Foresight Investing: A Complete Guide to Finding Your Next Great Trade

By James Lee

If you want to be in the right place at the right time, it pays to show up a few minutes early.

Fortunes can be made by finding "the next big thing." Some of the best investments over the past few years came from Silicon Valley. Over the next decade, we'll see even bigger opportunities from the internet of things (IoT), 5G, augmented reality, cryptocurrencies, automation, artificial intelligence, longevity science, and new sources of energy.

Foresight Investing provides a remarkable toolbox for improving your trading skills. These tools will help you identify where to find the best opportunities, what companies to invest in, when to buy and sell, and understand why news events can influence the market.

Loaded with insights from a top-performing strategist, this might be the last book about investing that you'll ever need.

Inside, you'll find:

• Six megatrends for the next decade, including stock watchlists
• Ten things you never knew about the P/E ratio
• Multiple stock valuation methods
• Principles of momentum
• Complete system for technical analysis of stock prices
• Exit strategies for successful (and unsuccessful) trades
• Essential portfolio management techniques
• Tips for using style and sector rotation to generate higher returns
• Tools for understanding company narratives
• Intermarket relationships between stock, bond, currency, and commodity markets
• Demographic trends with implications for consumer spending patterns

• Language: English
• Publisher: BookBaby
• Release date: Apr 9, 2021
• ISBN: 9781098341237

Book preview

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© James H. Lee 2021

Print ISBN: 978-1-09834-122-0

eBook ISBN: 978-1-09834-123-7

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system without the written permission of the author, except where permitted by law.

For my amazing wife, Stephanie.

Contents

Introduction

How to Use This Book

A Few Guidelines for Successful Investing

Trends

New Energy

The Petroleum Century

Now and Near

Going Further Out

Gray Boom

Now and Near

Aging in Place, Made Possible by Technology

Genetic Sequencing and Health Care

Longevity Revolution

Innovations in Cancer Research

Going Further Out….

Tiny Revolution: Bioscience and Smart Materials

Part 1: An A–Z of Biotech Frontiers

Part 2: Smart Materials

Opportunities in Materials Science

Digitization

Now and Near

Automation

AI and Mental Health

AI and Decision Making

AI as Customer and Gatekeeper

Quantum Computing

Neuromorphic Chips

Robotics

The Internet of Things (IoT)

3D Printing

Job Displacement

Going Further Out

Soft Robotics and Flexible Electronics

Distributed Autonomous Organizations

Technology and Transhumanism

Urbanization

Now and Near…

Post-Pandemic Scenarios

Going Further Out

Next Level Analysis

Finding Multi-Trend Leaders

Trend Blending

Numbers

What Do the Numbers Say?

Getting the Facts

The Poor Man’s Bloomberg

Accounting 101

Where to Find Accounting Statements

How to Read an Income Statement

Earnings Statement—Reading Between the Lines

How to Read a Balance Sheet Statement

Balance Sheet Statement—Reading Between the Lines

How to Read a Cash Flow Statement

Minding Your Ks and Qs

Ratio Analysis

Valuation Metrics

Growth Metrics

Liquidity Metrics: Current Ratio and Free Cash Flow

Risk Metrics: Back to Beta

Profitability Metrics: The DuPont Model and

Return on Equity

Using the DuPont Model for Better Trading

Going One Step Further

The Best Measure of Profitability?

Intro to Valuation

Graham’s Intrinsic Value

The Dividend Discount Model

Going One Step Further: The Discounted Cash Flow Model

When It All Gets Too Complicated

10 Things You Never Knew About P/E

What the P/E Multiple Actually Means

Cheap Does Not Always Equal Good

P/E/G Ratios Are Often Better at Making Comparisons

P/Es Are Often Completely Useless

Some Industries Trade at Higher P/Es

P/E/Gs Can Be Used to Create Price Targets

P/E Sometimes Will Tell You When to Sell

The U.S. Federal Reserve Uses P/E to Forecast the Market

P/Es Are Pretty Good at Long-Term Forecasting

P/Es Are Lousy at Short-Term Forecasting

Summary

Sentiment

Quantifying Feelings

Understanding Price Charts

Trendlines, Support, and Resistance

When Resistance Becomes Support

What Constitutes a Valid Break of the Trendline?

Turning Up the Volume

Using Volume to Spot Major Market Reversals

Ins and Outs of Accumulation/Distribution

Using Accumulation/Distribution

Better than Average

The Double Moving Average

Getting Sentimental with the Relative Strength Index

What Is the Relative Strength Index (RSI)?

