I love teaching other investors my preferred method on how to invest money. One of the most important tools I use in putting together portfolios of growth stocks is what I call the principle of zig-zag. Our goal is to have portfolios of stocks with powerful fundamentals and extreme buying pressure and to stay invested at all times. In order to accomplish this, we have to take as much of the daily stock market gyrations out of the equation and let the strength of our stocks speak for themselves. Zig-Zag can help do exactly this.

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To apply zig-zag, we have to find stocks that first have the characteristics we want. In my newsletters, Blue Chip Growth and Emerging Growth, I use my skills as a computer geek to mix and match stocks based on their co-variance. This is simply a statistical measure that helps me find stocks that zig when the market zags and helps me insulate subscribers from some of the market’s fluctuations. In simple terms, it’s really a matter of finding stocks that behave differently to economic and financial events.

To help you better understand the idea of zig zag, let’s take a look at a portfolio of stocks that might meet the idea of zig-zag.  If we find that several retail stocks have all the things we like to see in a growth stock, we need to look for great growth companies that behave differently than the retailers.  Retailers do very well in a growing economy so we want to find some that do well when things slow down a little—food stocks come to mind here as well as drug companies. So if we have several retailers, we want to look for companies in these industries to help balance them out. Technology stocks and large financial companies also react differently to the economy, and they are a good example of zig-zag stocks.

How to Apply the Zig-Zag Approach

In both my Blue Chip Growth and Emerging Growth newsletters, I do the work for you and have the buy list portfolios spread across many different industries that behave very differently from the market and from each other. Right now, for instance, we have wireless phone companies, defense contractors, large multinationals, utilities, insurance companies and food companies. All of these will react to the daily moves differently and help smooth out the volatility of growth stock investing. 

To help you see the zig-zag approach in action, take a look at two of our Blue Chip Growth stocks, America Movil (AMX), one of our top telecommunication stocks and Gilead Sciences (GILD) one of our biotech stocks, in the chart below.  These two stocks illustrate the zig-zag approach perfectly.  America Movil, the line in green, zigs when Gilead Sciences, the line in light blue, zags.  Both stocks also zig-zag in relation to the S&P 500, the line in purple.

 

Another great way to help you achieve the calming zig-zag effect in your portfolio is to add international stocks to your domestic-only holdings. In my Global Growth service I recommend powerful growth stocks located outside the United States. Quite often these stocks will do a sharp zig in one direction when the U.S. markets are zagging in the opposite direction.  Look at the performance of Nokia (NOK) a telecommunications company out of Finland and Elbit Systems (ESLT), a defense stock out of Israel, compared to the S&P 500.

 

One of the benefits of being a subscriber to my newsletter services is that I will do this work for you. When I put my my list together each week, I ask my computers to dig into the database and find those stocks that will give us the highest return with the least amount of risk. I then ask this wonderful machine to mix the list of stocks so that the portfolio has stocks that zig-zag against the market and each other. What we are trying to achieve is a portfolio that ignores the market to the greatest degree possible and just moves upward based on the powerful fundamental growth of the companies and the intense buying pressure from institutional investors that want to own them now.

The Zig-Zag Approach; It helps smooth our path to profits as growth stock investors.