Producing market-beating returns is the gold standard for investors.
It’s also a standard that even most professionals fail to achieve.
According to S&P Global, only 21% of large-cap U.S. funds outperformed the benchmark S&P 500 Index last year.
But finding stocks that outperform their benchmarks gets a little bit easier when you’ve got the flexibility that I have in Cabot Stock of the Week, where each week I choose a new stock from a wide range of Cabot advisories to share with my subscribers.
Stock of the Week leverages the expertise of Cabot analysts to pre-screen their universe of coverage for exciting new opportunities across a variety of sectors.
The portfolio holds growth stocks, tech stocks, value stocks, dividend stocks, and more. And right now, it boasts a 46% average return across all open positions … excluding Tesla (TSLA), which is a long-term winner for the Stock of the Week portfolio that, if I included it, would skew the average return on open positions to an astronomical 1,081%.
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Obviously, having a team of professional analysts to draw from helps tilt the odds in my favor, but there are also a handful of rules I follow when managing Stock of the Week that have contributed to its enduring success.
Today, I’d like to share a little bit more about those rules.
Stock of the Week’s Five Rules for Market-Beating Returns
1. Cut Losers Short
This is the only set-in-stone rule for Stock of the Week. (There’s also a 20-stock limit, but that’s really more of a suggestion.)
When I open a new position, I put a 20% stop-loss in place. It helps ensure that, no matter how good a stock’s story is or how good the chart looked before I bought it, if it turns against me, I get out before it can do too much damage.
As my colleague Mike Cintolo says, good-looking stocks can go bad in a hurry.
And while I have that 20% stop-loss in place, the constraints of the 20-stock limit and a new pick each week mean that I often have to cut underperforming stocks even before they trip my stop or do anything “wrong.”
Sometimes, a promising stock just doesn’t generate the momentum it needs to stay in the portfolio.
So, to sum it up, have loss limits in place to protect yourself, and don’t be afraid to cut a stock loose if it’s not delivering the way you hoped.
2. Take Profits on the Way Up
There’s a well-known adage on Wall Street that you should “cut your losers short and let your winners run.”
It’s good advice, but it leaves something to be desired in practice.
How far, exactly, should you let those winners run?
Over the years, I’ve found that taking partial profits on the way up is a good way to buy peace of mind.
The “right” approach will vary by investor, but if a stock is up 80% or 100% from my entry point, I like to take some profits off the table.
That profit-taking buys me the opportunity to let the remaining share (say, half of the original position) keep running.
3. Never Fall in Love with a Stock
This rule is a corollary to rule number 1. In Stock of the Week, I’ll never double down on a losing position, and I won’t “hold and hope.”
Some value investing schools of thought would argue that a good stock that falls 25% is an even better value, but there’s generally not room in my portfolio for multi-year turnaround plays or “cigar butts” that Wall Street is ignoring.
Better to move on to the next opportunity, no matter how compelling the stock’s story may be.
4. Don’t Ignore “Boring” Stocks with Momentum
I mentioned earlier that Stock of the Week invests in stocks across a variety of sectors, and that’s because individual sectors can swing in and out of favor rapidly.
Just look at energy stocks this year.
So don’t ignore “boring” stocks just because they’re not the latest and greatest thing on Wall Street.
The Stock of the Week portfolio currently has a “boring” bank stock that’s up 83% in the last 15 months and a “boring” delivery company that’s up 47% in the last seven.
They may not come from flashy sectors, but both of those stocks are outperforming AI poster child Nvidia (NVDA) over their respective time frames.
5. Expand Your Horizons
There’s always a bull market somewhere.
It may not be in your preferred sector or country, but there are always promising investment opportunities. You may just need to expand your horizons to see them.
Sometimes that means looking in the aforementioned “boring” sectors; sometimes it means looking to international markets.
In the words of Warren Buffett, “Money will always flow toward opportunity.”
And if you’re interested in finding out where I see opportunity in the market today, consider a subscription to Cabot Stock of the Week.
We’re currently offering a special promotion for new subscribers, and you can learn more about it here.
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