Those Who Buy Now, Will Pay Later

Monday, 20 July 2020
Melbourne, Australia
By Greg Canavan
 

In last Monday’s Insider I highlighted the bubble conditions in the ‘buy now, pay later’ stocks.

For investors buying now, it certainly appears as though they will pay later for their folly. Although their dues might come much sooner than ‘later’.

Certainly, those that bought into the hype just a few weeks ago have already paid a decent price. Last week, the sector saw a bout of profit taking.

For example, from a high of $9.15 on Monday last week, Sezzle Inc [ASX:SZL] fell to a low of $5.91 on Friday. That’s a 35% fall from top to bottom.

While many of the converted will consider it a buying opportunity, I fear that it’s just the start of a sizeable correction.

I don’t know for sure, of course. I just think a stock valued at $1.3 billion and no earnings until at least 2023 has a low probability of making you money beyond the vagaries of day trading.  

But this is 2020. So what would I know?

And while I don’t know much, I know I…

Wait…this is sounding like a cheesy love song.

Let me start again.

The market’s sole purpose is to confuse you. To make you think you know something, when in fact you know very little.

If you go into a ‘hot’ market and make money based on dumb luck, you can almost be certain that the market will take it back off you down the track.

My favourite quote is from a book called The Money Game. It goes like this:

If you don’t know who you are, this is an expensive place to find out.’ ‘This’, of course, being the stock market.

A lot of newbies have come into the market over the past few months and are playing around in the ‘hot’ tech sector. In Australia, it’s all about BNPL.

They have taken risks and have made some money. Good on them.

But how well do they know themselves?

Are they humble enough to recognise that they are probably just the beneficiaries of a bubble? Do they have an exit strategy? Are they familiar with the effects of fear and greed on their mindset?

I suspect in the months ahead, plenty of newcomers will realise the stock market is indeed an expensive place to find out about yourself.

It relentlessly attacks your weaknesses. Until you address them, it will keep on attacking.

That’s the beauty of the stock market as far as I’m concerned. Yes, it’s a place where you can invest capital and grow your wealth over time. But it’s also a place that will help you find yourself more than any other, if you’re willing to look.

This view may resonate with you.

Or you may wonder what I’m going on about.

But the truth of the matter is, if you want to take control of your finances and manage your wealth independently, this issue of ‘knowing yourself’ isn’t going away. It could be the difference between making or losing a lot of money over time.

Losing money is OK. It’s a part of the process. You won’t get every pick right.

But you want to make sure your losses are a part of an investment process.

You don’t want to find yourself sitting on a decent loss because you caved in to greed and bought BNPL stocks just before they reversed.

Because, then what?

Do you hold on in the expectation of a rebound, buy more, or get out?

Chances are you won’t know what to do. Because the initial buy was a punt on the expectation of making quick and easy money. When that doesn’t happen, you don’t know what to do.

It’s like Mike Tyson’s famous adage: Everyone has a plan till they get punched in the mouth.

Having a process doesn’t guarantee success. But, provided you execute the process with discipline, it does increase the odds of success.

It’s certainly much better than reacting to every bullish move on the market and wanting to be a part of it.

What’s my process?

I use a combination of fundamental and technical analysis to evaluate investment opportunities. I know that the market doesn’t care what I think, so I use charts (the technical analysis) to confirm whether I’m on the right track.

It works for me.

But it might not be for everyone.

That’s the beauty of publishing a number of different newsletters here. Everyone has their own take on how to make money in the market.

Later this week, you’re going to hear from Ryan Dinse. He’s going to tell you about his system — built around a proprietary momentum indicator — that gets you into small- and mid-cap stocks early on in the piece.

It’s like an early warning signal that something is happening below the surface. It doesn’t always mean a stock price will rise. But if it does, you can be sure Ryan’s early warning system will have detected the early momentum.

Ryan took me through his system a few weeks ago. It was during that hopeful period when Melbourne had opened back up, before Chairman Dan epically blew it.

I was impressed. With Ryan, I mean. Not Dan.

If you’re a small-cap investor, or interested in the opportunities that investing in small-caps can bring, be sure to tune in on Wednesday to hear more from Ryan.

In the meantime, have a think about what your investment process is. Does it really work? Or are you fitting it in to accommodate your weaknesses?

Tough questions and honest answers are the only way to improve. It’s true in life, and it’s true in the stock market too.

Continue scrolling below for this week’s ‘Week Ahead’ update from Pivot Trader editor, Murray Dawes.

Cheers,
Greg


Uranium Off the Canvas
By Murray Dawes

 

[Murray thinks uranium is worth adding to your watchlist. Click on the picture above to see why.]

Ever since the Fukushima disaster in 2011, uranium has been on the nose. Prices have sold off to the point where mines were no longer viable. Huge stockpiles were run down, mines went onto care and maintenance, and still prices couldn’t lift their head.

The COVID virus has knocked the uranium market out of its slumber with supply disruptions seeing a large spike in prices recently. Prices will need to rally much further before we will see a supply response from the market.

Prices are so low that most mines wouldn’t be able to operate profitably. Current prices are around US$32/lb, but need to be above US$40–60/lb before mothballed mines will consider entering the fray again.

The current supply disruptions may be fleeting as a result of COVID and prices may drift back down to the mid-20s. But the writing is on the wall that within a few years, stockpiles will have been run down and prices will need to rally a lot to ensure supply going forward.

There are 140 nuclear reactors on the drawing board to be built before 2040, so the idea that uranium is dead as a result of Fukushima is not true.

There’s an old market saying that there is nothing like low prices to cure low prices. Supply destruction and overconsumption usually leads to a cycle of high prices again. In the uranium market it will take years to get mines up and running again and reactors need to keep an eye on their supply years into the future.

Perhaps the recent spike in prices will be the starting gun to a new bull market in uranium. If so there are quite a few unloved uranium stocks that could come alive again and deliver substantial gains to the early movers.

I have a look at the US and Australian equity indices as well in todayrsquo;s ‘Week Ahead’ update. You can choose what you want to watch from the table of contents in the bottom right corner of the video (the three horizontal lines).

Regards,

Murray Dawes,
Editor, Pivot Trader