about to go up 1,000% is to find one where earnings per share are about to go up 1,000%.

That doesn't happen in a day, a week, or a month. It takes years. That means it takes some significant trends into account.

For avid traders, I recommend learning from Market Wizards like Zweig and incorporating their lessons into your approach to trading and investing.

Check out Enrique Abeyta’s conversation with Whitney Tilson on the HX Podcast.