Winning and Losing in the Insurance Game
First Graders Playing Soccer
Two Great Growth Stocks
When the very first issue of Cabot Wealth Advisory was published, back on February 1 2007, the lead article was about insurance. Today I’ve decided to run it again, since we have so many more readers, and I believe strongly that the facts (and opinions) in the article are important for you to think about.
“I begin today with an anecdote about my father, Carlton Lutts, who landed a job as a building inspector for an insurance company soon after he received his degree in mechanical engineering.
He didn’t stay long in the insurance business; he quickly found better opportunities elsewhere. Nevertheless, he learned something valuable about the industry and many years later, when I was old enough to appreciate it, he passed that bit of wisdom on to me. It makes perfect sense, when you think about it. It’s saved me a lot of money over the years. Yet it’s something that no one else has ever said to me.
This nugget of wisdom is this: “Only buy insurance for things you can’t afford to replace.”
That’s all. It sounds simple, but it’s big. And when you use this precept as the guiding principle whenever someone tries to sell you insurance, you end up buying a lot less!
The extended warranty on that new computer? No thanks.
Loss protection on your teenager’s new cell phone? Nope.
Insurance on the rental car? Never. It’s covered by your credit card, anyway.
Trip insurance? I’ve never bought it and I’ve never regretted it - and I’ve traveled to over 30 countries, including places many Americans would rather avoid.
But people don’t think like that. Because they’ve been conditioned to avoid risk. And because--as psychologists tell us--they fear loss twice as strongly as they crave gain.
So when someone tells them they can protect themselves from loss, breakage or simple malfunction for just a few dollars, they say, “Why not?”
Well, the reason why not is that over the years, those dollars add up. And where do they go? To the insurance company. Now, these guys aren’t stupid; in fact they’re very good with numbers. And they know that if they can sign up enough customers, and thus spread the risk far enough, they’ll come out as winners. And they do.
So if the winner in the long run is the insurance company, the loser in the long run is the average consumer. You and me. And the more insurance you buy the more likely you are to be a loser.
Sure, you can come up with anecdotal evidence of “winners” in the insurance game. A friend’s two-year-old computer died and was replaced for free because he’d bought the extended warranty. Or a relative’s cruise was canceled because of mass illness and he got all his money back.
But it’s not good logic to use anecdotal evidence in an argument. Contrarily, these people are the exceptions. The simple truth is that most people never collect on their insurance policies ... and thus they lose.
So, going back to my father’s advice, if you can afford to absorb the loss, don’t buy the insurance. Over a lifetime, you’ll come out a winner. And equally important, you’ll make yourself just a little more independent from the insurance establishment, and that’s a good thing.
Now, there are some policies that you simply must buy. If you’ve got a mortgage, the bank requires that you buy homeowner’s insurance. If you’ve got a car, you’ve got to buy auto insurance--at least in 45 states.
Life insurance is generally a good thing for breadwinners, and disability insurance can be good, too. But you don’t buy life insurance for children. Cold-hearted as it sounds, the loss of a child generally does not bring financial hardship, except in cases where the child is actually a breadwinner.
But beyond those major assets, you’ve got to remember the golden precept. “Only buy insurance for things you can’t afford to replace.”
Because in the long run, the insurance companies will emerge as winners.”
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As to the stock market, here’s the way I see it.
The market is in a correction. We’ve been telling you that for weeks and it became QUITE clear to most people when the Dow plummeted more than 1,000 points mid-day last Thursday.
Today we had a great rebound, and while that helps to repair some of last week’s damage, by no means does it mean the correction is over. To me, it seems the market is acting no more sensibly today than a bunch of six-year-olds playing soccer, who rush from end to end of the field en masse.
So what comes next?
Well, I think the correction has farther to go. Mainly, I think we need more TIME for a sense of malaise to spread among investors.
So I’m continuing to recommend that you be cautious, and build up your cash reserves, so you have some ammunition to use once the market bottoms.
But I’m confident that once this correction runs its course, the market will resume its major uptrend, and even break out to new highs. And that’s not blind optimism talking; it’s a disciplined interpretation of our time-tested market timing indicators.
You can get the full explanation behind this optimistic reading in the latest issue of Cabot Market Letter, edited by Michael Cintolo.
For more information, click below.
As to individual stocks, the cool thing about this correction is that it provides a great opportunity to build a watch list, a list that you can use to “go shopping” when the pressure comes off the market. But how do you build a watch list? By watching charts, and digging for true growth stories.
Ideally, what you want to see are stocks that resist the broad market’s selling pressure, stocks that are not yet well-loved (or even well-known) but that demonstrate the growing presence of institutional support, and stocks of companies that have great growth prospects.
Below are two to look out for that have been featured in recent weeks in Cabot Top Ten Report. Both are technology stocks with great growth prospects, not least because demand is growing fast for their products!
Back on March 1, editor Michael Cintolo wrote this:
“Acme Packet (APKT) is the leader of the session border controller market. The 1% of you who know what that is may already own the stock. To the rest of you, we’ll explain. A session border controller is a box that controls the activity of a VOIP (Voice Over Internet Protocol) call as it passes from the border of one network to the border of another. The networks might be two ISPs, or even two networks of one business enterprise. In any case, the session border controller protects the networks, ensures quality of service and gathers statistics that empower managers to optimize performance. And business is very good, as more and more phone calls move to the Internet. The company was founded in 2002, and has grown revenues every year since. Profit growth has not been quite as smooth, but the company exceeded analysts’ expectations in the fourth quarter of 2009, and raised guidance for 2010, projecting that revenues would range from $182 to $186 million, and earnings would range from $0.44 to $0.47 per share. Note: 42% of revenues come from Alcatel Lucent, Nokia Siemens and Sprint. Fundamentally, we like it.”
Mike liked it so much, in fact, that he named it Editor’s Choice that week. It was trading at 17. Since then APKT has earned a spot in Cabot Top Ten Report three more times, most recently last Monday when it was trading at 27.
The market wildness on Thursday took it down (briefly, of course) to its 50-day moving average at 20, but it’s bounced right back up, showing strong institutional support, and I think it has further to go.
Then there’s SanDisk (SNDK), a stock that has appeared in Cabot Top Ten Report 15 times over the past seven years.
One of those was on March 22 of this year, when Mike Cintolo wrote the following:
“SanDisk is the ultimate feast-or-famine chip stock. Its products are basically commoditized-flash memory-and fall in price most years. However, the flash storage business topped out well ahead of the economy, and thus the industry was slashing capacity even before the 2008 and early 2009 meltdown. That left the industry short of supply ... just as demand was picking up! The biggest driver of this demand is the surge in smart phone usage-an iPhone, for example, uses much more memory than a standard cell phone-though the bigger picture is that, in the years ahead, untold amounts of data will be stored on possibly billions of consumer devices. In terms of bits stored, the industry could ship seven times as much within the next few years! Of course, long-term projections in this sector are not advised, yet the fact remains that SanDisk is firing on all cylinders right now.”
When that was published, SNDK was trading at 34. Since then, it’s climbed to 44, thanks to a crackerjack earnings report (it earned 95 cents per share, while analysts had projected 59) and then pulled back to 34 at last Thursday’s low. But now it’s back up at 41, showing that institutions are still in buying mode. As long as this persists, I think short-term investments in SNDK (the King of Flash) will work.”
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory