By day, David Zanoni is a humble operations manager working in the retail sector. But on evenings and weekends, he dons his investor’s cape and morphs into a mighty stock picker. The proof is in the recommendations published in his seekingalpha.com blog since 2008. They have outperformed 99.6 per cent of the 6,474 financial bloggers tracked by TipRanks.com since 2011.
We asked Mr. Zanoni how he does it.
How do you invest?
I have a focus on momentum stocks. I look for companies whose stock prices have been increasing for six to 12 months. Academic studies show that they continue to do well in the near term. For example, a 1993 study by Narasimhan Jegadeesh and Sheridan Titman in the Journal of Finance found that stocks with positive momentum for six months outperformed the market over the next six months. They also found that stocks with upward earnings surprises and revisions tended to do well.
But I don’t like to trade stocks as often as a pure momentum approach requires. So I do research to see if the stock with positive momentum can continue to perform long term. If the company can sustain above-average growth over multiple years, I will hold onto its stock for the long run.
A caveat is that momentum investing breaks down during bear markets. But the latter can be anticipated. They usually begin six to 12 months after the yield curve inverts [when short-term interest rates rise above long-term rates]. So momentum plays should be unwound in the months following yield-curve inversion.
What stocks are in your portfolio, starting with some recent purchases?
The most recent addition to my portfolio was the ARK Web X.0 exchange-traded fund, trading under the ticker ARKW. There are multiple high-growth companies in this ETF that I had on my watch list, so I decided it would be better for me to just buy ARKW instead of the stocks separately.
For example, the FANG stocks [Facebook Inc., Amazon.com Inc., Netflix Inc., and Alphabet Inc. subsidiary Google] are some of the holdings in ARKW. I have owned Facebook for a few years and I still think the stock will outperform for many years since the company keeps growing ad revenue and is highly profitable. I had the other FANG stocks, along with Alibaba, Tencent and Nvidia, on my watch list for a while, so I was happy to find an ETF with all of these companies included in one basket.
So, your portfolio is concentrated in tech stocks?
No, most of my investing money actually goes towards my retirement fund composed of diversified funds. I do this through dollar-cost averaging [investing at regular intervals]. With this approach, you are buying more shares of stocks at low prices when the market is down and reaping the benefits of price appreciation when the market rises.
I hold the momentum stocks in my non-retirement portfolio, where I strive for higher returns by taking on more risk. It’s what TipRanks.com uses to rank my performance. My retirement portfolio is more conservative and keeps my personal risk level at safer levels.
What has been your best move?
The best move was contributing consistently to a retirement plan by dollar-cost averaging, regardless of what is happening in the market. This makes investing automatic. The other best move is to focus on companies that have momentum in their stocks and the potential to outperform for many years into the future.
What was your worst move?
One of my worst mistakes was not understanding the effect that competition can have on a company, and picking a non-leader over the leader in the industry. The non-leader could be valued lower than the leader, but the leader tends to outperform over the long term.
Any advice for other investors?
My best advice is to make investing automatic and dollar-cost average into a retirement plan for most of your investment money. This takes the emotion out of investing and eliminates procrastination because you are continually putting money into the market at regular intervals. It also keeps you diversified because you are investing in different funds.
I would also say to invest outside of retirement plans to grow money that you won’t need for five years or more. That’s where looking for good growth companies comes into play.
This interview has been edited and condensed.
Larry MacDonald is an economist, author and financial writer.