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How the Smart Money Bets

Market goes up, get in. Market goes down, get out.

Don’t Bet Against Strength

Tick, Tick, Tick

Plasma, Benjamin, Plasma


“The race is not always to the swift, nor the battle to the strong, but that’s how the smart money bets."--Damon Runyon

Like most really good quotations, Damon Runyon’s memorable reworking of Ecclesiastes 9:11 exists in a bunch of different versions. It’s one of my favorites in the cynical, wised-up style, taking an original bubble of sentiment that basically says, “You can do anything!” and puncturing it with a jab of common sense.

Runyon was a sportswriter and a lifelong gambler, so his use of “smart money” was no accident. The slightly shady characters he wrote about--the ones that formed the basis for the musical “Guys and Dolls"--all wanted to believe that they were savvier and more clued-in than the average mark, square or schmo.

Well, wouldn’t we all. There are lots of people who want to be right even more than they want to be rich.

If you’re one of them, today’s your lucky day, because I’m going to give you one rule that will allow you to gain a reputation as a very savvy individual indeed.

Here it is. In just 10 words.

Market goes up, get in. Market goes down, get out.

Those words are the basis of the Cabot market timing philosophy, an approach that has won the Cabot Market Letter a spot near the top of the list for all market timers. It’s also the basis for the Cabot China-Timer, which I use in writing the Cabot China & Emerging Markets Report. And which helped Cabot China & Emerging Markets Report land in the #1 spot on Hulbert’s list of the top financial newsletters for the last five years.

You wait for the market to go up before getting in for the same reason sailing ships wait until the tide is going out before they leave port. It’s also the reason people who want to go up step on the up escalator rather than the one going down.

Of course it’s still possible to find advancing stocks when the markets are going down. If you had bought stock in the biomedical company Amgen (AMGN) in March 2008 at 39, you could have sold it a year later, when the market bottomed, at 52. But believe me, with the S&P 500 Index plummeting from 1342 to 667 (a 50% drop, which is the equivalent of a haircut that stops at your beltline) during the same period, it was anything but easy to find winners at the time.

So why am I telling you this? Two reasons. First, it’s because the tide of the market is now against us. We had a correction from January 19 to February 5 that dropped the S&P 500 by 9.2%. Then came a nearly 17% rally from February 5 to April 26 that pulled even more money into the market. The correction that began on April 27 has now (as of May 19) trimmed 8.8% off the S&P 500 from that April high and dropped it below its 25- and 50-day moving averages.

Translation: Escalator going down. Time to sell all but your strongest stocks and curtail new buying.

But the second reason is even more important. It’s that this market correction will continue until it wrings out enough hot money, dumb money and worried money from the market. And at that point, there will be an entire smorgasbord of attractively priced stocks available to those who can recognize a new leg of this bull market in its infancy.

Just as getting out of a down market saves your money, getting into a new up market makes you money. And Cabot’s growth disciplines will tip you off about the new bull market buy signal while the dumb money is still groaning and holding its head, wondering what hit it.

So there you have it, a recipe for smartness in just 10 words. Market goes up, get in. Market goes down, get out.

And if you’d like to have a trustworthy advisor to tell you which way the escalator is running (and when it changes), a no-risk trial subscription to Cabot Market Letter will make sure you stay smart.


Technology has been a part of stock investing for as long as anyone now alive can remember, but it wasn’t always so. From its informal beginnings in 1792, until the year 1844, when the telegraph was invented, the only way for people to know the prices of stocks on the New York Stock Exchange was to actually be there. Failing that, brokers and investors relied on runners, who sprinted from the trading floor with news for those who employed them.

The first big technological advance was the introduction of the telegraph (after its invention in 1844), which allowed the financial district to expand beyond running range. For a long time, including well into the 20th century, having exclusive use of a dedicated telegraph line to a New York brokerage was the height of investing sophistication.

Things changed even more with the introduction of the telephone, which took just two years from its invention in Boston in 1876 until the first phone was installed on the floor of the New York exchange in 1878.

But in many ways, the world of modern investing, including the global spread of brokerages and investment houses, was created in 1867 when the first stock ticker began operating in New York.

The stock ticker used telegraph wires to send information about stocks to a dedicated printer that reported five things: the stock being traded, the size of the trade, the price at which the sale was made, whether that price was up or down from the stock’s close on the previous day, and how much higher or lower (expressed in eighths of a point).

So if you see a picture of a man who’s standing by a little instrument that sits on top of a four-foot pedestal and under a glass dome and he’s reading a piece of paper tape, here’s what he’s seeing. It will be something like T 10K @ 12 1/2 ^ 1/2 which reports that 10,000 shares of AT&T stock have been sold at $12.50 per share, which is a half point higher than the stock closed on the previous trading day.

This level of information revolutionized the investment world, allowing traders, manipulators, plungers and speculators to hone their strategies and run their scams.

The advent of computers began digging the grave of the stock ticker and the Internet sealed its coffin. It lives on in the generic name for any scrolling list of stock trades and prices, in the words “uptick” and “downtick” that still indicate incremental changes, and in the increasingly rare “ticker tape parade,” which began as a parade of heroes through (usually) New York streets during which brokerages would empty their baskets of used paper tape onto the streets.

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When markets are dealing out losses left and right, as they are now, it’s a good idea to pull in your horns and keep lots of cash in your account. But that doesn’t mean you can just put your feet up and enjoy a refreshing beverage.

The construction of a Watch List of likely stocks is, itself, a dividend-paying investment.

My candidate for further observation is a small (market cap of $328 million), thinly traded (130,000 shares per day, on average) Chinese biopharmaceutical company called China Biologic Products (CBPO). The stock uplisted to the Nasdaq exchange just last November, and it has been performing well despite a challenging market environment.

The company’s lead product is human albumin, a blood protein that accounted for half of 2009 revenues, and various forms of immunoglobulin. Albumin is vital during medical emergencies and immunoglobulin can prevent and treat many diseases.

The company’s 2009 sales were up 155% over 2008, and Q1 results showed a 27% gain in earnings on a 28% jump in revenues, with a 27.1% after-tax profit margin. Expansion is coming via both M&A activity and construction of new plasma collection stations.

This is a great stock for your watch list, and when the market turns up again it may provide your portfolio with a real shot in the arm.


Paul Goodwin
For Cabot Wealth Advisory

P.S. I appeared on CNBC earlier today to answer the question, “Is there a China bubble?” Find out what I said by watching the video here:


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