Identifying stock catalysts and why you should recycle your weakest positions
Every stock needs a catalyst to send them to the moon — which comes in various forms:
- New CEO or management team — i.e. GameStop acquiring a new board and management team.
- Geographic expansions — i.e. Sea entering the Latin American market.
- Partnerships — i.e. Affirm partnering with Amazon.
Other catalysts include product launches, regulations, economic policy changes and consumer behavior changes.
The earlier you identify these catalysts and the greater their impact, the higher your returns. But these catalysts have their own risks:
- Failed product launches or management teams that can’t execute lead to wasted labor, capital and time.
- In many cases, the market prices potential benefits into stock prices. If the catalyst fails or misses expectations, the stock could fall.
It takes time for catalysts to play out if there are any at all — in which case, sitting on these companies could hurt returns.
More than one way to invest: Investors are often told to invest and hold for the long term. But Harris Kupperman, Founder of Praetorian Capital, has a different philosophy.
He identifies himself as an inflection investor — catching the point when the company is about to take off. His advice, recycle your capital:
- Invest in companies with catalysts — events/triggers that could accelerate the stock price.
- Identify the best investments and rotate capital into those companies.
Every few months, he’ll purge the weakest portfolio positions. And sometimes, even long-term buy and hold investors can benefit from recycling their positions into the best opportunities.