Every quarter the ASX rebalances its indices by adding new stocks which have been performing and removing stocks which have been underperforming - and this morning, it removed 4 of the falling knives stocks I had been cautioning- YOJ/BLA/EDE/BRN and added CLV into the ASX Ords index.
As I previously mentioned, the indices have been frequently used by the fund management industry to depict that investing in shares in the long term would yield the best returns amongst asset classes. Of course it does when you keep changing the mix of stocks in the indices especially removing dogs and including stars. It is like the luxury a football team has by always being in the position to include in its team the rising star players and removing the tired out of form players- you would surely have the best football team! Some call this cheating. So remember, your fortunes are not guided by the indices but the very stocks you are investing in.
And I especially love it when my stocks go up while the index languish, it means I am ahead when I should be behind. On the flip side, it would be terrible if the indices have been going gangbusters and your stocks are languishing behind, it means you are missing out. That is as far as the indices are good or useful to me apart from indicating broad market direction and sentiment.
So if you are buying a specky stock and yet believing the mainstream mantra that if you look at the ASX indices, in the long run you would prosper, think again. Your specky stock may have been in the All Ords and then drop out and if they go out of business, none of that gets captured in the indices in any shape or form. But the reality is so different from what mainstream fund industry is telling you.
In 2019, it is more so important to invest and trade in the right stocks- stocks that would outperform the market and stocks with good or high reward to risk ratios have the best chance of outperforming the market- whether this be undervalued or incorrectly priced stocks, undiscovered stocks, low expectation stocks that surprises on the upside, fundamentally strong stocks that continue to overwhelm in its growth or stocks displaying good technical indicators (both short and long term)- and avoid stocks with high risk to reward ratios - 'tainted' stocks, stocks with 'falling knives' charts, stocks which are overvalued (generally or specifically for their relative progress), stocks with bloated share base, stocks whose products/services have yet to receive market validation and no market traction. Through appropriate allocation of limited resources across a wider range of stocks with high potential reward to risk ratio, there is greater chance of moderating overall risks while improving chances for strong returns in the midst of a challenging market environment. Too often I see so many HC posters who are banging on a one-shot pony success in the speculative end of the market (they only talk about that single stock in their entire HC history!) - a folly we've seen played out too often (remember BIQ, GSW?).
