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Leaders are stocks that breakout immediately when the market confirms a new rally. This doesn't mean that they can't have a nice run, it just means that the chances for failure are higher because 'dumb money' may be bidding up the cheaper stock in that particular group.

The 'smart money', otherwise know as institutions may have ran up stock 'XYZ' for 3 months and will most likely allow weak holders to sell before they resume the advance.

Leaders are stocks that liberation immediately when the market confirms a new rally. In the first several weeks, strong stocks with leadership technical brilliance will escapism on volume over and above their 50-day average. Some of these stocks will release on the largest volume ever. Typically, newer stocks that have come public in the past few years will have the most strength for sizable gains.

As multiple stocks extrication from similar industry groups within larger sectors, a confirmation of blue leadership is established. “Sister Stocks” will usually move in crowds and lead the way in similar fashion. Their charts will show some resemblance and their custom with be punctiliously related. When one leader goes up, so will the others in the group. It’s not an exact science but close anyone could cast the progression of leaders during the radical stages of a rally.

Laggards are stocks that don’t outlet immediately when the market confirms a new rally. They grow laggards if they wait a few months to finally escape while dozens of other stocks have once gone on to excellent runs. Investors must be on the lookout for a healthy correction afterwards several strong months of enhancement within a specific industry group or heavy sector. As the correction materializes, the original leaders will be poised to continue their run so long as the ‘M’ in CANSLIM is still positive. ‘M’ stands for market health.

Investors must be on the lookout for stocks that only start their furthering on the overall correction. These stocks tend to be weaker and are more prone to failure. The original leaders will have more institutional support and are more likely to fit further. Laggards will often sport a nice extrication during the correction phase, only to disappoint the investor with a reversal.

Let’s use a hypothetical example: XYZ breakouts out in October and runs up 50% in 3 months and then pulls back to correct. ABC breakouts out 3 months later in January while the correction is taking place (from the same industry group) but has been stagnant the past 3 months as many other stocks in the industry groups have made nice gains (like XYZ).

Laggards stay stagnant during the inchoate stages of bull markets. This doesn’t mean that they can’t have a nice run, it just means that the odds for failure are higher since “dumb money” may be nod up the cheaper stock in that particular group.

The “smart money”, otherwise know as institutions may have ran up stock ‘XYZ’ for 3 months and will most likely consider the source weak holders to sell by election they resume the advance. In the mean time, those weak holders may be the investors running up stock ‘ABC’ as long as it looks cheap. They may reason that it should be moving up inasmuch as ‘XYZ’ moved up in the prior 3 months.

Finally, be provident and analyze each specific stock and situation previous to you make a commitment. This is a general rule to help you select a leader within a strong industry group. The market never works perfectly every time so make sure you are prepared for anything.

Someone who reads my blog sent me this email:

Geoff,

I came from Japan to US for business school in 2001. I became extremely intrigued by Buffett's value investment philosophy. I wanted to read everything available about his philosophy and became more and more familiar with his investment philosophy. And I personally pick stocks too. 

Anyway, about investment in Japan, I read your "Japanese stocks: Now 34% of My Portfolio - Plan to hold Them For At Least 1 Year", I see one part in "Buy Japan", you are talking about "Japan is barely a capitalist country." I see that you see Japan pretty well. They care much less about generating profits to shareholders than people do here in US. I imagine, that US investors who invest in Japan would feel slighted. They should be the boss, but not in Japan actually. 

Here is the key point why I wrote. You say "It’s definitely the most investor unfriendly place on the planet – excluding a few countries that seize private property". In my view, Japan is a country that would seize private property away from you. Not by legitimate ways, but more subtle but practical ways. Who has the largest control over Japanese economy? The system of capitalism?  Absolutely no. Bureaucrats have. They have tremendous control over businesses with both explicit laws and implicit powers. 

They have ways to drag down companies performance that they don't like. If a business is strong enough and brave enough to openly fight against bureaucrats, like Softbank did in the past, there is chance to win. But most businesses are afraid of this structural, chronic bully that deprives Japan of economic flexibility over the years. But interesting thing to me is, this chronic inefficiency sometimes works well, but sometimes doesn't. Like it worked in our 70s to 80s. But not in the later decades. My father always tells me that this is just like fascism that drove Japan in WWII all the way to final disaster. When it works well, we are invincible, but once the ship turns to a wrong way, we are unstoppable. Being said that, I wonder how, like you mentioned, pre-war southern states unraveled their woven bonds and connections and became part of the rest of the capitalism world. Losing the war changed their way of business life completely? Then, maybe Japan also needs dramatic change like that. 

In my view, the Japanese have strong fear of sticking out. If you stay in a crowd, you are invisible and no one would say anything. But if you stick out too much, bureaucrats will get you. Rising stars in business are always the easiest to go after for bureaucrats who are influenced by competitors. In US capitalism holds the power. This is the rule of the game and it seems that even the government cannot defy this rule. In Japan, bureaucrats rule the market most definitely. 

And most obviously, this system is not working for our prosperity. 

So, I just wanted to point out your assumption that Japan is not a country who seizes private property may not hold.

Shin

Talk to Geoff about Japanese Stocks

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