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Know Your Customer Rule: Why Deep Corrections (>20%) Are Healthy in Leading Stocks

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Know Your Customer Rule:

Everyone in the asset management business should know FINRA’s Know Your Customer (“KYC”) Rule – Here. The rule basically states that it is the portfolio manager’s responsibility to pick investments that are suitable for each client (that is why it is necessary to know your client). I also apply this rule when buying/sell stocks.

Know How Your Stocks Behave:

From where I sit, it is behooves anyone who makes their own buy/sell decisions (individual and professional) to know how the stock (or market) they are interested in behaves (before they buy/sell). This way they can familiarize themselves with normal/healthy action vs, unhealthy action. Failing to take the time to properly study how leading stocks behave could cause you to zig when the stock zags and vice versa (which might cause you to mishandle/lose money – even in a monster stock).

Why >20% Corrections are Healthy In Leading Stocks:

Over the past few weeks, leading stocks (mainly momentum, biotech, and growth stocks) have been smacked, most falling >15% from recent highs (which is not an insignificant sum). Interestingly, when you study history, there are countless examples of leading (monster) stocks that correct (>20%), within a broader multi-year advance.

Trends Bend & Break:

Essentially, a few steep pullbacks/corrections can be healthy in leading stocks, early in their move. Here is an excerpt from this week’s’s weekly report which takes a closer look at two leading stocks: Tesla (TSLA) & Facebook (FB). Both stocks are monsters and have experienced sharp declines of over 20% 4 times over the past year. Interestingly, each decline was followed by a massive advance. Keep in mind, trends (uptrends and downtrends) break- but the move is not over until they break.
Will this time be different? As always, we’ll let the market decide. Bottom line, in both bull and bear markets, you will do much better if you study how your stock behave. The same way a portfolio manager should “know their customer,” you should know your investments.

Tesla (TSLA):


Facebook (FB):