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Portfolio Risk Management

The biggest influence on the success of your growth stock portfolio is the general trend of the broad market.

Stock Market Video

Portfolio Risk Management

When Complacency Reigns We All Get Wet

In Case You Missed It


In this week’s stock market video, I note that the short-term trend of U.S. stock markets has now turned down, giving us a caution light for any new buying and a signal to kick the underperforming and losing stocks out of our growth portfolio. Keep portfolio risk management in mind. I emphasize the influence of the market on even the strongest stocks, and point out how some stocks stand up to the downward pressure and some cave in totally. Reacting accordingly is a necessary investing skill, and sooner is better than later. Stocks discussed include: Biogen Idec (BIIB), Cabot Oil & Gas (COG), Activision Blizzard (ATVI), FleetCor (FLT), and many others. Click below to view my opinion on the market’s most recent action and my advice on how to preserve your profits.


Portfolio Risk Management and a Few Words on the Boston Marathon Bombings

Although you may not think about it in this way, you are constantly assessing risk in your life. Sometimes it’s about trivial things like the risk of getting the wrong change back after buying something for cash or the risk of flicking spaghetti sauce onto your shirt at lunch. That’s why I count my change and stuff a napkin into my collar.

Then there are the bigger risks that we try to get a handle on, like sneaking through an intersection that’s (technically) a red light, climbing up almost any ladder for any reason and defending the value of our investment portfolios from the vagaries of the market.

Much of what I do at Cabot is aimed at either finding the strongest stocks to recommend to subscribers to Cabot China & Emerging Markets Report or portfolio risk management. Looking at company stories, digging into revenue and earnings trends, analyzing charts, taking the temperature of international economies and following the trends in U.S. markets; that’s what I do.

And over all the years I’ve been doing this, the one thing that hits me between the eyes, over and over, is that the biggest influence on the success of your stock portfolio is the general trend of the broad market.

What that means is that your risk of losing money in the stock market is always highest when the market itself is in a downtrend!

I want to repeat that, because it’s probably the single most important rule of growth stock investing. If you want to make money by having the price of your stocks go up, the single greatest influence on your results will be the general trend of the market.

A bull market can make you feel like a genius. And a bear market can make you feel like there is a very nasty demon taking a personal interest in seeing you lose money and be miserable.

Cabot’s growth disciplines have lots of rules that have been refined over four decades of trial and error. Yes, lots and lots of error. But that’s how the market works. Losing money is a great motivator for learning. Portfolio risk management is crucial.

Cabot’s short-term trend-following indicators have just turned negative, which is big news. The editors of our growth stock advisories are looking critically at their portfolios with an eye to kicking out the weakest stocks and putting marginal ones on very short leashes. And that’s because we know that the correct response to a market in a downtrend is to lower our exposure to stocks and hold our assets in cash. Bears feast on fat stock prices, but they don’t eat cash.

And that, in a nutshell is the best advice I can give you about portfolio risk management.

But I also want to say a few words about the recent bombings in Boston.

My wife and I used to sing in a chorus that practiced every Monday in a church near the Boston Marathon finish line. I’ve walked around picking up discarded mylar blankets that are handed to finishers and mingling with the happy crowds of (very) late finishers on Boylston Street on the way to rehearsal. I’ve even applauded some of those finishers, figuring that people who need hours and hours to finish probably need the encouragement more than the light-footed gazelles who get on television.

Like most people, I was deeply angered by the bombings and moved by the outpouring of comfort and support from the people of Boston for the stranded runners who could neither finish the race nor return to their hotel rooms. It feels very personal to have walked right over the spots where each bomb exploded.

And yet, this attack won’t change my assessment of the risk of going to Boston or walking down Boylston Street. I know that the most dangerous thing I do, in the short run, is to commute 57 miles to work every day and back. And in the long run, my riskiest action is just to keep getting older.

The Boston Marathon bombing might seem like a logical act to someone who is sick in the head, or like an emotionally correct act to someone who is sick in the heart. But I refuse to concede my enjoyment of the world—and where I go in it—to such people.

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Here’s this week’s Contrary Opinion Button. Remember, you can always view all of the buttons by clicking here.

When Complacency Reigns we all Get Wet

When Complacency Reigns We All Get Wet

Tim’s Comment: This button is simply an alternate way of expressing the classic contrarian sentiment. When all is rosy and everyone is happy, that means that all investors who might buy stocks have bought stocks, and thus there is no more fuel to push stock prices higher. At that point, all it takes is a whisper of bad news, or even apprehension of bad news, for selling pressures to overpower buying pressures and start the market on a downward slide … during which we all get wet (unless we quickly go to cash or sell short).

Paul’s Comment: Personally, I think this particular button is just an excuse to make a bad pun (reigns/rains), but it’s certainly a valid sentiment. Markets are always prepared to use your weaknesses against you, and complacency is high up on the list of things Mr. Market is prepared to penalize. Question everything! Pay attention! That’s the recipe for success.


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.

Cabot Wealth Advisory 4/15/13—Five Pillars of Disciplined Investing

Robin Carpenter, editor of Cabot ETF Investing System, runs down some strategies that will improve your trading results, including getting specific, writing your strategy down, making a report of your results, getting an outside audit and revising accordingly.

Cabot Wealth Advisory 4/16/13—Boston Marathon Bombing Changes Everything

Tim Lutts of Cabot Stock of the Month gives his thoughts on the Boston Marathon bombing, the big bear market in gold and the world-changing potential of “the unforeseeable and the incalculable.” Stock discussed: Tesla Motors (TSLA).

Cabot Wealth Advisory 4/18/13 — Options Volatility at Earnings Season

In this issue, Jabob Mintz of Cabot Options Trader pins down the uncertainty that earnings season brings to the pricing of options just before and after earnings reports. He gives the examples of JP Morgan Chase (JPM), which beat on earnings, and Infosys (INFY), which disappointed, and how options could have helped lower risk.

Have a great weekend,

Paul Goodwin
Editor of Cabot Wealth Advisory
and Cabot China & Emerging Markets Report Related Articles:

One Important Factor in Growth Investing

Understanding Stock Market Indexes

Advantages of Being an Individual Growth Investor

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