Daily Posts Archive

In 1931, Humphrey Neill, who later became famous as the Vermont Ruminator, wrote a book called “Tape Reading and Market Tactics - The Three Steps to Successful Stock Trading.” What are the Mr. Neill’s three steps to successful stock trading? The first step is familiarizing yourself with the methods of the institutions that move the market. The second step is learning how to interpret the actions of both these groups and the investing public. The third step (and hardest of all) is achieving mastery of yourself; of the “temperament, emotions, and the other variables that go to make up human nature.”

The news is out: Brazil is now the largest emerging market in the world by market capitalization of its stocks, and Petrobras, the Brazilian oil giant, is the largest company in the emerging markets by market cap. Brazilian stocks now make up about 15% of the MSCI Global Emerging Markets Index, compared with China’s 14%. The South American giant has surpassed China, in part, because the Chinese stock market is in the middle of a pullback that has given its stocks a significant haircut. That’s the way it is with emerging markets; they go up faster than developed markets and come down faster, too.

We appear to be at a major turning point, a changing of the guard, if you will, and if you don’t heed the market’s message, you risk discovering that it has taken some of your hard-earned money. The fact is, most leaders of the last bull market are toast. Google is 37% off its high. Apple is down 37%, too. So what’s working? Two sectors.

One thing that I am almost never asked about is what it takes to be a great investor. Everyone is focused on today’s stock, or tomorrow’s headlines. I can literally count on one hand the number of questions I’ve answered that concern building a successful system that will generate above-average profits for years. The funny thing is, that system - while it involves many rules and tools for finding, buying and selling the best stocks at the right times - really begins with the individual. People are usually their own worst enemies when it comes to winning the investment battle.

Intellectually, everyone knows that the right time to get into the market is at the bottom. Stocks are cheap and there are bargains galore. Unfortunately, figuring out when a bear market is going to bottom is about as easy as knowing when a long-winded speaker is going to quit talking. It can’t be done. Maybe it’s fairer to say that you can’t see a market bottom by looking forward through the windshield. It’s something that can only be seen in the rear-view mirror.

At Cabot we’ve learned that it takes excellent, innovative management to steer a fast-growing company down the highway of success. Contrarily, bad management can wreck even the most promising company. As might be the case with one carbon fiber company Cabot’s been watching for more than a decade.

Here’s one of the biggest differences between successful and ineffective traders: The market can change its tune in a heartbeat but ineffective traders cannot...or at least they refuse to try. These traders think everything has to make sense, and rapid changes in direction rarely make sense, so they fight the new trend.

The trick is to think about taxes before you invest, not when you’re thinking of selling.

Each year end, I review my investing strengths and weaknesses, examining stock charts of previous buys and sells, comparing them to market action, and so on.

A bear market is not tolerant of aggressive behavior. The effects of your mistakes are magnified—the secret to surviving the bear market is adapting.