The Single Most Important Number in Investing…
I love stocks and the market. I love reading about, thinking about it and, best of all, profiting from it. But year after year, I found the same thing happening to me over and over again. I was great at buying the right stocks… but I was a terrible investor. If you’re anything like the average investor, this has happened to you too. Ask yourself this: How many times have you bought a stock, then sold it, just to find out that it rose much further? This happens for a few reasons. And chances are, if you’re anything like me, it’s happened to you in the past… a lot. To help prevent this kind of impulsive decision making, I made it my mission to develop a system that prevents me from doing that to my portfolio… It has worked wonders for me! And it can help you too. And today I’m going to show you how it works… The Right Way to Buy and Sell In October 2016, I bought Advanced Micro Devices (AMD).  This action makes me look like a genius; AMD has gained more than 1,000% since I bought into the stock. But I’m not a genius because I sold nearly right away…  Why did I sell? I trusted my gut. The same gut that I trust to judge right and wrong and who to be friends with. You know, the emotional being in me that makes all my decisions. Clearly, that didn’t work out well for me. And you probably have a lot of these types of examples too. So how is it that we can buy the right stocks, but we wind up being terrible investors? Well, because we make quick decisions when we trust our gut. Do you have a regimented process for understanding exactly when to buy a stock, how much to buy, and when to sell it? I do NOW, and it all starts with this formula below …  Before I unpack this for you, let me tell you about the findings of two Nobel Prize winners in behavioral economics. You may have heard about Richard Thaler and Daniel Kahneman. Their groundbreaking studies of behavioral economics and investor psychology ultimately won them both the Nobel Prize. Their first finding was that we are “risk-seeking when we’re losing.” This is simple. And I bet you’ve had this happen plenty of times. I call it “rationalizing your decision after you make it.” When a stock is falling, you say to yourself: - I’m going to buy this on the dip.
- This stock will come back, and my break-even price will be lower.
- It’s just a paper loss.
Really, what you’re doing is adding more risk to your position. You are “seeking out more risk” by buying more OR holding on to a falling stock. Momentum is the single most important factor in investing. MSCI Inc. has studied this factor and labeled it one of the most important in reference to a stock’s rising or falling. Here’s what that means in plain speak: When a stock has a confirmed uptrend, it is more likely to rise in the short term. When a stock has a confirmed downtrend, it is more likely to fall in the short term. And by buying more of a stock as it’s falling, or by “waiting” for that stock to turn around, you are taking on risk and even increasing risk. You are setting yourself up to lose more money. So how do you combat that? You cut your losses when a stock is in a confirmed downtrend. Stop the bleeding. But what Thaler and Kahneman found about winning is even more important to understand. They found that when a stock rises, we are “risk-averse when we are winning.” Here’s what that means, and I’m sure you’ve been there with me. Typically, when a stock is rising, we get excited. We have a winner! So we decide to sell our stock to “lock in our gains.” Folks, that’s lowering our risk. That’s taking money off the table. But we’re winning! When a stock is rising, and it is in a confirmed uptrend, you are winning. Here is where you want to take more risk, folks! This is the BEST TIME to either ride the winner higher or even add more money to the position to take advantage of its short-term rising outlook. And that leads me to our (TradeSmith’s) discovery of the single most important number in investing AND why it works. This number is the formula I showed you above for the “VQ,” which stands for Volatility Quotient. And it solves so many problems that individual investors face today. Certainly people like me, and likely you as well. It’s a measure of historical and recent volatility – or risk – in a stock, fund, or crypto. And that measurement is really focused on the moves a stock, fund, or crypto makes. Here’s what it tells you (I’ll just refer to stocks, but it covers everything we track): - When to buy a stock
- How much of a stock to buy
- When to sell a stock
- And how risky that stock is – how much movement you should expect
To show you an example, here are the VQs of some popular stocks:  Let me leave you with a single nugget that may change your investing life forever. It certainly has changed mine… The trend is your friend. If the confirmed trend is up, stay in your stock. Ride the winner! If the trend is a confirmed downtrend, cut your losses. The best way to get the most out of a winner and cut the loser (and of course, winners become losers at times) is to deploy a trailing stop. A trailing stop acts as a point at which you sell a stock (or any other fund, crypto, etc.). When you buy a stock, you specify what your trailing stop is – most people pick a “generic” number like 25%. That means that from the moment you own a stock, there is a stop loss number at which you will then sell the stock, and the trailing stop trails the highs (but not the lows) that the stock makes. If you buy a stock at $100 and it goes down over time by 25% and never makes a new high since you purchased it, you sell at $75. If that stock rises to $200 and never falls 25% from a high, you’re still in that position, and your stop out point is $150. So you ride your winners and cut your losers. But NO TWO stocks, funds, or cryptos are the same. That’s why you can use the VQ number for each stock you buy to determine exactly what the right stop loss would be. Looking at the table I posted above with popular VQs, that means your stop loss for Johnson & Johnson would be about 12%. But for Tesla, your stop loss would be around 49%. Tesla moves around more than three times as much as Johnson & Johnson. Now you know that if you were to buy Tesla, you would have to suffer through a lot of thrashing around, but it may be worth it. And on my AMD trade, had I followed a 25% trailing stop, I would have made nearly 50% instead of losing 3.5%! And had I used a VQ-based trailing stop, well, I could have followed the signals and made more than 1,300%. I would have known that AMD is risky and moves around a lot.  So… the VQ is important. It sets expectations and gives you a framework for making better decisions. It turns great stock pickers into great investors! I honestly believe it’s the most important number in investing. On Feb. 27 at 8 p.m. Eastern, I’m going to unveil the biggest prediction in my company’s 20-year history. And I’ll explain how anybody can use the VQ to make data-driven decisions about their investments. It’s free to attend; all you have to do is register. Happy investing! | 
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