The Little Book of Sideways Markets: How to Make Money in Markets that Go Nowhere

Chapter 14. On a Scavenger Hunt For Stocks

Once You'Ve Sold, What Should You Buy?

Strict sell discipline will increase portfolio turnover, and replacing stocks that are on the way out with new ones will become a priority. This creates the need for a continuous new-idea discovery process. Here are some suggestions on how to find new stocks.

Map the Market

Contrarian investors are usually drawn to the sectors that are not hitting all-time highs but are instead staring into the abyss of multiweek, -month, or -year lows. An easy way to identify an entire group of stocks the market has dumped in favor of a new fling is by looking at exchange-traded funds (ETFs).

ETFs provide an elegant and easy way to map the global markets, as they are slicing and dicing them every conceivable and some previously inconceivable ways—by sector; stock characteristic (market capitalization, P/E, dividend yield); investment style (value, growth); asset class (stocks, bonds, gold, oil, currency); CEO's height and weight (okay, I made that one up)—covering the globe in every plausible way.

Periodic review of ETF performance provides a quick but useful global intelligence report on what different pockets of the market are doing, helping you to be selective about where you spend your energy looking for ideas and enabling you to spend your time in places where opportunities are more likely to exist.

Use Screens

Stock screening is to value investing what apple pie is to America. Stock cheapness is quantifiable, thus ...