Using RSI For Long-Term Reversal Signals

A Few Summary Notes on Using Relative Strength

Principles of Momentum

A Simple Screen for Momentum

The Importance of Hitting New Highs

Good Advice and Better Advice

Too Good to Be True?

Some Trading Rules with Technical Analysis

Entry and Exit Points for Short-Term Traders

Entry and Exit Points for Long-Term Investors

Technical Analysis Case Studies

Tabula Rasa HealthCare

Home Depot

Carnival Corporation

Patterns

Finding Patterns Everywhere

The Hype Cycle

The News in Circulation

How to Use the Hype Cycle

Narrative Analysis

Pace Layer Thinking

Intermarket Analysis

Murphy’s Principles of Intermarket Analysis

Four Key Markets to Follow

Making Connections

Intermarket Relationships Explained

Examples of Intermarket Relationships

Optimal Conditions for Various Asset Classes

Sector Rotation

Why Sector Selection Is a Key to Outperformance

How to Track Sector Momentum

Getting Ahead of Momentum

Sector Rotation and the Economic Cycle

Spending Waves

The Biggest Wave

Cycles and Seasonality

What Next?

The Values and Expression Cycle

When Decades Start

Echoes in Time

Decades and Moods

Looking Backward, Looking Forward

Portfolio Management

Why Portfolio Management is a Key to Success

Staying in the Game Long Enough to Win

The Many Dimensions of Risk

Market Risk

Style Risk

Getting in Step with Style

Sector Risk

Selection Risk

Position Sizing

The Cowboy Split

Adding Up the Dimensions of Risk

Finding Sources of Outperformance through Attribution Analysis

The Truth Behind Amazing Returns

The Paradox of Investing

Summary

The Keys to Selling

The Five Tribes of Investors

Building a Trading Plan

Selling the News

Rules for a Multidisciplinary Approach to Selling

Guidelines for Managing Taxes on Trades

The End of Asset Allocation?

The Limits of Asset Allocation

Rock Paper Scissors: Enhanced Index Strategies

Putting It All Together

Building Your Toolbox

Finding Stocks for Trading

Finding Stocks for Shorting

Finding Stocks for Investing

Let’s Continue the Conversation

Acknowledgments

Appendix

Disclosures

Endnotes

Index

Introduction

Where? What? When? Why?

These are all very simple questions that sometimes deserve complicated answers. Here are the same questions, this time from an investor’s perspective:

Where can I find the best opportunities?

What are the best companies to buy?

When do I get in (and get out)?

Why does the news influence the value of my investments?

The world is an interesting place, and my job involves finding opportunities for clients and explaining them in a way that makes sense.

Good answers can sometimes get quite complicated. However, the best answers are often quite simple. It is really just a matter of finding the right tools. My tools happen to be trends, numbers, sentiment, and patterns.

As a financial futurist, the question that I’m asking every day is, What happens next?

The word next can mean any number of things. Next month? Next year? Next decade? Different questions sometimes require the right perspective to answer them correctly.

If we want to look at the next decade, it is easiest to look at the trends. Futurists ask questions such as How is our society changing? and What types of technologies are being developed that can influence how we live? This gives us insight on where to invest. Strategic foresight is about using what we know about the future to make better decisions today.

Looking at the next year or two, the focus shifts to economic reality. To understand this, you need to study the numbers. Financial analysts ask, Which company is the best positioned? Is it profitable? Are its earnings consistent and predictable? Is the balance sheet healthy? This informs us what to buy.

In the short term, what drives stock prices is perception. Technical analysts ask, How do people feel about a company? Are people confident? Are they overoptimistic? Are opinions changing? All of these things are reflected in charts. In the short term, investor sentiment is the single most important factor for the market in general. This helps us understand when to buy and sell.

Finally, there are the questions of why and how the news impacts our stocks. Looking at patterns from the perspective of a market historian tells us how to connect the dots. These patterns can cover multiple time frames, from days to years.

Foresight Investing provides a complete approach for understanding where to invest, what to buy, and when to pull the trigger. Buy reasonably priced, predictable stocks that are going up. Sell overpriced, unpredictable stocks going down.

How to Use This Book

Foresight Investing is a Rosetta stone to help you understand and become fluent in the languages of finance.

Being able to see and understand patterns is a remarkably useful skill for everyone. If you are a trader, you might already understand the basics of sentiment. Financial analysts typically have good grasp of the numbers.

This book is written for people who are already familiar with the basics of investing. However, some will have more experience than others. Skim the material that is already familiar to you, and focus on the information that is new.

Take notes. Underline things. Check the references. Read it again.

