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Getting Back to Investing Basics

A recent reader survey revealed a high interest in learning more about investing bacics.

The Results Are In

Stock Market Analysis Video

In Case You Missed It


A couple of weeks ago, I asked you to take a survey for us so we can better understand how to serve your investing needs. Many of you responded and I appreciate all of your feedback.

We’re going to integrate some of your suggestions into Cabot Wealth Advisory and our other newsletters, as well as cover many of the topics you requested. Today, I’m going to discuss a topic that came up frequently: beginning investing.

Many of our readers are already experienced investors, but a lot of you are completely new to the game. So today I’m going to attempt to get you up to speed in the hopes that having more basic knowledge will give you the tools you need to better understand what we write about. (Note: These lessons primarily apply to growth investors, but they can be beneficial to everyone’s investing strategy.)

Why should you own stocks?

Over the long term, stocks have outperformed all other investments. From 1926 to 2008, stocks in the S&P 500 brought investors an average annual return rate of 9.6%. Stock ownership entitles you to benefit from price increases and to receive dividends the company distributes.

How many stocks should you own?

We generally recommend owning no more than 12 stocks. That allows winners to truly have a big positive effect on your portfolio, while at the same time preventing losers from sinking it completely. We advise investing equal dollar amounts in each stock to balance risk.

How does Cabot pick growth stocks?

Cabot’s growth stock selection system starts by focusing on stocks that are strong and going up faster than the general market. These stocks are said to have positive momentum. But we need to see more than that. Behind each stock, we want to see a great growth company. In most cases, we require a company to be demonstrating strong growth of both sales and earnings. And we want to find a story that convinces us this great earnings growth is likely to continue in the years ahead. This system is followed in Cabot Market Letter, Cabot Top Ten Report, Cabot Green Investor and Cabot China & Emerging Markets Report.

What is relative performance?

Relative performance (RP) is a measurement of how a stock is acting relative to the market as a whole. It is one of the tools used by Cabot growth stock analysts to gauge a stock’s momentum. When a stock’s RP line is moving upward, the stock is performing better than the general market; when the RP line is moving downward, the stock is performing worse than the market; and when the line is level, the stock is performing the same as the markets.

What is market timing?

We are strong believers in long-term market timing, mainly so we can sell stocks and avoid losing money and raise cash when the broad market enters into a major decline. Market timing is not an exact science, but we’ve had great success timing the market over the years so we feel confident in recommending that all growth investors practice it. Our three primary market timing indicators are Cabot Trend Lines, Cabot Tides and the Cabot Two-Second Indicator.

The Cabot Market Letter averages one major market-timing signal per year. If it’s a sell signal, we work to reduce risk by selling our poorest performing stocks and putting close limits on the others. The object is to reduce the risk of loss and to raise cash for the next buy signal, when bargains abound. When that buy signal comes, we invest aggressively in the best-performing stocks we can find. Interestingly, that’s the time investors are most fearful!

How do I know when to sell a growth stock?

The most important rule in growth investing--and the hardest to learn is, “Cut your losses short.” That means if your loss in a growth stock exceeds 15% or 20% at the end of any trading day, you sell. Period. In general, we also believe it is wise to sell a stock when it has underperformed the market for eight weeks. The stock’s RP (relative performance) line is a good indicator of this.

On the other hand, you will have many winners, and knowing when to sell them is more difficult. These are stocks in which you already have doubled your money--or more, and still see the potential for great appreciation in the future. In such cases, you should hang on to your stock through corrections, confident that the long-term results will prove rewarding. If you can do this, you’ll benefit mightily from the magic of compounding.

Is it risky to buy stocks hitting new highs?

In the long run, no, because a trend, once established, tends to persist. So if you’re convinced a stock’s trend is up and you’re convinced the company is capable of great earnings growth in the years ahead, you should buy. But better yet is waiting for a normal correction, and buying a stock when it touches its 25-day moving average.

What are options?

An option gives you the right to buy or sell shares of a stock if it reaches a specified price by a set date. Cabot does not provide specific advice on options. But because we set buy and sell prices for the stocks we recommend, Cabot stocks work well for options traders.

Which Cabot newsletter is right for me?

In addition to Cabot Wealth Advisory, which is free, Cabot publishes nine other newsletters covering a variety of investing strategies. We understand that it can be difficult to decide which one best suits your investing needs, so we created a quick quiz. You can take it here:

That’s all for today. I hope you learned something that will help you become a more successful investor. Again, thanks to everyone who filled out the survey … expect to see more topics pulled from the results in the future!

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Calling All New Investors

Are you new to investing and looking for advice on what stocks to buy? If so, I ask you to consider our entry-level investment advisory, Cabot Stock of the Month Report.

Not only is it priced so low that every investor can afford it, it’s also designed so that subscribers get a taste of a multitude of investing styles. Every month, Editor Timothy Lutts highlights a new stock from a variety of investing styles: growth stocks, emerging markets, momentum stocks, Green stocks or value stocks.

I call this approach Spectrum Investing, and I think you’ll like it because you’ll get to see a variety of investment opportunities from a variety of investment styles. A new issue came out on Tuesday, don’t miss it! Click below to get started today.


Now on to Cabot’s weekly Stock Market Analysis Video with Cabot Market Letter and Cabot Top Ten Report Editor Michael Cintolo, where he discusses the importance of the 25-day moving average as an intermediate-term indicator that the market is in a confirmed uptrend. Mike says it’s time to buy some stocks and he gives several picks in the video, including Baidu (BIDU), Cleveland Cliffs (CLF), Walter Energy (WLT), Ford Motor (F), CTrip (CTRP), Aruba Networks (ARUN), and Avago Technologies (AVGO).


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, I have links below to each issue.

Cabot Wealth Advisory 3/1/10 – The Olympics Hijacked My Life

On Monday, Timothy Lutts discussed all the things he enjoyed about the Olympics, which took over his life for most of February. Tim also discussed why First Solar is no longer a good investment and why certain technology companies are looking good. Featured stock: NetLogic Microsystems (NETL).


Cabot Wealth Advisory 3/4/10 – Generate Income as America Slims Down

On Thursday, we heard from the editor of Dick Davis Digest and Dick Davis Income Digest, Chloe Lutts. Chloe wrote about America’s obesity epidemic and what various entities in our society are doing about it. Chloe highlighted a company that is working to build a healthier America and was recently featured in Dick Davis Income Digest Featured stocks: PepsiCo (PEP).


Until next time,

Elyse Andrews
Editor of Cabot Wealth Advisory

Editor’s Note: In just the past two years, Cabot Market Letter, on timing alone, has beaten the market by 64%. That figure comes from Timer Digest, which just ranked Cabot Market Letter third among all long-term timers. If you’re a Cabot Market Letter subscriber, this will not be surprising. You know how Michael Cintolo helps readers conserve cash when the market is unsupportive and to invest aggressively when the market trend is up. But if you’re not a subscriber yet, you owe it to yourself to take a look at the Cabot Market Letter. Click below to get started now!


Elyse Andrews, is a contributor and former editor of Cabot Wealth Daily, focusing on educational topics on finance, the stock market and individual stocks.