It’s January - which must be the absolute favorite month of health clubs, yoga studios and vendors of dieting products - when many people resolve to lose weight (at least the seasonal bulk they added in December), get in shape and otherwise take control of their lives. The northern hemisphere is filled with people forced indoors by short days and cold weather, regretting their dietary indiscretions and vowing to lead better, simpler, healthier, leaner lives. It’s enough to make a gym owner break out in smiles.
The end of the year may have forced you to make some decisions about what stocks to sell for tax purposes. Or the holidays may have given you a chance to tot up your performance for the year while you prepare for the quarterly ritual of earnings reports.
Whatever the reason, the end of a year is a great opportunity to make a New Year’s Resolution to be a better investor. The question is: what should you resolve?
The experience of people who vow to lose weight or stop smoking or learn Chinese should give you a little guidance here. Huge resolutions often lead to huge failures. The key to a successful resolution is thinking small.
Rather than give the same old big advice (buy quality stocks on reasonable pullbacks, let your winners run, cut your losers short, and don’t try to go against the trend of the market) I’m going to recommend three small changes that you might actually be able to implement. And a successful small change is much better for you (both financially and emotionally) than a big change that you can’t make happen.
Resolutions
So here they are.
First, resolve to set your loss limit as soon as you buy a stock. This means, for instance, that if you buy a stock at 30, you will make a note that says: “Sell the stock if it closes below 24.” Make a note of it and keep it where you will see it often. If you prefer a 15% loss limit, write down “Sell at 25.5.” Making the note makes it official; it says, “I will not absorb any more big losses this year.” But your resolution is just to make the note and keep it where you can see it.
Second, you could resolve to read one investment book this year. You don’t have to try to turn yourself into Warren Buffett (on the value side), Peter Lynch (on the growth side), or Gordon Gekko (on the wild side). Just pick one book and get through it. (Carlton Lutts, the founder of Cabot Heritage, says that all he needs from a book is one good idea.) You might consider Invest Like a Shark by James DePorre or Inside the Investor’s Brain by Richard L. Peterson or even Jim Cramer’s Stay Mad for Life by guess who.
And third, resolve to look at your resolutions at the end of every quarter to see how you’re doing. This used to be easy when we all used wall calendars. These days you may have to put it on a PostIt note or key it into your Blackberry. But try to make sure that you jog your memory a few times a year to keep yourself focused on the good idea you had in January.
I used to do communication consulting, and I can report quite confidently that small changes are the best. They give you confidence and a sense of achievement. They allow you to feel like you’re in control of your life. (This may be an illusion, but the Cabot Wealth Advisory isn’t a philosophy course.)
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I’m not a Baby Boomer, myself; I was born during the latter stages of WWII. But I’ve gotten used to all the fuss about the Boomers as they’ve followed me through the educational system and The Sixties and on and on. When I was in school, I remember hearing about all the great new programs and facilities that would be coming along for the benefit of the Boomers ... just after I left. I’ve also known that every time I’ve had a birthday that ended with a zero, I would soon be reading about the Boomers hitting 40, or 50, or 60 and how the poor darlings were dealing with the changes.
The purchasing power of the Boomers has always made them an object of fascination for marketers. They’re the generation that made the original Walkman such a hit and they pushed denim jeans smack into the middle of the fashion world.
Boomers haven’t exactly fallen off the radar as they’ve started to push into their seventh decade, but advertisers are still locked into their obsession with the 18- to 35-year-old demographic. Still, if you ever watch a golf tournament, you know that makers of cars and pills for “E.D.” (nudge, nudge) have their sights centered on the post-war demographic bulge.
This also makes the Boomers a puzzle for investors, who often try to anticipate what this massive aging cohort will need. Guesses have included adult diapers, rehab facilities, retirement communities and even mortuary and cemetery services. But the Boomers have outsmarted the investors, which provides a useful learning experience.
Partly they’ve done this by refusing to age as quickly as their parents’ generation did. Boomers have refused to slow down, sicken, deteriorate and even die on the schedule that investors have set up for them ... at least so far. They smoke less, exercise more (see the first section of this Cabot Wealth Advisory), have more sex (thus the E.D. pills) and are generally reluctant to act their age.
