Daily Posts Archive
Today I want to start off with a word about a certain technical indicator you’ve probably heard a lot about this week. It’s a prediction that gets made every year by Punxsutawney Phil, who sticks his head out of the ground to predict whether or not winter is here to stay. As a child, I believed in the power of the groundhog to forecast the weather. But soon I realized that it would probably be winter here for at least six more weeks. In any event, I’m not putting much stock in old Phil to forecast the seasons or anything else. We don’t do predictions here at Cabot, we watch the market and use our disciplined market timing indicators to stay on the right side of the trends.
The cynic might say that if the IRS just took a close look at the last 10 years’ tax returns of everybody in the Federal government it would scare up enough revenue to close the budget deficit by a few percentage points. Me, I’ll just repeat and elaborate on my main point. The tax laws are too complicated. Every new program, gained by earnest lobbying, that aims to fine-tune the system to benefit or penalize specific groups, only serves to make the whole process more complicated, and thus less efficient, for both the taxpayers and the overseers. And that helps nobody but the people employed in the tax industry.
I rarely ever delve into the murky, stinky waters of politics, and really, I’m not going to start now. If you’ve listened to the news, you probably know about the good and bad of the $800 billion (and growing) stimulus package that will soon be taken up in the Senate. I’m actually optimistic that the Senate will be able to pass a workable, bi-partisan bill. However, my rant today is based on policies that have been adopted by Democrats, Republicans and Independents alike. I’m talking about the various tax credits currently in the tax code, and the income thresholds that apply to them. Some aspects of the current stimulus bill include these thresholds.
Today I’m bringing you a Q&A with Cabot Benjamin Graham Value Letter Editor J. Royden Ward. You haven’t heard from him in a while, so I wanted to bring you up to speed on his latest thinking about what happened in 2008 and where he sees the stock market and value stocks headed in 2009 and beyond.
One of the hardest concepts for individual investors to grasp is the idea that the stock does not represent the company. In fact, the stock represents investors’ PERCEPTIONS of the company. If investors think a company’s future is bright, even though it is not yet a big success, they’ll pay a premium for their expectations--pushing the stock up in the process. Contrarily, if investors perceive that a company is becoming less successful, or simply growing less rapidly, its premium will shrink. In the worst cases, the stock will decline, even though the company is still growing!
Carlton Lutts, the founder of our company, used to say that all you need to get from a book to make it worth the reading is one good idea. Cabot is headquartered in a decommissioned branch library, and the wall next to where I sit is lined with books on investing, some of them dating back to the 1920s. If you’re serious about becoming a better investor, you should be doing your homework, hoping that every book you read delivers that one good idea.
Plummeting prices last year brought many stocks down 50% or more, so that their yields now look extraordinarily high. My database now shows 63 stocks with annual yields of 20% or more. But there’s something wrong with these stocks--business at every one of these high-yielding firms is faltering. The stocks’ plunges tell us that. And while the yields may look high today, they’re based on the past 12 months. If business shrinks, the dividend will shrink more. And if the business shrinks, the stock price may fall further, too. All in all, chasing these super-high yields is a dangerous game, suited only for professionals who can determine when the selling has been overdone and when the dividend is secure.
Last year, I started writing a series explaining our investment advisories in an effort to help answer one of the most common questions we get from investors, “Which Cabot publication is right for me?” Also last year, we expanded the Cabot family by purchasing Dick Davis Digest and Income Digest. This is what Timothy Lutts wrote at the time: “Now, it’s our honor to be the steward of these well-respected publications. Our goal is to honor the past reputation of these Digests, while improving the newsletters so they serve subscribers better in this Internet age. I’ll be telling you much more about these Digests in the future.”
One of the most encouraging signs I see in the market is the action of many potential leading stocks. There are more than a handful that are hanging in there despite the market’s woes. And there are a few that have actually broken out on the upside! A group that has broken free is one that I pointed out to you in my last Cabot Wealth Advisory (dated January 5)--education stocks.
Entrepreneurs, according to academics, are motivated by an overwhelming need for achievement and a strong urge to build. As Thomas Edison commented, while he and his team were working to develop an incandescent light bulb that lasted more than a few minutes, “I have not failed. I’ve just found 10,000 ways that won’t work.” Without entrepreneurs the world, would be far, far poorer today. Most entrepreneurs are less famous than the men in this issue. But they are no less valuable. One is my father, who launched Cabot Market Letter from his kitchen table back in 1970 and persevered until he could afford to leave his regular job a few years later.