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The Key to Investment Success

Discipline is key to investment success. Don’t stray from your plan and make reckless decisions.

My Biggest Loser

My Biggest Winner

The Big Difference

The Next Winner?


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To consistently make money in the stock market is difficult. But when you don’t adhere to your game plan or, even worse, don’t have any game plan, winning in the stock market becomes almost impossible.

Your plan needs to be simple, formalized, written down, and stored on your computer (or the electronic device of your choice). Your plan should include your investment objectives for the immediate and long-range future, as well as details on how you intend to achieve those objectives. You should review your plan’s progress at least annually, preferably quarterly.

Whenever you review your plan, figure out what you did right (give yourself a pat on the back), as well as what you did wrong. Then ask yourself the big question: What can you do better in the future?

(Here’s a tip: Allow yourself to invest in a wild stock or two, but never exceed your predetermined allocation for this type of investment. We all have gambling instincts, but keep you gambling under control--allocate no more than 5% of your portfolio to risk bets.)

Discipline is key to investment success. We all lack discipline sometimes, but you can’t let that happen when you’re investing your hard-earned money. Don’t stray from your plan and make reckless decisions.

My discipline revolves around Benjamin Graham, who is known as the father of value investing. Many consider Graham’s writings to be the Holy Grail of investment analysis. Graham’s premise of buying stocks for less than their value is logical.

Mr. Graham created several analyses to point investors in the right direction, most of which are easily learned and implemented. I employ two of his analyses in the Letter with great success.

But if you find Graham’s style does not fit your goals, then Cabot offers 10 other investment letters that can help you achieve your investment objectives. A list of the Letters appears at the end of this Advisory, or you can click here for more details.

As I mentioned, I recommend that you review your investment results annually or quarterly. I keep a spreadsheet with my Ben Graham Letter recommendations, which includes the purchase date and price per share, company name and symbol, and sell date and sell price. You should keep similar records.

Admittedly, I have recommended some stocks that lost money, but rest assured, my winners far outnumber my losers. Altogether, my recommendations gained an average of 10.1% per year compared to the average increase for the Standard & Poor’s 500 Index of 5.6% per year. That’s before dividends and transaction costs. Adding dividends to my returns raises my annual return to 11.5% per year.

The stocks that lost money share certain commonalities. When it was difficult to find stocks that fit all of my criteria, I sometimes stretched my rules a bit to fill out my portfolio. My rules include low debt, low price-to-earnings ratio, no deficits during the past five years, and a solid outlook for sales and earnings growth during the next year or more.

One of my worst choices, which I made three years ago, was SUPERVALU (SVU). When I recommended the stock, SUPERVALU fit all of my criteria, except for one item: The company’s long-term debt was high. The extra leverage created by high debt could have worked in SUPERVALU’s favor, but the company began to lose market share to Walmart, and the stock began to plummet, exacerbated by the stock market dive in late 2008.

Revisiting your biggest stock losses is painful, but a great deal of knowledge can be gained. I learned that I should never compromise my fundamental rules ... even by a little bit. Ben Graham was right; never buy companies with high debt.

I’ve recommended a lot of companies that turned out to be winners, too. Oracle (ORCL) is one of my biggest successes. I recommended the company five years ago, and the stock has gone up quite consistently ever since. No flaws with Oracle. Debt was low and other factors looked very good. My subscribers are now enjoying a gain of 150% and my sell target, which has been raised many times since, is well above the current price, which indicates that more profits could develop. Picking a stock that meets all of my criteria is paying off!

I could provide additional examples of winning and losing stocks, but I’m sure you understand my point. Develop a plan that includes stock-picking criteria--and don’t waver from your criteria.

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So which stock will be our next big winner? BlackRock (BLK) offers great potential and fits all of my fundamental criteria. The stock price is very reasonable, too.

BlackRock is the largest publicly traded investment management company in the world with assets under management totaling $3.65 trillion. The company offers a variety of investment and advisory products and services to institutional and individual investors at home and abroad.

BlackRock’s December 2009 acquisition of Barclays Global Investors is adding significant revenues and profits. Barclays’ vast array of iShare ETF offerings will enhance BlackRock’s product portfolio and lead to significant cross-selling opportunities. A recent study found that many institutional investors, such as pension funds, are investing significantly more dollars into ETFs in 2011.

During the past 12-month period, BlackRock’s revenues and earnings per share (EPS) soared 56% and 48% respectively. The Barclays purchase and improved financial markets helped to produce outstanding results. I forecast revenue and EPS growth of 15% during the next 12-month period. BlackRock could exceed my forecast if sales of iShare ETFs continue to accelerate.

BlackRock’s shares sell at a reasonable 15.0 times my forward 12-month EPS forecast. Cost savings and new selling opportunities from the Barclays acquisition will lead to significant growth during the next several years. I expect BLK’s stock price to increase to my Minimum Sell Price within two to three years. BLK is very low risk and the dividend yield is attractive at 2.8%. Buy BlackRock, and don’t be scared off by the ostensibly high price of almost 200. I think the company’s stock price has a lot further to go.

Until next time--be kind and friendly to everyone you meet.


J. Royden Ward
For Cabot Wealth Advisory

Editor’s Note: You could buy BlackRock here and hope for the best or you could subscribe to Cabot Benjamin Graham Value Letter today to get Roy’s latest recommendation on this and other top value stocks. Click here to learn more.

J. Royden Ward has spent his entire career seeking strong investment returns for his clients while keeping risk low. In 1969, he developed a computerized model of stock selection based on formulas created by investment legend—and Warren Buffett mentor—Benjamin Graham, and since 2003, he’s been spreading his wisdom far and wide as chief analyst of Cabot Benjamin Graham Value Investor.