From among the vast array of technology stocks, California money manager Russ Mathews picks two US cybersecurity stocks as his current ‘best buys’.
Regular investors told over and over that their chances of exceeding market returns are slim-to-none, take heart: California money manager Russ Mathews says a blend of conservatism and risk-taking consistently outperforms the masses.
“Basically, in academia and in stockbrokers’ school, they teach you the mantra, ‘Markets are efficient. . . . Everything knowable is in stock prices already so you can’t consistently beat the markets so don’t even try.’” he recalls.
“‘Buy and hold and diversify and hang in there for 30 years,’ which is what is taught by 98 per cent of Wall Street advisors . . . even though I was taught that way, I guess I disagreed with it is the short answer.”
Mr. Mathews says his real-world experience has taught him it is possible to achieve better market growth through a mix of defensive (namely cutting one’s losses early on with stop-loss orders) and offensive (such as writing covered-call options to the upside on already-owned stocks to boost returns) measures.
Indeed, he is staking his career on it. Starting out as a stockbroker for Wells Fargo after finishing his undergraduate business degree at the University of Utah in 1993, he moved on to a variety of consulting positions related to financial services and risk management for the industry before returning to money management as a principal in the large US investment banking arm of a major Canadian bank.
However, he said its restrictions on any outside business interests proved stifling, especially since his opinions often diverged from the bank’s official position. “You can’t give advice. You can’t really do anything.”
Mr. Mathews decided to leave and founded Mathews Capital Management, based in Sacramento, in 2019. In August 2019, he also published Stock & Options Trading for Life: The Most Effective Stock & Option Trading Strategies for Individual Investors to Profit Safely in All Market Conditions (previously excerpted in Investor’s Digest). In addition, he hosts The Modern Stock and Options Trading Show podcast, available on Android, Apple, and Spotify.
Build a “base” and a “boost” portfolio
Mr. Mathews advises his clients to divide their portfolios into a “base half” and a “boost half”. The base half, made up of conservative stocks, REITs and the like, provides the stability for investors to take more chances with the boost half, made up of the aforementioned covered-calls and promising but more speculative, volatile, or expensive bets.
Accepting mistakes without emotion and cutting losses early (he typically sets a stop-loss at seven per cent to 10 per cent less than current trading prices) is key to avoiding disastrous losses or possibly a years-long wait until recovery, he underlines, pointing out that even the best traders are only right 65 per cent or so of the time.
“It allows us to be a little bit more aggressive because we always have that backstop.”
He also notes that defining one’s risk tolerance and creating a plan beforehand makes it easier to keep emotions out of investing.
“We all have the fear and the greed,” says Mr. Mathews. “The choice to get out is not yours” with a stop-loss order though he concedes, “the second decision of when to get back in, that is a timing decision.”
Asked what are some sectors he favours in today’s investing environment, he says he is most bullish on health-care and biotech stocks. “I like that theme in light of COVID and in light of baby boomers . . . retiring.”
Meanwhile, he is avoiding “sleepy” utilities and any non-clean energy firms, especially in light of the Biden administration’s strong support for green development.
Mr. Mathews says of technology, “I still think it has legs,” noting that Google parent Alphabet Inc. boasts more than 10 business lines under its banner making revenue of more than US$1 billion yearly. “These are just cash machines.”
2 best cybersecurity stocks to buy
“I also like the sub-themes within technology, like cybersecurity. The bad guys are still out there.”
He highlights two “best buy” selections working in the field, CrowdStrike Holdings Inc. (NASDAQ—CRWD) and Palo Alto Networks Inc. (NYSE—PANW), which he describes as the best cloud-native and best hybrid on-premise and cloud cybersecurity companies, respectively.
“CrowdStrike is kind of the young upstart,” explains Mr. Mathews; it boasts that it can take care of any prevention and intrusion detection tasks remotely, eliminating any need for onsite infrastructure. On the other hand, he says, “Palo Alto is the big, bad behemoth,” well-known and well-equipped to handle any threat launched via IT either live or remotely.
This is an edited version of an article that was originally published for subscribers in the March 19, 2021, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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