If you want to be successful as an investor, designing, using, and refining a process is just about the most important consideration.

One of the greatest ways to build an investing process is to define your principles. Principles allow you to codify and standardize your decision-making, which is critical as an investor. When things are going very well or very poorly, it can be easy to get carried away by your emotions, but principles can help to always keep you grounded.

Now, in my tenth year as a trader, the market still manages to surprise me day after day. As investors, we must always be learning from our mistakes and fine-tuning our methodology because there is no end goal, just a constantly evolving process. If you love the process and learning, you can do well in markets.

Now that we have moved on to 2024, it can be useful to reflect on the last year of trading so we can identify what worked and what didn’t. Falling back on the most basic principles should allow us to have success in bull markets and bears.

Price Action Over Economic Forecasts

Want to hear something crazy? The S&P 500 never traded below the low of the first day of the year. That means the stock index never went negative YTD once! Despite widespread forecasts for a recession and market downturn, 2023 defied predictions and emerged as a banner year.

While the economists were referring to their models, they forgot about the best economic forecasting tool in the world, the market itself. Because the stock market is a forward discounting mechanism, it is almost always doing a better job at discounting future risks than any individual analyst or trader.

Now, a few weeks into the new year, stock indexes are pushing into new all-time highs and carving out a clear upward trend. Until the price confirms otherwise, that should be considered bullish!

That doesn't mean the trend can’t change, and I would encourage investors to use one of many measures of trend, but until it proves otherwise, stick with it.

This is why it is so important to really listen to what the price tells you and try to read through the most popular narratives swirling around the market. The price action tells you everything you need to know.

Follow the Big Trends

Every year, there are often one or two big trends or narratives that carry a stock or sector to massive outperformance. In 2023, it was Artificial Intelligence. As soon as ChatGPT was released, and investors began to grasp how many data center products Nvidia was going to be selling, the monster trend set off, and barely took a breath all year.

Looking back another year, in 2022, energy and especially oil and gas were leaders throughout the year, providing huge opportunities for outperformance.

They aren’t always immediately clear, but if you watch closely, the big themes usually become evident by Q2 and definitely by the second half of the year.

Since the time of this writing, we are only a few weeks into the year, so I’m not yet sure what the big trend will be, but I am going to keep my ear to the ground.

I will also add that this Artificial Intelligence boom has the potential to carry the market higher for a second year. Its influence on the economy and stock market is reminiscent of the early Internet boom, which proceeded for several years.

But you shouldn’t stop there – I know there will be at least one more big idea that carries a sector far and above the rest of the market.

Invest in What You Know

Many commentators on the internet often say retail investors looking for alpha should focus on micro and small-cap stocks if they want an edge. However, I wholeheartedly disagree. I personally have always been one to closely follow large and mega-cap stocks because I think they are fantastic businesses with many more years of growth.

And it paid off! I was prepared to own big tech stocks in 2023, and many returned more than 100%.

Nvidia and Meta Platforms, two of the largest companies in the world, were the best-performing stocks in the S&P 500. The setups were quite compelling, with Meta Platforms ending 2023 at its lowest relative valuation in a decade and Nvidia leading the Artificial Intelligence revolution.

Both stocks were steadily trending higher, confirming bullish price action all year.

Follow the stocks you know and understand, and when the opportunity to own them presents itself, you will be more ready and confident than other investors.

Utilizing the Zacks Rank

This is my first year at Zacks and my first time using the proprietary tools. I was constantly impressed with how effective they were at anticipating which stocks would be the top performers.

In my experience, I have gone through many different filtering and signal generation tools, and the Zacks Rank has easily been one of, if not the simplest and most effective, for identifying winning stocks.

For example, Nvidia and Meta Platforms enjoyed Zacks Rank #1 (Strong Buy) ratings for many months and sat atop the list right from the beginning of the year. Because the Zacks Rank aggregates the earnings estimates and revisions from all analysts on Wall Street, it provides a broad opinion on expectations, like the way the market functions.

As earnings estimates trend higher, institutional traders begin buying the stock, thus pushing it higher. I’ve carefully reviewed the earnings estimate trend of META. Following the upgrades in February, the stocks rallied higher all year.

Risk Management

In my opinion, risk management should always be the number one concern of investors. As always, the first goal is not to lose money. Don’t focus on how much you can make; focus on how much you may lose.

The calculation for risk management should be simple. After entering a stock, identify the level where you think the thesis is wrong. This is where you place a stop loss. You should be sizing your positions as a function of this amount.

Say you have 10% of your portfolio in a stock, and your stop loss is -10% below the current price. If you get stopped out, you will lose a total of 1% of your portfolio. Do this for every position in your portfolio and you will know the max drawdown of all your current positions.

Even the best traders are wrong on nearly half of their trades, so we must get used to taking losses. It is just the cost of business. However, the focus should be on maximizing how much you make when you are right and minimizing how much you lose when you are wrong.

If you are doing your research correctly and making the right decision, the returns will take care of themselves. 2023 made it extremely clear that no investor needs margin – there were half a dozen large-cap stocks that more than doubled last year!

Final Thoughts

Of course, hindsight is 20/20, and though Meta Platforms and Nvidia were top Zacks Rank stocks, many investors doubted they would continue to trade higher all year. Although it isn’t a new insight, good trading requires courage. You must form your opinion and stick to it, even if that goes against the herd.

However, utilizing each of the principles listed above should aid in doing good research and thinking independently. Filter and identify stocks through the Zacks Rank, follow the price action on each stock, and the market to identify the trend, understand the businesses you are investing in, and try to ride the major thematic waves influencing the market.

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