Moderation in Growth Investing
I’m a big fan of moderation. I drive fast during my commute to Cabot, but I never want to be the fastest car on the highway. I like to watch television, but my family makes do with a 32-inch screen. And while I certainly like to eat and drink, I avoid restaurants with unlimited buffets; I can’t eat all I can eat. But today, what I really want to write about is the path of moderation in growth investing.
Stock Market Video
Moderation in Growth Investing
This Week’s Fortune Cookie
In Case You Missed It
In this week’s market video, Mike Cintolo remains relatively neutral while the market continues to chop sideways, but a couple of factors are making him more optimistic, including worsening investor sentiment (that’s usually a good thing for the market) and improved price/volume action in some growth stocks, including a bunch that are making persistent advances, which he hasn’t seen for many months. He’s still being choosy on the buy side, but he’s finding more and more to like. Click below to watch the video.
Moderation in Growth Investing
I’m a big fan of moderation. I drive fast during my commute to Cabot, but I never want to be the fastest car on the highway. I like to watch television, but my family makes do with a 32-inch screen. And while I certainly like to eat and drink, I avoid restaurants with unlimited buffets; I can’t eat all I can eat.
The so-called Doctrine of the Mean is usually attributed to Aristotle in his Nichomachean Ethics. Aristotle saw moderation as the moderate position between two extremes. So, for example, courage looked to him like the laudable middle way between the extremes of recklessness and cowardice.
This theme of the middle way makes its way through Western thought via Marcus Aurelius (and through Chinese thought with strong roots in Confucian thought).
Moderation always takes a beating at the hands of young people, especially (let’s face it) young men. Extremism has, indeed, come to be seen by many as an admirable display of character. (In young men, endeavors such as beer consumption, hazardous sports and automobile driving spring to mind.)
But today, what I really want to write about is the path of moderation in growth investing.
By its very nature, growth investing requires a higher amount of risk tolerance and at least a pinch of optimism. Growth investors are willing to bet that economies will grow, that technology will make advances and that stocks will (in the long run) increase in price. And growth stocks usually exhibit higher volatility than value or income stocks.
So how can growth investing be moderate? Let me count the ways.
1) It’s moderate to use all the available information. Some investors (fundamentalists) buy stocks based solely on their historic and projected revenue and earnings. Others (technicians) use only chart analysis. And still others (enthusiastic idiots) look only at the company’s story before buying. The more moderate position is to use all sources of information and require that they all give positive signals before hitting the “buy” button.
2) It’s moderate to invest in sync with the market. Bull markets are profitable; bear markets aren’t. Anyone who maintains the same amount of exposure to growth stocks in a bull market as in a bear market, just isn’t listening to what the odds are telling them. If there were a little light over a roulette wheel that let you know when the odds were in your favor, sensible gamblers would wait for the green light before putting down big bets. Increasing your buying during strong market conditions and going to cash during market corrections just makes sense.
3) It’s moderate to limit your losses. Just as one or two great stocks can make up most of your gains for the year, one or two big losers can sink them. Of all of the standard wisdom about investing, the one that growth investors should have tattooed on their forearms is “Cut your losers short; let your winners run.”
4) It’s moderate to learn from your mistakes. Sometimes the only thing that will get people to change their behavior is to be forced to swallow a big old loss. Often it’s a string of mistakes that begins with an impulsive stock selection and ends with a stubborn refusal to sell at a loss. Fortunately, the market is happy to teach its lessons over and over ... for a fee.
I could, of course, say something at this point about how it’s nice to have an experienced mentor to teach you about these potholes and the discipline that can tame the ups and downs of the market and its stocks. But by now, you already know I’m ready, willing and able to help.
Tim Lutts’ comment: The Mr. Spock of the Victorian Era, Holmes was not only ever-logical but also quite capable physically, a trait that came in handy from time to time. For investors, however, physical prowess is useless. Risk-analysis, balanced against profit opportunity, is all.
Mike Cintolo’s comment: Mr. Doyle must have been a damn good investor. Life tells us to stand up to adversity (generally good advice), but in the market, cowardice (running away when losses develop) will keep you in the game, and make your winners count that much more.
In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
Our chief investment strategist Tim Lutts salutes the many who gave their lives for our country, then describes part one of his 4,218-mile road trip through the Midwest (yes, he drove his Tesla!). Stock discussed: Middleby (MIDD).
Nancy Zambell, editor of Dividend Digest and Investment Digest, makes a compelling case for fintech—an emerging financial service technology—to become the next disruptive technology, and will deliver big profits to investors early to the game.
Trading options is too risky. Options expert and chief analyst of Cabot Options Trader and Cabot Options Trader Pro Jacob Mintz dispels this myth and four other commonly held myths about options trading.
Have a good weekend,
Chief Analyst, Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory