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Playing Hunches

While hunches can lead to interesting and useful carving projects, they don’t really have a place in stock investing.

Weekly Stock Market Video

Playing Hunches

Doubt All Before Believing Anything

In Case You Missed It


In this week’s Stock Market Video, Cabot Market Letter editor Mike Cintolo discusses the recent distribution in the market and advises investors to back off a bit. But you should avoid throwing the baby out with the bathwater, as there remain many growth and commodity stocks that are setting up well. Stocks mentioned include Michael Kors (KORS), Range Resources (RRC), IAC Corp. (IACI), Seadrill (SDRL), Gap Inc. (GPS) and various exchange-traded funds.

I’m a woodworker, but my style of woodworking doesn’t generate much sawdust. I don’t use power tools and I don’t buy lumber. My raw materials are provided by the firewood, mostly oak and maple, that fills my New Hampshire woodshed, and my basic tools are knives and gouges. I’m so committed to my simple tools that I feel like I’m cheating when I pick up a handsaw or a plane, but I deal with it.

I guess you’d say that I’m a woodcarver, but I don’t work with spruce or basswood or any of the other softwoods that are happy to be scooped like ice cream. I also don’t carve little figures of Santa Claus or fishermen or birds or chains, not that there’s anything wrong with those admirable subjects.

My projects mostly begin when I look at a piece of firewood that I’m about to throw onto the fire and I see something in the grain or the color or shape of the wood that suggests that there might be something interesting in there.

I’m not mystical enough (or delusional enough) to suggest that the thing hidden inside the wood actually speaks to me. But somehow the notion takes root in my brain that there might be a tiny chair or a table or a spoon to be found in the chunk of dead tree I’m holding.

Accordingly, I give the piece of firewood a reprieve from the flames, put it aside and go looking for what I thought I saw in it.

I don’t even average one project a year. There is too much lawn and garden work when the days are long, and in the colder months, my wife is not fond of the gnawing-rodent sound of a carving knife taking tiny bites of seasoned hardwood, so in the spirit of comity, I can’t carve during the time we watch TV together.

But the compulsion to create is strong, and I keep at it.

Paul and the Chair Photo

My choice of projects really amounts to a hunch. I suspect—on the basis of absolutely no evidence—that something good will come of the choice I’ve made. Plus, if the project doesn’t turn out, the failure can still serve its original purpose in the fireplace.

Many people like to make decisions based on hunches; sometimes they’re called “educated guesses” and sometimes “feminine intuition.” And there’s some experimental support for the idea that snap judgments often prove quite sound.

The vagueness of hunches only becomes a problem when you start to use them to decide how to put real money at risk.

This happens all the time in the stock market, most frequently when potential investors decide that they know what the stock market is going to do in the future. Or they read about a stock and they just know that it’s going to be a real moon shot.

Right now, the investing world is filled with people who know that markets are just about to fall off a cliff. Maybe they have some evidence (a guy on a cable channel in a really good suit or an astrologer who’s never, ever been wrong), or maybe they just feel it in their bones that things are going to get unimaginably worse.

These people who are prepared for the end of the world as we know it are offset—though not currently balanced—by a group of equally convinced investors who just know that the markets are gathering themselves to spring skyward in a massive rally that will deliver unimaginable wealth to anyone with the sense to see it coming.

All I have to say about this is that when we get a true consensus among investors that things are as bad as they could possible be and they’ll never get any better, that’s when the markets will turn back up. And ditto in reverse for the enthusiastic optimists.

I really hope I’m not harping on this too much. It’s easy to sound like a crank when you’re expressing skepticism.

But the long history of Cabot provides plenty of evidence that markets top when people are at their happiest and markets bottom when people are most depressed. That’s both a historical fact and a demonstrably logical certainty.

So the lesson there is to look at what the market is actually doing, not what you’re afraid/hopeful that it will do. Any guess about the future of the market is just a hunch. And while hunches can lead to interesting and useful carving projects, they don’t really have a place in stock investing.

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

Doubt All Before Believing Anything


Tim’s Comment: The original quote, by Sir Francis Bacon in “The Advancement of Learning,” is this: “If a man will begin with certainties, he shall end in doubts; but if he will be content to begin with doubts he shall end in certainties.” The condensed version above can be traced to Humphrey B. Neill, who in his book, “Tape Reading and Market Tactics,” wrote, “As Sir Francis Bacon wrote nearly three hundred years ago: Doubt all before you believe anything! Watch your idols!” In any event, this button tells us that skepticism is a valuable trait that can ideally lead to further knowledge.

Editor’s Comment: I’ve always thought that any opinion, if it’s held so strongly that you never question it, can turn into a chain that keeps you from moving or a ring in the nose that you can be led around by. Maybe that’s why my favorite bumper sticker of the last year is “Don’t believe everything you think.”


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 10/8/12 — Stock Market Performance from a Different Angle

Rick Lehman uses this issue to look at the long-term performance of the stock market, and the possibility that recent trends may foretell a lower growth rate than has historically been the case.

Cabot Wealth Advisory 10/9/12 — In Investing, It’s the Recipe That Counts

In this issue, Robin Carpenter compares the System to the home production of ice cream as he remembers it from his childhood; get the recipe right, turn the crank and you get your treat.

Cabot Wealth Advisory 10/12/12 — How the Best Investors Buy Growth Stocks

Mike Cintolo, the sage of Cabot Growth Investor, uses this issue to discuss how much of a good growth stock you should buy, paying special attention to the dangers of taking bites that are too small. Stock discussed: Michael Kors (KORS).


Paul Goodwin

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