Don’t Tell the Market What to Do
The lesson is that it’s never a good idea to try to tell the market what to do. If you’ve been reading the Cabot Wealth Advisory for a while, you know that we have a saying carved onto the mantelpiece of the old branch library building that we call home here in Salem, Massachusetts. It says: “Markets are never wrong, opinions are.”
In accordance with this piece of deathless wisdom, the Cabot newsletters that share a growth orientation (Cabot China & Emerging Markets Report, Cabot Market Letter, Cabot Top Ten Report and Cabot Green Investor) don’t try to predict what will happen. We find our stocks by looking for stocks that are already in strong uptrends. A stock with a rising price provides its own evidence that investors are finding something they like. When minds are changing for the better about a stock, there are more people who want to buy than sell, and the price goes up.
Fundamental investors sometimes find a stock whose story or performance numbers are so compelling that they want to buy it even though its price is either flat or heading down. They haven’t learned the Boomer lesson that all kinds of things (stocks, generations, sports teams) refuse to conform to our notions of what ought to happen.
The Boomers will no doubt bow to the inevitable and start buying the Senior Citizen stuff that investors have been counting on ... eventually. But trying to figure out when, or exactly what, is a great way to lose money on the stock market.
We’ll stick with the momentum component of our stock picking. It gives us the clearest information available about what’s actually happening, and that’s valuable information.
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My investing idea in this issue is a small Chinese company that’s been tantalizing investors since it came public back in August 2005. The company is China Medical Technologies, a maker of diagnostic kits that use bioluminescence to provide results in screening for diabetes, thyroid abnormalities and other conditions. Sales of these kits to Chinese hospitals have been solid enough to push earnings up every year since the company was founded in 2001.
Management has also pushed revenues along by acquiring rivals in the diagnostic business, most-recently the late-November acquisition of Beijing Bio-Ekon Biotechnology.
But it’s not the diagnostic kits that put the gleam in investors’ eyes when they think about C-Med. Rather it’s the company’s High-Intensity Focused Ultrasound (HIFU) machine, a computer-controlled system that uses a beam of concentrated ultrasound to kill solid tumors inside the body without the need for incisions or anesthesia, and without any reported pain. The ultrasound beam can fry tumors inside the abdomen, on bones or on hands and feet. When the tumor bites the dust, the body cleans up the residue and the patient (who probably came to the clinic on an outpatient basis) just walks out.
The promise of the HIFU machine helped CMED to become a selection for the Cabot China & Emerging Markets Report back in January 2006. Unfortunately this was near the end of the stock’s post-IPO run from 15 to 45, and the portfolio sold it in March for a disappointing loss.
But the attractiveness of the HIFU machine persisted, and after the stock built a very tight three-month base from March through May of this year at around 24, news that the machine was in FDA-approved clinical trials in the state of Washington kicked off a new rally. The stock roared from 24 to its recent price near 50, earning five appearances in the Cabot Top Ten Report along the way (including another in today’s Top Ten).
CMED is still a pretty speculative, trick-or-treat stock. If the HIFU machine proves to be safe and effective and earns the FDA’s blessing, the stock could be a real rocket. On the other hand, if it turns out to be a clinker, the stock will no doubt take a hit on the waterline. In this regard, CMED is just like all growth stocks, only more so.
For aggressive growth investors, stocks like CMED are meat and potatoes, risk and all. And the Cabot Top Ten Report and the Cabot China & Emerging Markets Report sniff them out before the broader investment community even know they’re there. If you have the temperament for the high risk that comes packaged with the potential for high reward, you might want to consider a no-risk subscription to one or both.
Paul Goodwin
For Cabot Wealth Advisory
Editors Note: Paul Goodwin is the editor of Cabot China & Emerging Markets Report. Hulbert Financial Digest recently listed Cabot China & Emerging Markets the Top Investment Newsletters of 2007 with 74.1% return for the year. Peter Brimelow of MarketWatch several days later did the same... naming Cabot China & Emerging Markets Report his 2007 Investment Letter of the Year.
Emerging markets have outperformed the markets of the developed world over the past few years, and China is the clear leader in economic growth. But it’s not the only player. The Cabot China & Emerging Markets Report focuses on the BRIC countries (Brazil, Russia, India and China) and seeks out the stocks with the best stories, the soundest fundamentals and the hottest charts. If you’d like a dependable guide to investing in these intriguing markets, you should consider a no-risk subscription. Click below to get started.
http://www.cabotinvestors.com/ecciicwa06.html
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