What is a 'Fat Pitch?'
The Pareto principle states that for many outcomes, 80% of the consequences come from 20% of the causes. In other words, a small percentage of causes have an outsized effect. This phenomenon relates exactly to an individual’s experience in the stock market: 20% (or less) of investments/trades made will often make up 80%+ of one’s portfolio gains.
This Newsletter will focus on identifying those ‘20%’ of trades.
What is a ‘Fat Pitch?’
In baseball, a batter steps up to the plate with the goal of getting a hit and getting on base. When batting, the pitcher may throw a couple balls/bad pitches, it’s important for the batter not to swing at these which will hurt his odds of getting on base. But once the pitcher throws the fast ball down the middle, considered the ‘fat pitch,’ the batter will want to swing for the fences. It won’t be a home run every time, sometimes a single, sometimes a double, and sometimes even an out. But swinging at a ‘fat pitch’ will greatly increase the odds of success for the batter.
It is exactly the same in the world of investing and trading in the stock market. There are opportunities every single day in the market, and which opportunities you take will either greatly improve or greatly reduce your odds of success. The great thing about trading in the stock market is there is no time limit and there is no pitch count. You can wait as long as you want for the perfect opportunity to come, and be hyper-aggressive when it does come.
What I look for
My philosophy as a trader and investor revolves mostly around technical analysis. As retail investors/traders, we are playing in a market with institutions that have the best possible research tools and data. Because of this, there’s a high chance that we will not be able to outsmart the institutions, but we can beat them at their own game. There are massive advantages retail investors have:
You don’t have to be fully invested at all times
You don’t have position size limits
You can enter/exit positions easily without worrying about liquidity
There’s a reason that hedge fund performance often looks ugly and very few outperform. If there’s a fund looking to deploy hundreds of millions or even billions in capital, their options are insanely limited.
Using technical analysis, we can find stocks that institutions are buying and ride the large move to higher prices. Massive moves in stock prices usually begin from an important catalyst - a big upside surprise on earnings/guidance, a sector trend, etc. When focusing on technical analysis we don’t have to fully understand the fundamental reasons why a stock is making a large move, we just have to follow the trend with the ‘smart money’ that is moving the stock.
For example:
Carnival Cruise Lines ($CCL) broke out of this 2-year long downtrend and year-long consolidation base on May 5th (2023) and followed-through for a 90% upside move in less than 2 months.
This was a textbook ‘fat pitch’ technical setup based on the length of the consolidation base and the well-respected downtrend line. The stock gave easy entry opportunities and levels to set tight risk as well.
This is also a perfect example of following the technical trend and beating institutions at their own game. This year there has been massive demand for cruises, and with the data that institutions have they recognized it early, accumulating the stock before the increased demand was reflected in the company’s earnings.
A fundamental or ‘value investing’ approach never would have caught this move in the stock. $CCL is riddled with debt including $10.6B in current liabilities and $31.95B in long-term debt. Along with this, the company has been unprofitable for the past 3 years and revenue is way below pre-covid numbers. If just looking at that data, this company looked dead in the water (haha).
Institutions recognized the cruise trend coming quickly though and it has become a sector trend with earnings and 2024 estimates increasing rapidly. Using just a simple technical trend following approach, this stock move could have been caught without doing any deep-dive research into the company and cruise industry, all that had to be done was scanning through stocks with technical analysis. It can also help to know the story and bull thesis behind a stock to increase conviction of holding that position which I will be touching on in future newsletters (specifically for longer term swing ideas).
This is just one example of many. In future newsletters I will highlight potential ‘fat pitch’ setups that I am watching for - including intraday, short term swing trades, and long term swing trades.
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