How to Avoid Stocks That Go Sideways

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  • Callum’s three-year-old daughter recommends…
  • Avoid this nasty share market trap
  • Plus, why small stocks are the best!

Not many investment writers will draw your attention to the Disney movie Coco. But I’m going to.

It’s such a good film you should watch it anyway. It also contains a useful way of thinking about the share market.

Perhaps I have no choice to write about it. My daughter has watched it so many times she can recite the lines of it. So can I.

Coco is the story of a Mexican boy called Miguel. One of his ancestors abandoned his wife and child to pursue a career in music. 

His memory is banished forever. Such is his disgrace that this great-grandfather is even left off the family’s ‘ofrenda’.

An ofrenda is a collection of objects and family photos that Mexicans venerate on the Day of the Dead.

Miguel is accidentally transported to the afterlife where the dead live on. Their spirits are kept alive from the memories of those who knew them in life.

The flesh of their bodies is gone, but not their bones. Imagine some well-dressed skeletons cavorting about and you get the idea of this different world.

It’s called the Land of the Dead…

These spirit-skeletons can survive here until the memory of them is lost forever in the real world. Then they pass into the final unknown.

Why am I talking about this?

I think it’s a useful way of thinking about ideas in the stock market.

Remember, the stock market is not just about numbers and statistics.

It’s about ideas that are vibrant and alive.

Alive in the companies that could burst higher at any time and have a bright future in front of them.  

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I have five of these companies on my buy list right now

Then there are other ideas that are gone from our conscious minds. But they haven’t been killed off completely.

These companies live on in the stock market equivalent of the Land of the Dead. They’ll never come back but they’re not gone forever, either.

Part of the trick to navigating the share market is avoiding these companies.

Here’s one example…

Sideways…sideways…sideways

About two years ago, a friend of mine brought my attention to the stock Salmat [ASX:SLM].

It’s a marketing company that’s been around since the late 1970s. At the time, I went over the stock. Nothing about it excited me in any way.

This is not a criticism of Salmat as a business. But I’m looking for stocks that I think can go much higher, and quickly.

There are certain things I like to see in a potential investment. Salmat had none of them.

Now here’s the tricky thing about the stock market.

You can never know exactly what a share will do. You can only try and put the odds in your favour as much as you can, as often as you can.

I thought the odds of Salmat going up were poor and told my friend as much.

What’s it done since?

Nothing.

It’s neither up nor down. Since 2016, Salmat has been stuck in a range, roughly from 40 to 60 cents.

Think about that for a moment. That’s three years of your money tied up in a stock going sideways.

Unfortunately, this is what a lot of stocks do. Mature businesses and industries don’t leave much scope to break out of this dynamic.

Salmat is a pretty good example of this. Is it likely to break out of this range?

Truth be told, I don’t know. But I doubt it. The odds suggest it’s unlikely.

Here’s a better idea…

Focus your resources here

Investors love to see big growth, especially in new markets or in new ways of doing things. 

I’m not sure Salmat offers much in that way.

Point being: You want to own stocks that have big catalysts in front of them that can rerate the share price.

That’s why small caps can be so lucrative.

Usually, they are young companies with a huge runway of potential growth.

Landing a big contract or new international market along the way can fire up the share price.

Natural resource stocks are also great for big catalysts. That’s because a new discovery or great drilling results can send the share price skyrocketing.  

The important thing, before you commit your money, is that there’s potential for something big to happen in the near future that can change the market price of the stock.

Don’t get stuck with a share that lives in the Land of the Dead.

The stock market is about change as much as anything.  Companies goes through a life cycle, as we all do.

It’s better to focus on the young and vibrant if you’re hunting for capital growth. 

Cheers,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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