Good companies with solid price appreciation are out there and yours for the taking, says Howard Lindzon, founder of StockTwits.com. He suggests names such as RightNow Technologies (NASDAQ:RNOW) and LivePerson (NASDAQ:LPSN) to play the growing interest in customer relationship-management software, and is continuing to track growth leaders Lululemon Athletica (NASDAQ:LULU) and Chipotle Mexican Grill (NYSE:CMG).
Kate Stalter: I’m speaking today with Howard Lindzon, and many people recognize him as the founder of StockTwits, but Howard is also an asset manager.
With all of your background, give us some of your perspective on the market and what individual investors should be looking at right now.
Howard Lindzon: It’s hard. The markets change so often, you know. There’s people that love technical analysis, there’s people that like fundamental and value analysis.
I’m trying to teach people that there’s no way to tame the market. You’ve got to learn to manage it, and people that invest really should be doing so if they’re committed to trying to not just beat the market, but absolutely trounce it.
So you have to invest a lot of time and energy, and I think you have to try and find the best stocks, pretty much in line with Investor’s Business Daily and some of the old momentum people, where you’re trying to find the best companies.
Those sometimes aren’t the best stocks, but you’re trying to find the best companies whose stock prices are acting the best, and then own them during as long a period as they’re moving.
Kate Stalter: What are the methods that you use to identify some of these great companies with terrific stocks?
Howard Lindzon: Well, it used to be all-time highs. You always have to evolve your strategy.
I still look at all-time highs, but because of 2008, when stocks were dropping 90% due to liquidity problems in the market, a lot of things change in terms of how you look at companies and long-term track records. So lately I’ve been using at least three-year highs to find candidates.
- Also read: 4 Defensive Names Near All-Time Highs
The whole idea of using computers is not to give a computer your money, in my opinion, but to use computers to surface ideas, because we’re busy. Everybody has a job. So I like to set my computer to show me stocks at all-time highs, or three-year highs.
Looking at that over the period of three to six months, you really get a feel for what companies are doing, what industries are doing well. If you just do that, and that’s what I tell beginners, is to tune into StockTwits.com, it’s like learning a language.
By just staring at the stuff 15-20 minutes a day, you will learn to understand what people are talking about. You don’t learn Spanish in one day, and you’re not going to learn how to invest in stocks in one day. Treat it like a language.
It’s going to take six months to a year to even get yourself up to speed, but the most important asset you have is your money. Other than language, I would pick money. You’ve earned it, so you’ve got to respect it.
It’s hard to get people to understand that. We’re suckers for a good pitch, but there are no shortcuts.
Find the best companies, follow the lists of the best companies over a three-to-six-month period. Then overlay your own experiences with those companies and find companies that you really understand and don’t have to stare at the screen all day to follow and you’ll be surprised how well you can do.
Kate Stalter: What are some names, Howard, that have caught your attention in the current market?
Howard Lindzon: Well, for a long time I’ve liked Apple (AAPL) and Amazon (AMZN). I own them. I’ve been selling them the last three or four days. On StockTwits, I’ve been saying that I’ve owned them for a long time now.
- Also read: Scrambling for Virtual Lifeboats
The most popular, underloved names that I like, in terms of what I talk about the most, are in the customer-assistance business. Facebook and Twitter have completely changed how customer service is done.
Now with companies, it’s all about finding, not just who’s talking about what’s good or bad, but what’s their reputation? So companies like LivePerson (LPSN) and RightNow Technologies (RNOW) just really held in there well through this correction.
There have been huge home runs in the last year, but a great way to play the Facebook trend, people are looking for ways to ride that trend, and to me you just have to keep it really simple. It makes common sense, and then you find companies that actually are hitting six-month, three-year, or all-time highs, and you’d be surprised what you find. Those are two companies that continually do well.
Kate Stalter: One of the areas that investors often get tripped up on is selling in some of these growth names. Can you give us any advice on some sell signals to look for?
Howard Lindzon: That’s the question. I don’t think there’s any rule. Obviously you’ve got to set your own parameters of the risks that you can take, but if you’re doing my strategy, trend following, you have to give stocks a wide berth.
You know it’s not for the faint of heart, and again, why would I invest to make 8% a year? I’d rather just invest in myself and go to school and start my own business. But if I’m shooting for 30% to 40%, that does not come without risk, so that’s the first thing.
So I give my stocks a wide berth. I know that a lot of times I’m going to be wrong, because I assume that the first stock I buy is going to drop 30%, but generally I sell a little bit if I’m right. I continually sell little pieces on the way up, and then usually something within 15% to 20%. I’ll own eight to ten stocks, but somewhere between 15 to 20%, which is a wide birth, generally there’s something wrong.
Kate Stalter: Okay. Does that change?
Howard Lindzon: Yeah, it changes as the stock goes up. They get more volatile. As institutions discover stocks, they just get more volatile, period.
And you want that. You need to embrace that. It’s a constant fidget. I don’t want to get too technical here, but you know, I’ve studied so many different things. You have to give great stocks a wide berth, and it just comes down to very personal choices.
- Also read: Turn Off Your TV
I think commissions are to the point where that should never factor into it. I generally don’t think about taxes when I’m investing in the stock market. I worry about that in other forms of my investing. So the hardest part, I think, is you’ve just got to do it, and see what you could tolerate.
Kate Stalter: One last question for you, Howard, on the topic of selling. I know a lot of investors follow some kind of sell rule to cut their losses if a purchase does not work out. Do you use anything of that nature?
Howard Lindzon: Yeah. I mean, it’s not in stone. I generally like to buy stocks in markets that are going up, so even though I own Amazon and Apple, it’s not like I’m confident in the market...so I wouldn’t own as much as if I was extremely bullish right now.
So again, that’s just general feel, and I think you can spend 20 minutes a day, like I said, on StockTwits and you’re going to find people that kind of jibe with you and are sharing ideas.
My general rule is buy stocks in up markets, so the moving averages are moving in the right direction, upwards and to the right. That’s when I get interested in the market, in general.
Then next, somewhere in the 15% to 20% berth, so if I bought Apple today at $400, am I prepared to ride it down 60 or 70 points. What’s the upside? If I think Apple can be a trillion-dollar company, so an $800 stock, am I willing to risk?...so that's 400 points for risking 60 or 80.
I mean, if you’re willing to take a four- or five-to-one trade, which I am, then you stay long in the stock. You have to be willing to sell the stock when it goes outside that band.