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Why You Should Ignore Predictions

Many analysts have been touting the coming correction, which has not yet appeared.

Waiting for the Correction

Dispatch from the Snow Zone

Hitting the Books in China


Cabot analysts (including me, frankly) have been talking about a coming correction in the stock market for quite a while now, but no correction has materialized. I’m starting to see the wisdom of one of Trotsky’s followers who said that it was proof of the farsightedness of Trotsky’s predictions that none of them had come true yet.

This coming correction has been on people’s minds because dire predictions make people nervous. I’m also getting lots of questions about the wave of recent articles predicting a recession or a hiccup or a collapse for the Chinese economy.

I have two answers to all predictions about what will happen to the markets—in the U.S. or China—or any other stock, sector, industry, country or market.

The first is that I don’t know what will happen. That seems kind of obvious.

The second is that stock market rallies always lead to corrections. Always. And the reasons for those corrections and the exact timing of when they occur just aren’t that interesting. Especially if you’re just in the market to try to make some money.

Consider this. The S&P 500 Index finished up a major, four-and-a-half month correction in August, then took off in September and has been in a strong uptrend ever since. From its August lows, there’s been just about a 25% advance for this key large-cap index.

The Dow Jones Industrial Index, the traditional mega-cap indicator, is now pushing toward 12,000, a level it hasn’t enjoyed since it crashed below it on the way down in 2008. That correction hit its bone-jarring bottom at 6,500 in March 2009.

And that March bottom, despite a significant correction and consolidation in 2010, was really the beginning of the bull market that we’re still enjoying.

Well, maybe “enjoying” isn’t quite the right word, because the market has been pretty cranky lately. While the indexes continue to advance, many of our favorite growth stocks have come in for some punishment and volatility has picked up.

This rotation out of the leaders, combined with elevated investor sentiment and an advance that has kept the major indexes out of contact with their moving averages since late November is plenty of reason to anticipate that some turbulence is likely sooner rather than later.

Fortunately, the Cabot growth investment disciplines don’t depend on predicting market movements. So I’ve never spent any time trying to nail down when the pullback might come or how large it might be.

This keeps me within the guidelines laid down years ago by a savvy economist who said that you should never write a number and a date on the same page if you want to keep your reputation intact.

The takeaway from all this is that you should try as hard as you can to ignore predictions about what the market is going to do.

If you’re standing on the beach with your surfboard, what you really need to know is whether the waves are up.

If they are, you surf.

If they aren’t, you wait.

And when the correction that everyone knows will occur gets here, you shorten your mental stops on the stocks you own, restrict your new buying and build your watch list of attractive stocks for the time when the markets get healthy again.

It’s a lot easier than trying to tell the future.

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If you like snow, this New England winter should be one of your favorites.

We’ve had at least four major snowstorms and the piles of snow beside most streets are about three or four feet high. Many streets have been reduced to the width of country lanes by the encroaching snow berms.

My own commute from Dover, New Hampshire, to Salem, Massachusetts, usually takes me a little over an hour and features mostly restricted access roads like New Hampshire’s Spaulding Turnpike and Interstate 95.

But the limited access that usually protects traffic flow can backfire when there’s an accident or some other obstruction.

And this morning my commute was closer to two hours after an accident on the Spaulding backed traffic up for more than a mile during morning commute time.

Then a pair of snowplow/salt trucks traveling at about 35 miles an hour blocked two of the southbound lanes on I95, backing up that flow (which usually zips along at about 80 mph during the morning rush—don’t tell the state police) for additional miles.

The big unspoken secret about winter driving in New England is that drivers here don’t all handle it with the patience and expertise that you might expect if you only know the region from reading Yankee Magazine.

There hasn’t been a single “snow event” during which I haven’t seen a series of fender benders, spinouts and SUVs on their backs in the median. While my pickup truck and I are doing our safe-and-steady reduced pace in the snow, slush and salt, we’re constantly passed by numbskulls in four-wheel-drive vehicles of all sorts, many of them with pilots who have cell phones glued to their ears.

Apparently they don’t realize that it doesn’t make any difference if all four wheels are driven if none of them is in contact with the pavement.

I’ve always said that if you build idiot-proof cars, nature will build a better idiot.

There’s an investing lesson here, too. I think it’s something about the way some people feel that access to the Internet and online brokerage accounts with truckloads of information and a huge array of exchange-traded funds, options and selling controls gives them a real edge in the market. The sense of invincibility conferred by loads of information is remarkably similar to the myth that SUVs can’t lose traction during blizzards.

In investing, just as in driving, you have to take conditions into account.

Of course that’s a lesson I had to learn by spinning my VW Rabbit around three times before its rear end came gently to rest on an I95 snowbank all those many winters ago.

Traffic, like the stock market, always charges a steep price for its lessons.

If you’d like a trustworthy partner in buying stocks of companies in emerging markets, you might want to consider a no-risk trial subscription to Cabot China & Emerging Markets Report. With a cautious eye on market conditions and years of experience in negotiating the ups and downs of these volatile regions, I think I give pretty good advice. You can get started by clicking this little link here. And good luck with any snow that falls in your region.


My stock tip today is an emerging markets stock that made a splash when it came public in the U.S. in early December.

It’s E-Commerce China Dangdang (DANG), an online bookseller that’s being called “the Amazon of China.”

There’s plenty of precedent for calling a company “the _______ of China,” including (the Expedia of China) and Baidu (the Google of China). And the implication that a similar business proposition will prosper in China as it has in the U.S. is actually fairly sound.

Dangdang had six million active customers in 2009 and sales of $298 million. In a country of 1.4 billion people, that leaves a ton of headroom for an ambitious company that’s pushing its way (as Amazon already has) into general merchandise and third-party sales.

My point about Dangdang is that its stock was initially priced at 16 at its IPO, so its close at 30 on its first day brought a nice premium for those who got in early. But those favored few were the only people to really luck out. Anyone who bought in at 30 on December 8 is now under water by about 30 cents, as DANG has traded in weekly swings in a tightening range.

Enormous potential isn’t enough to earn a buy rating in my book, but the combination of potential plus a stock that’s trading sideways (forming a base, in other words) is certainly enough to put it on my Watch List.


Paul Goodwin
For Cabot Wealth Advisory

P.S. Paul Goodwin is the editor of Cabot China & Emerging Markets Report, which Hulbert Financial ranked as the #1 newsletter for five years in 2009 and 2010 with a 20.5% annualized gain! Don’t miss out on any more of Paul’s great advice. Do your portfolio a favor and subscribe today. Get started now!

Paul Goodwin is a news writer for Cabot’s free e-newsletter, Wall Street’s Best Daily.