More than at any time in the past 18 months, investors will need winning investment strategies to be extremely successful. In the second half of 2020 and, to a lesser extent, in 2021, it was fairly easy to pick winning stocks, as a ton of high-flying names kept rising relentlessly. Last year, shorting overvalued tech stocks and buying oil stocks was an easy, winning strategy. Although I’m bullish on stocks this year, I also think that investors will truly have to contend with a “stock pickers”” market in 2023. That is, with the “big money” neither completely bullish nor largely bearish for the first time in years, there will be wide divergences in the performances of stocks even within the same sector. And, of course, some sectors will perform much better than others. In such an environment, knowing and utilizing the top investment strategies is very important.
Here are seven top investment strategies that investors can use to succeed in 2023. I’ve developed and had success with some of them in the past, while others were created by Wall Street and have been utilized by a portion of the Street’s foremost investors for many decades.
Follow the Agendas of the Most Powerful Governments
The world’s largest governments have at least three extremely powerful tools on their side: laws, a huge number of employees, and tremendous amounts of money.
Therefore, when most or all of the world’s largest governments embrace a sector or technology, the chances of it thriving are very high. And consequently, many or most of the largest companies within the sector or those that provide the technology are likely to be highly successful.
In the past, for example, I’ve used the strategy to profit from defense companies, solar energy companies, casino operators, and the cybersecurity sector. Going forward, because of this principle, I remain upbeat on the latter sectors, as well as on several electric-vehicle makers and a few companies involved in hydrogen.
By the way, the inverse of this principle also tends to be true. That is, if powerful governments vigorously oppose a sector or technology, it’s unlikely to succeed. During my career, I’ve seen that scenario play out with the crypto, coal, and for-profit education sectors, as well as with the marijuana sector to some extent. And because of this principle, I’m somewhat bearish on the longer-term outlook of oil companies.
Follow the “Big Money” and Insiders
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I think it’s a very good bet that huge institutional investors often have access to expertise and, at times, information about individual companies that retail investors lack. For example, institutional investors can access analysts’ reports about firms that most retail investors don’t get to see, and large investors can speak with board members, CFOs, and even CEOs individually to get “color” on the outlook of companies.
And, of course, company insiders themselves, i.e., board members and top executives, have access to tremendous amounts of non-public information about their companies’ performance and outlooks.
Therefore, buying the same stocks that large institutions and company insiders are acquiring makes sense and works.
Nasdaq.com has comprehensive, easy-to-access data on the stocks that insiders and large institutions are buying. InvestorPlace also often publishes stories containing that information.
Dollar Cost Averaging/Buying on Weakness
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Fairly often, the Street underestimates the value of great companies and sectors because they aren’t producing great quarterly results or because the macroeconomic situation is unfavorable.
Consider, for example, that, within the last 15 years, Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), and Netflix (NASDAQ:NFLX) were all shunned by the Street for various reasons, only to make huge comebacks in subsequent years. Or look at how sharply the stocks of many great companies fell during the Great Financial Crisis, the Tech Wreck of late 2018, and the early days of the pandemic before rebounding tremendously as macro worries subsided. Finally, many solar stocks plunged sharply from 2016 to 2018 before surging tremendously.
Those who bought the shares of the good companies and sectors when they were shunned by the Street and held the stocks until they soared made a great deal of money. Buying more of the stocks that you already own when they plunge is called “dollar cost averaging.” That’s because, when you take that action, you’re lowering the average price for which you’ve bought the stock.
Buying stocks after they’ve dropped, whether you own them or not, is referred to as buying them on weakness. In more recent years, the strategy has become more commonly known as “buying the dip.”
The CAN SLIM Method
The CAN SLIM method states that investors should only buy the shares of companies that meet a series of criteria.
For example, according to this method, investors should only buy the shares of companies that are leaders within their sectors, whose profits are expanding, and whose stocks are being widely bought by institutional investors. Additionally, CAN SLIM advises investors to only purchase stocks when the market is climbing.
Generally, the method is used to identify growth stocks rather than value names.
Investor’s Business Daily, which was founded by the inventor of the CAN SLIM system and promoted the method, recommends that investors sell stocks if they drop 7-8% below the point at which they bought them. The website also generally recommends selling stocks after they’ve generated profits of 20-25% for you.
Identify Important Trends That Are Not Being Reflected by Stocks
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Sometimes, for various reasons, important developments in the world, in the U.S., or in certain sectors are not reflected by stocks for a long time.
For example, in a recent column, I noted that Mastercard (NYSE:MA) had reported that “U.S. holiday sales jumped 7.6% year-over-year in 2022., with clothing spending climbing 4.4%, spending at restaurants soaring 15%, and overall online spending increasing 10.6%.”
Because much of the Street still believes that the course of the American economy and U.S. corporate profits will be dictated solely by the Fed, consumer discretionary stocks do not now reflect the strong consumer spending that’s obviously occurring. Indeed, most of these names’ valuations bake in strong downtrends of consumer spending that’s obviously not occurring and, given the strength of the labor market and wages, will probably not occur this year. Therefore, it probably makes sense to buy the stocks of strong consumer discretionary companies such as Macy’s (NYSE:M), Amazon (NASDAQ:AMZN), and Brinker International (NYSE:EAT).
Similarly, also because of worries about the macro trends and some relatively small setbacks suffered by Tesla (NASDAQ:TSLA), I believe that most EV stocks now do not reflect the huge boost that the sector is poised to receive from tax credit from EVs that are starting to kick in now.
Anticipate Developments That Are Likely to Occur But Are Not Yet Reflected in Stocks
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This method is similar to the previous one, but it’s riskier, potentially more lucrative, and presents more opportunities for investors.
Often, developments that likely have a 70%-80% chance of occurring are not reflected in stocks because institutional investors either do not believe that they will happen or do not want to take the chance that they will not occur.
For example, it was fairly obvious that China would not continue its anti-coronavirus lockdowns much beyond the end of this year because of the ruinous effects that they were having on its economy. But, as late as last October, Chinese stocks reflected little or no likelihood of the lockdowns ending anytime soon. Therefore, it would have made sense for investors to buy Chinese stocks or ETFs at that point.
Similarly, now, as I pointed out in my last column, there are pretty strong indications that the Ukraine-Russia War will end in the medium term. However, that scenario does not appear to be reflected in stocks. As a result, it would make sense to buy some European stocks and/or ETFs that are likely to benefit from such a development.
Follow the Methods of Great Investors
Many great investors established criteria that they used when deciding what stocks to buy and publicized these criteria.
Benjamin Graham, widely viewed as the inspiration for many of Warren Buffett’s ideas, emphasized the importance of buying defensive stocks with low, attractive valuations. He advised investors to listen to what stock analysts say without giving too much value to their opinions.
Peter Lynch, who made a great deal of money on stocks in the 1970s, tells investors to buy the stocks of medium and large companies whose earnings are growing 10%-19% annually. He also looks for companies whose price-earnings ratio is 50% or below their growth rate plus their dividend yields. Lynch also does not like manufacturing firms whose inventories are climbing faster than their sales, and he thinks that investors should only buy the stocks of companies with very little or no debt.
Finally, well-known investor Ken Fisher is a big believer in buying the shares of companies with low price-sales ratios. He reasons that such companies are “popular relative to their size” and can easily increase their profits.
Readers who want to learn more about the methods of these and other great investors can buy the book The Market Gurus by John Reese and Todd Glassman, from which I obtained the information in this section.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.