Stock Market Video
Winning in Baseball … and the Markets
This Weeks Fortune Cookie
In Case You Missed It
In this week’s Cabot market video, Mike Cintolo talks about the market’s split personality--overall, the bull market looks fine, but among the bigger leaders, he’s seeing some abnormal action. The good news is that “fresher” (as Mike calls them) names that got going just during the past month are acting great, and a few new leaders have emerged during earnings season, with more likely on the way.
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Winning in Baseball … and the Markets
I don’t know if the rest of the country is as interested in the World Series as the citizens of Red Sox Nation are, but with the Series on, I had an idea about how to explain growth investing.
Hall of Fame baseball manager Earl Weaver of the Baltimore Orioles used to say, “You win games with good pitching and three-run home runs.” And I think that’s a pretty good analogy for the way you win at growth stock investing, too.
In growth stock investing, good pitching means keeping the other side from scoring runs, which is another way of saying that you keep losses small. The Cabot growth disciplines teach you to control losses in two ways.
First, our market timing indicators—the medium-term Cabot Tides and the longer-term Cabot Trend Lines—keep us on the right side of the major market trends. When the indicators are positive, as they are now, we advise you to move toward heavier investment in strong growth stocks. But if the indicators turn negative, Cabot’s growth advisories will advise you to keep your stocks on a very short leash, selling any that break down before they hand you a big loss.
Second, the most important thing that separates successful growth investors from the wannabes is having explicit sell disciplines in place on all your growth stocks. When you buy a stock, you should make a note of the downside price at which you will sell it. Cabot uses a maximum 20% loss from your original investment price (and a 15% limit if markets are in a downtrend), but those are absolute maximums; we often cut our loss in the 8% to 12% range You may also consider using trailing stops or declines from a stock’s peak price.
But whatever you do, you shouldn’t be undecided. It’s the days that you spend watching a stock drop and hoping that it will come back up that can kill your portfolio’s performance. So be cold-blooded and be decisive and keep the discipline in sell discipline.
The three-run homer part of Weaver’s philosophy is just as easy to understand. While some baseball teams use stolen bases, sacrifice bunts and singles to manufacture runs one at a time, that wasn’t Weaver’s way. He wanted to get some men on base and then let one of his power hitters bring them home in bunches!
And Cabot’s growth advisories are like that, too. We want to buy some good stocks and let them turn into big winners! Some investors are satisfied by pecking away with small returns, just as some baseball teams are satisfied with scoring a run here or there. But we have found that there is no substitute for a growth stock that goes up like a rocket and then keeps on going.
Some of our long-term subscribers will remember the stocks that put people’s children through college back in the days of the Tech Bubble! But there’s nothing wrong with this year’s winners like LinkedIn (LNKD), which has gained 109% for Cabot Market Letter subscribers, Qihoo 360 (QIHU), a 108% winner for Cabot China & Emerging Markets Report readers, and Tesla (TSLA), where profits topped 500% for Cabot Stock of the Month followers. These stocks are the stock market equivalent of the three-run home run.
Really, when you do the math, it’s not unusual to get the lion’s share of your profits for the year from just a handful of stocks. Growth investing is skewed that way. That’s why it’s so important to develop (and hang onto) some big winners.
In theory it’s simple to “cut your losers short and let your winners run.” But I know that it’s not easy to do in practice. Psychologically, it’s especially hard to let go of your losers. You have to give up a little hope and admit that your judgment isn’t always perfect. We always say there’s a reason why we talk of buying opportunities but sell disciplines. Right now, markets are a little choppy as this year’s big bull market is in one of its periodic bouts of indigestion (earnings season will do that). But our timing indicators are still positive, and leading stocks continue to gain.
If you’re a growth investor, it’s a perfect opportunity for you to bring in better pitching (review those thorny sell disciplines) while letting your successful growth stocks swing for the fences!
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Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.
Tim’s Comment: Quibbling slightly, sometimes at least one of them is scared, frustrated, so nervous he can’t sleep, or simply responding to his broker’s margin call. However, in the “normal” condition when both think they are astute, the market will in time prove one more astute than the other—and this is not a problem. It’s not a contest. Your goal in investing should be to find and practice a system that fits your risk tolerance and meets your investing goals. That’s all.
Paul’s Comment: I’m sure Mr. Feather, a Cleveland publisher who wrote The Business of Life and was known for his pithy aphorisms, thought he was mocking the delusions of stock investors when he wrote this. But it’s only the literal truth. And given the different aspirations and tactics of growth, value and income investors, the standards of astuteness are quite broad enough for both buyer and seller to be absolutely right!
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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 10/21/13—Fama, French and Ward
Roy Ward, Chief Analyst of Cabot Benjamin Graham Value Investor, writes about two economists who used measures of price to book value (P/BV) ratios to find great value investments, a method that he uses himself. Stock discussed: Nissan Motor (NSANY).
Cabot Wealth Advisory 10/22/13—Finding the Next Tesla
Cabot Stock of the Month’s Chief Analyst Tim Lutts writes about how to find the next big winner (like Tesla), and comes up with three criteria that mark the best candidates. Stock discussed: Yandex (YNDX).
Cabot Wealth Advisory 10/24/13—The Money Pit
Cabot Market Letter Chief Mike Cintolo writes in this issue about the mixed blessing of buying a house that needs a little work. He also draws the parallel between remodeling projects and buying growth stocks: schedule, flexibility and the ability to rise above the occasional reversal. Stock discussed: ProShares Ultra Russell 2000 Index Fund (UWM), SPDR Oil &Gas Fund (XOP) and Financials Select SPDR (XLF).
Have a great weekend,
Paul Goodwin
Chief Analyst of Cabot China & Emerging Markets Report
and Editor of Cabot Wealth Advisory