There will be plenty of ideas to choose from at the end of each chapter in the trends section. The remaining four sections will provide you with guidelines on how to find the best opportunities and how to manage them.

In the end, I’ll bring all the elements together and provide a step-by-step process that you can use to manage your own portfolio.

This isn’t the first book you should read about investing, but it might be the last one that you’ll need.

A Few Guidelines for Successful Investing

You won’t agree with everyone. For every buyer there is a seller. People usually have different motivations and time frames. Don’t try to figure out the consensus—reach your own conclusions.

In those rare moments when everyone holds similar opinions, it is time to flee in the opposite direction.

The view is better from the edge. If you do what everyone else is doing, you will likely get similar results.

Do something different.

Opportunities of a lifetime usually happen once every few weeks. There will be more. Find out what excites people. Sometimes you’ll find ideas in unexpected places.

The best speculations are often made before they appear completely reasonable. In order to be in the right place at the right time, it is usually helpful to show up a few minutes early. This can be confused with being lucky.

If you show up too far ahead of time, you might find yourself to be the only person in the room.There is no fun in that.

Investing rules are made to be broken. Most financial types enjoy connecting the dots. I prefer to paint my own dots, draw random doodles around them, and then color outside the lines.

There is always someone richer, smarter, and better looking. Stop making comparisons to others. Simply work toward becoming an improved version of yourself.

Don’t be afraid of making a few mistakes. Keep them small, if possible.

Be curious. Read constantly. Seek out opinions differing from your own. Map out concepts and ideas in a notebook.Nothing beats a well-informed intuition.

Wealth is the result of good habits over time. Start building your portfolio early in life by saving systematically. Keep records. Reflect on what works and what doesn’t. Make adjustments as needed.

Trends

New Energy

What is energy? It seems like a simple question.

Energy is flow.

If you can capture the flow between an area where you have a lot of something to where you have much less of it, you can use that flow to do all sorts of things. Warm a house. Power a laptop. Fly a plane.

That something could be almost anything—wind, air, water, electrons, photons, heat, etc. These things can easily change into something else.

When I was a kid, my dad would do all kinds of experiments in his workshop. He built some perpetual motion machines just for fun. In the process he found out that they all received their power from somewhere.

A favorite invention of his was a windmill that would just sit on the shelf, doing nothing. When you held the windmill in your palm, though, it would start to spin, without any sign of a breeze. The toy harvested energy from your hands. Or, more specifically, it gathered your warmth and turned that into rotational force by means of thermal convection.

There was also the time when he wired us kids up to a fancy-looking oscilloscope to prove that we were constantly generating electric currents within our bodies—roughly 2 or 3 watts to be exact.

My sister’s crystal radio seemed like magic. Using a small piece of galenite, a wire, and a tiny speaker, she could convert radio waves to sound. How amazing is that?

I learned early that energy is everywhere—not always in massive quantities, but just enough to do small stuff.

Now think about the Internet of Things (IoT) and the future of personal devices. Will we be able to use these ambient sources of energy to provide electric power without wires or batteries?

It is quite possible that the coming decades will be marked by an abundance of energy and not a scarcity. This could happen once we change a few things. Before we travel into the future, let’s visit the recent past.

The Petroleum Century

Industry in the twentieth century was powered by petroleum. When the Spindletop gusher was discovered in 1901, it modernized the petroleum industry and made a fortune for the Rockefeller family.

What is the secret behind petroleum? The murky, gooey stuff we call black gold is liquid sunlight.

Crude oil is a fossil fuel made by the decaying remains of aquatic plants. Most of the Earth’s oil was formed between 60 and 250 million years ago. Over the course of their lifetimes, aquatic plants store carbon from photosynthesis before dropping to the bottom of the ocean floor. The stored hydrogen and carbon molecules are what gives fuel its potency.

Oil is particularly energy-dense. This makes oil more practical to carry around as a fuel—far more useful than firewood or coal. While oil can be used for such things as home heating, the main energy use has been for transportation. Cars, trucks, jets, and boats all use oil.

But oil also provided the materials for many other familiar twentieth century products, including asphalt, paints, pesticides, plastics, and fertilizers. Anytime you hear the word chemistry, you might also think petroleum.

Oil is an energy commodity and also a feedstock for basic materials. One question worth asking is whether or not we should be burning the same natural resources that we need to make stuff. We are depleting oil far more quickly than we are discovering it, with some estimates suggesting that global production shortfalls will exist by 2070.¹

Of the five largest oil fields in the U.S.—Permian Basin, Prudhoe Bay, Barnett, Eagle Ford, and Bakken—only the Permian Basin is not in decline. Production boosts from horizontal drilling, fracking, seismic imaging, and tar sands will likely be short-lived.

