LEARN TO BEHAVE LIKE AN INVESTING MILLIONAIRE
It will greatly benefit you if you have an understanding of what the market is doing over all every trading day.
I don’t care if you are a day trader or a long-term diamond handser. Handser? *stares off in the distance*
Well regardless of what type of investor you are understanding what the sectors are doing and what small, mid, and large caps are doing will greatly increase the quality of your trades.Let’s assume you’re here because you are in the wealth accumulation phase like me. I spend most my days thinking about how I’m going to make my investments work or how I’m going to increase my active and passive income.
Let us break down what I do every day and why it helps me make better trades both short and long term.
Market cap: The collective market worth of a corporation is expressed in monetary amounts by market capitalization, or "market cap." Look at apple, at the time of writing this apple has a market cap of 2.53 trillion dollars. This means people own 2.53 dollars worth of apple stock collectively. Apple has the highest market cap of all the publicly traded companies. Market cap indicates a company's "market" worth.
Market capitalization is also used by investors and analysts to compare and categorize the size of firms.
There three main categories they fit in.
- Small cap
- Mid cap
- Large cap
Small cap: These are smaller companies that are relatively unknown. The term "small-cap" has various definitions, but it commonly refers to a corporation with a market valuation of $300 million to $2 billion.
Mid cap: These are generally companies you know of, but they aren’t huge. The term “mid-cap” is basically the same thing, but it refers to a corporation with a market valuation of $2 billion to $10 billion.
Large cap: Everyone knows the names of the vast majority of large cap companies because they are absolutely massive. Facebook, google, Walmart, amazon are a few examples. These are companies valued at $10 billion or more.
Now that we’ve cleared some of that up let’s talk about why it’s important to review patterns that happen and the relationship, they have with each other.
Let’s look at what is going on right now in the stock market. One way to analyze the stock market and give valuation to a stock is by using the stock’s forward PE ratio.
Forward pe ratio: Forward price-to-earnings is a form of the ratio of price-to-earnings that uses predicted earnings for the P/E calculation.
let’s break that down in human terms. A company brings in income from its services. This is called earnings. You divide the company earnings by its current stock price. That formula gives you price-to-earnings ratio.
Forward P/E ratio refers to analyst’s predicted earnings to a stock’s current price. You can see these analyst’s predicted earnings on Google finance and Yahoo finance.
To unpack this even more, there are analyst that their full-time job 9-5 Monday through Friday is to analyze a certain company. They give their predictions, and they are often pretty accurate. They are not perfect though, so take these predictions for what they are.
This is why you’ll hear often that a company beat its earnings. The earnings they beat are the analyst predicted earnings. This is a bullish sign for the company and often there will be a jump in stock price.
Now that we have a strong base understanding, let’s jump into how to use this to analyze the stock market and help you be a better investor.
I will leave a link that you can easily put as a bookmark on your browser that you can review every day.
Add this link to your bookmark bar. I’ll give you another link you’ll add to it as well later but I’ll explain why later.
This link will show you small, mid and large caps relationship. You can see how some may be up and some may be down. Understanding that overall health of each one will allow you to spot where you might be able to find more growth.
For example, right now the small cap S&P 600 is very undervalued. I look at this and I also see some interesting numbers in my own portfolio. That all my large cap companies are basically sitting at their all time high.
My small cap holdings are sitting at about 75% of their 52-week high. This shows me that the small caps have been beaten down.
If you do more digging, you’ll see something interesting that right now companies like apple and Microsoft are releasing wild quarterly numbers and their stock price isn’t reflecting the growth that the company's reportings should earn.
This leads me to believe that money from retail investors and institutional players isn’t flowing into these companies, it is likely going to other places in the stock market that may be able to help them get better returns.
This is my strategy right now and I’m seeing some fairly large returns over the last month once I spotted this. In fact, what turned me on to this was when apple released their last earning statement and the stock dropped 3% that day. They beat earnings expectations by almost 30% and the stock dropped.
This is very strange behavior. So that raised some flags for me and made me think about what is going on and how can I capitalize on this strange market behavior. My findings were to think about where the money is going if it isn’t going into a company that is currently at all time highs but is still releasing absolute banger earnings.
I looked at this chart and found that S&P 500 large cap is at it’s all-time highs and the mid and small cap sized companies are undervalued. So, I started looking for companies in the small and mid-cap to invest into.
As for how to find these companies and do the analysis on them, here is a link you can use to learn how to analyze a company and figure out if you should invest into them or not.
This link will tell you the skills you need to analyze a company.
Next, we are going to talk about different sectors you could target for investing. You use many of the same techniques outlined above to spot them. This way specifically targets different sectors.
Add this link to your bookmark bars too.
What is an investing sector?
To go a little deeper there are 11 sectors.
- Technology - XLK
- Materials - XLB
- Energy - XLE
- Industrials - XLI
- Utilities - XLU
- Healthcare - XLV
- Financials - XLF
- Consumer Discretionary - XLY
- Consumer Staples - XLP
- Communication Services - XLC
- Real Estate – XLRE
These are fairly straight forward. This is a list of different ways to divide the stock market into industries. You can analyze them and look at the way they affect each other. You may see a massive swing up in one of the industries and at the same time a drop in another.
Being able to see what is going on with the over all sectors does a lot for your mental. I hold strong to my saying, investing isn’t rocket science, it’s a discipline. Keep at it and you’ll find your place in the investing world where you can carve your mark and be supremely successful in your trades.
These are the 11 main sectors and their ticker for large cap companies. Remember there are mid and small cap companies that you can review as well. But for this example, we will be using large cap companies inside the S&P 500.
I haven’t made a list for the small and mid-cap companies myself I may do it eventually. This chart tells me information about the different sectors that apply to the market as a whole. I do use this as an indicator if a certain sector is undervalued or “on sale”.
Reviewing these will also help you understand where money is flowing through the overall market. Back after the wild growth of the stock market after March 2020 we saw massive technology growth. It was insane if you were invested into amazon, tesla, and google.
After the run there was this mass exodus from technology to the energy sector. Many people who invested at the top of the tech growth cycle were left wondering “why am I not seeing all this growth everyone is talking about”?
If you had access to this chart, you would have seen where the money was going and understood where it was all going. This knowledge will help you have diamond hands. Speaking of diamond hands check out my diamond hands shirts on my store.
Knowing this will give you mental fortitude to hold when your holdings plummet into the depths of oblivion and you are left scratching your head. Stay cool and now you have an understanding as to WHY your money is being affected.
To wrap this all up, reviewing the market behavior will help you make better trades because you will understand the relationship on a deeper level. Visualizing the markets helps you make more logical trades. Learning market behavior will allow you to spot patterns. Patterns will help you earn more than the typical retail investor.
New to investing? Check out my top 3 tips to start investing for beginners.
Once you've learned these skills you'll likely want to learn more about why you should consider Firing Your Financial Advisor.