Something I have noticed in the marketplace, especially here in Canada, is not only do the best fund managers trade in and out of stocks, they always seem to be in the same kind of stocks!  At first, I thought to myself: How could this be?  Are they moving in herds together?  Is this some sort of self-fulfilling prophecy where the best managers move into some stocks, and then the rest follows?  Or perhaps is this some sort of collusion where the public is continuously left holding the bag?  Or, maybe, just maybe, the best money managers somehow always know where the next rally will be.  Much like how the best hockey players, as Wayne Gretzky says, goes where the puck is going to be and not where it was.
 
For example, at the beginning of this year 2008, it seemed all the best fund managers were calling for natural gas, potash, and silver stocks to be winners.  Just watching old videos of the Sprott guys on BNN, looking through their portfolios on Sedar, perusing newspaper articles about Rohit Sehgal's Power team, or even reading about America's own Ken Heebner, and you will see evidence of this.  They were all in those sectors.  And low and behold, natural gas and potash stocks have since been on a tear!  I guess this is why those managers are called "the best".  This is how they pull off 25% returns every year.

Perhaps silver is next?

But I digress.  This article is not about potential winners; it is more about how to pick the winners.  One of my biggest challenges over the past couple of years has been to learn to identify the trends -- to find the best ideas at the right time.  This is so important because I have seen many value investors buy stocks at the wrong time (ie while they are still falling) and then having their money trapped for several years before things turn around.  Many, albeit, will argue that this is how value investing should be done.  You should buy now when prices are low, they say.  I beg to differ.  For not only have I seen the success of the managers listed above, I have also seen the failures of those who do not pay attention to the macro-environment.  Many investors who were recommending Citigroup last year, for instance, did not yield to the signs that the mortgage and derivatives markets were set to explode.  Or even those value investors who recommended natural gas stocks two years ago sat through a lot of pain before the commodity turned the corner.  Or how about those investors who bought lumber/paper stocks two years ago?  Had you bought those stocks supposedly on the cheap, you would have witnessed the sector getting crushed further from a slowing economy, and your stocks following suit.  Same said with media stocks.  Like everything in life, timing is key.

No I'm not saying I want to be able to time the market.  For that would be nearly impossible.  But I believe if you just "listen to the street", you can cut the waiting period down to a year or so.  Many value investors are always in stocks too early, and then they correspondingly miss out on huge gains because they exit their positions early after having waited patiently many years.  Some of them are even proud of this!  At first I thought this is how it is done, but after watching the best managers, like Ken Heebner, rack up giant gains year in and year out, I have realized combining value with a top-down approach can add many percent points to your portfolio returns.

A key point in accomplishing this seemingly difficult goal is identifying the catalyst.  Ask yourself why is the trend likely to change?  Why will it go up?  Why now?  Natural gas was a great example.  For not only did you have Rohit Sehgal (his hedge fund has a 60% 5-year record) bullish in January, there was mounting evidence from other experts that natural gas prices all over the world had been rising.  Once a commodity begins to rise, as most people know, the stocks – especially if they were beaten down like natural gas stocks were - will usually follow suit.  Lest not forget the icing on the cake: insiders of Canadian natural gas companies were buying tons of stock in December 2007.  Insiders - the people on the front lines of their respective sectors - are always the first to know when things are truly turning around.

So it seems these signs are out there, you just need to pay attention.  Perhaps the best advice on this subject has been from none other than one of the greatest macro-investors of our time, Eric Sprott:

While the supply of ideas may be limited, there's no magic to coming up with them, Sprott insists. "I believe that a little bit of hard work and keeping your eyes and ears open can make you a successful investor," he says. "There are things to see and notice - they're quite readily available - you just have to be receptive. You have to read between the lines a little to see what's happening."

And how does one keep their eyes and ears open?  Read.  Read everything.  Read what all the best fund managers are doing, read the news, read magazines, read books, and read blogs.  I am always looking for ideas.  More importantly, I am looking for those catalysts which will be why a sector is turning around or what has changed in a stock to make the upside huge.  Videos and audios too are useful.  BNN is my favourite financial TV station here in Canada, CNBC is the equivalent in the U.S.  I watch both.  Furthermore, I routinely seek out any media clips on Bloomberg or any other financial media hubs on the Internet.  Once again, the idea here is to listen to the street, especially the best investors or experts on the street.  If you can get an inkling to what they are thinking or doing, you too might be able to spot the trends before everyone else.

Let me conclude by telling you how I did not follow my own advice here and recently missed a huge opportunity with coal stocks.  Suntzu and I met for coffee late last year in 2007 and we were talking about stocks as usual.  In passing, we mentioned how Grande Cache Coal (GCE.TO), a stock we both followed, had reached the penny-stock level.  We talked briefly about the ridiculously low stock price and the company's high debt levels.  But then the conversation quickly moved onto the subject of gold.  For, at the time, the entire world was consumed with the gold price.  Anyhow, had we stopped to listen to the street, we might have noticed that coal prices had already doubled.  Or we would have noticed a lot of fund managers had started to take small positions in coal stocks.  Needless to say, Grande Cache's stock went from a low of $0.71 to $10.50 today!  That's less than half a year.  Eric Sprott was right: It really pays to be receptive.  (He, by the way, has made a killing in coal stocks since.)

So keep your eyes and ears open at all times.  The trend indeed is your friend.  But first you must spot it.