Industry expert Art Berman refers to fracking as a retirement party for petroleum engineers.² Exxon Mobil’s petroleum reserves have been falling for decades. It has been quietly disappearing since it was the largest publicly traded company in the world just a decade ago.

Price collapse and subsequent disinvestment in production during the early 2020s may lead to a tradable price spike for oil by 2023–24. However, investing in a depleting and unsustainable asset is a challenge for the long term.

Now and Near

The future is becoming electric. It’s not coal, oil, or nuclear. Coal is just antiquated, oil will increasingly be used to make stuff, and clean nuclear fusion is still ten to twenty (or more) years away.

Natural gas still has a future—it is relatively clean, cheap, and abundant. The infrastructure exists for its distribution in the U.S., and it is currently the preferred means of power generation for electric utilities. But, like oil, it won’t last forever.

Exactly how that electric power will be produced is still subject to considerable debate. We may be transitioning from the age of combustion to the age of electrochemical conversion.

A related question is what makes the world go around. Will it be the internal combustion engine or the electric motor? One is cleaner and more sustainable than the other.

There is some good news here. Overall energy consumption in the U.S. peaked in 2007 and has been moving sideways for roughly fifteen years.³ Call it negawatts—energy not consumed is energy that doesn’t need to be produced.

This is a big story that the media somehow missed. Decoupling energy consumption from economic growth is a new trend. It involves growing more while needing less.

Solar and Renewables Continue to Grow

Renewable energy sources supplied roughly 11 percent of U.S. energy consumption as of 2018, a small fraction that is growing rapidly. Between 2009 and 2019, solar energy production grew fortyfold in the U.S., while wind energy tripled.⁴ Over 361,000 electric vehicles were sold in 2018, up from close to zero in 2009.

Beyond solar and wind, some would include biomass in the renewable category (sugar-based ethanols and algal-based biodiesel). These can be grown, converted to fuel, used, then regrown. Hydroelectric power may be considered renewable as well, along with wave energy and oceanic thermal energy conversion (OTEC).⁵

A recent report by Stanford University shows that close to all of the world’s energy needs could be produced from renewable sources by 2050.⁶ Hawaii, California, New Mexico, Maine, New York, and Washington state all have established targets for 100 percent clean energy.⁷

The economics are beginning to make sense. The costs of utility-scale renewable energy are already equal to or lower than the costs of power generated by the cheapest fossil fuels.

Grid parity is already happening in the U.S. and abroad. However, alternative energy sources present their own unique challenges.

For example, electricity generated by renewable sources needs to be translated into something that our power lines can handle.

Inverters convert power from direct current (DC) to alternating current (AC), which our plugged-in devices run on. Inverters allow power from solar, wind, and batteries to connect to and supply the grid. Companies in this category include Advanced Energy Industries (AEIS), Enphase Energy (ENPH), and SolarEdge (SEDG).

Another challenge is that the productivity of renewable energy changes with the weather (wind, rain, or sun). This leads to uncontrollable surges in energy production, which either needs to be stored or is wasted.

Batteries and Storage Revolution

Today’s holy grail of energy research isn’t fusion; it is simply finding a better way to store electricity.

Ninety percent of the electricity in the U.S. is stored in water towers. These are a common feature of the American landscape, yet most people believe they just store water.

Here is how they really work: Utilities use excess power to pump water up into the tower, and gravity pulls water back down when power is needed. A small hydropower turbine at the base converts the flow of water back to electricity.

If this sounds a little primitive, well, maybe it is.

There is a better way to store electricity. This is what batteries are made for.

The first rechargeable lead-acid batteries were invented in 1859. They were used in early automobiles, but they suffered from problems with weight and poor energy density. Nickel-cadmium batteries came on the scene in the late 1890s, but they were expensive.

Sony introduced the first lithium-ion battery in 1991, after decades of research. Today, we are still using those batteries to power everything from watches to laptops and cars.

Solid-state batteries are already being produced in Japan by TDK Corp. (TTDKY) and are miracles of miniaturization—some are the size of a grain of rice. While most batteries have a liquid electrolyte to transport charged ions between the anode and cathode, solid-state batteries use a material more similar to glass, which reduces the risk of catching on fire. They also use lithium anodes instead of graphite, which can hold up to 60 percent more change in the same volume.⁸

Some companies, such as Tesla (TSLA) and its Powerwall division, are working on ways to store electric production from residential solar panels. However, these aren’t practical for utility-scale electric storage. They are just too expensive and wear down too quickly.

As a possible solution, researchers at the University of Southern California are making