Back to Basics
20 Tips for Better Investing
Precious Metals Stocks
With Hurricane Sandy bearing down on the East Coast this week,
it's back to basics for many families-people are stocking up on
things like water and batteries while focusing first on safety.
If you're in the path of Sandy, batten down the hatches and be
safe! We got hit last night and this morning, but being north of
Boston, the rain and storm surges have been reasonable, and the
wind gusts (of up to 50 mph or so) not too damaging.
With basics in mind and with the market shut down for a couple
of days because of the storm, now is as good a time as any to
review the investing basics ... though with 20 rules below, many
of these probably aren't basics to most investors. Nevertheless,
I have a list similar to this saved on my computer; whenever I
have some free time or am in a bit of a rut, it helps to go back,
read through them and make sure I'm not violating some core
I view this as blocking-and-tackling sort of stuff-it doesn't
show up in the box score necessarily, but lots of investors go
awry because they, for one reason or another, get off track and
don't adhere to the basics.
Make sure that doesn't happen to you!
Here are 20 of Cabot's top tips and tools that you can use to
become a better investor.
1. Cut losses short (definitely rule #1 for growth stock
2. Search for strong sales and earnings growth (especially
triple-digit sales growth).
3. Search for revolutionary products with major benefits.
First Solar, Crocs and Green Mountain Coffee Roasters filled the
bill and were some of our biggest winners.
4. Heed the message of the overall market--never fight the
5. Never average down in growth stocks.
6. Be prepared for all contingencies (always have an exit plan
ahead of time).
7. Never try to buy at the bottom or sell at the top (if you
try, you'll just lose more money).
8. To avoid gut-wrenching volatility, stick with stocks that
are liquid (at least 500,000 shares traded per day or more).
9. Only put more money to work after your past purchases are
showing you a profit.
10. Be humble-making money in stocks is tough, so don't kill
yourself over one or two bad trades. Be thankful when you hit a
11. Find an investing system that works for you, then follow
it. The best way to deal with stress from the market is to have a
game plan ahead of time. If you wait until things are blowing up
in your face, it's too late-by then, your emotions are out of
control and you're likely to do the exact opposite of what's
12. "Markets are never wrong; opinions are," is a quote from
Jesse L. Livermore, one of the most colorful, flamboyant, and
respected market speculators of all time. At Cabot, we agree
wholeheartedly with his comment and truly embrace this thinking.
And you should, too, if you want to become a successful growth
13. When looking for potential purchase candidates, examine
both the company's fundamentals and its stock's technical
performance. When analyzing the technicals, focus on the stock's
momentum and price chart, along with its volume pattern and
50-day moving average.
14. Find a company that has a big idea ... one that leaves few
if any limits on its future growth potential. It's these big
ideas that create an atmosphere that can push a growth stock to
15. Warren Buffett once said there were only two rules to
follow with your investments: Rule #1: Don't lose money. Rule #2:
Don't forget rule #1.
16. Our goal is to get you heavily invested while the market
is trending higher. During those times, when investor perceptions
are improving, investors are willing to pay more and more for
stocks. This is when you can make big money! But, of course, no
market moves in one direction forever. So, when the
intermediate-term trend of stocks is down, your best move is to
play defense. Easing up on new purchases, while building up cash
by selling your weakest stocks, is a good idea.
17. Be an optimist. In our more than three decades of
publishing investment advisories, we've seen many ups and downs
for both the market and our country. But after every tough event
our dynamic country and economy have eventually rebounded. So no
matter how bleak the situation, always stay optimistic because
our country and stock market will give you some dazzling
18. Diversify your portfolio. For our Model Portfolio in Cabot
Market Letter, 12 stocks provide plenty of diversification for
your growth portfolio. Smaller investors can do well with as few
as five stocks, but you should never have all your eggs in one
19. Once you've invested in a stock, be patient. Recognize
that time is your friend. Frequently stocks don't go up as fast
as you might want them to. But if you can develop a persistent
and tolerant attitude coupled with plenty of patience, you'll
have a great advantage.
20. Buy growth stocks with strong Relative Performance (
) lines. RP studies are a superb way to identify successful
companies and to avoid problem companies. You should buy stocks
that are consistently outperforming the market. This is a good
indication that they are under accumulation, week after week,
month after month, and that the companies are succeeding. The
best investing tips come from the performance of the stocks
themselves. So ignore hot tips!
Send me your tried and true investing rules and tools by
replying to this email.
For my stock pick today, I am going to an area where,
admittedly, I rarely go ... precious metals. Why do I shy away
from the group? Mainly because the stocks don't act like growth
stocks, or, said another way, the rules and tools we have in
place to manage our holdings tend to get us in (or kick us out)
at the wrong time in these stocks.
Nevertheless, I am a trend-following investor, and it doesn't
take a genius to see that gold and silver stocks are looking
good. But, beyond just the chart, many names in the group also
have solid expansion stories; combining rapid production growth
with potential elevated and rising precious metals prices should
cause earnings to spike and, just as important, attract big,
One of my old favorites,
Silver Wheaton (
, has come back to life in recent months, and looks poised to
head higher. In fact, the stock is in the midst of a beautiful
month-long pause ... but more on that in a second. First, I want
to get into the fundamentals.
The company is, as my fellow editor Paul Goodwin says, a miner
with no dirt under its fingernails. Why? Because instead of
operating any mines, the company simply enters into long-term
purchase agreements with mine operators to take the silver off
their hands. And why would these miners agree to such a deal?
Because, for the most part, these miners are focusing on gold
production ... but get some silver as residual output. So they're
happy to book some profit on the silver and focus on their core
Silver Wheaton was spun off from Goldcorp in 2008, but already
had five contracts that would allow it to sell 15 million ounces
of silver. Today the company has ballooned its business to 15
long-term agreements that are expected to sell 28 million ounces
per year. And management is aiming to boost that figure to 48
million (71%) by 2016! Moreover, because this is basically just a
licensing-type firm, its profit margins are ridiculous-a whopping
70% in the second quarter, and that was a slow quarter for the
Of course, much of this comes down to the price of silver; as
it's slid during the past year, Silver Wheaton's earnings and
stock have slowed down. But silver has picked up ever since the
Fed's QE3 announcement in mid-September, and analysts are
expecting the company's bottom line to increase 34% next year to
$2.30 ... a figure we think is conservative if silver prices rise
Back to the stock's action, it hit multi-year lows this
summer, but rose 10 weeks in a row from there and, impressively
has traded very tightly during the past six weeks (actually two
sets of tightness, one for four weeks and one for three, in case
you're charting from home). I think it's a decent buy around here
with a tight stop around 36. Or, if you want to be safe, you can
wait for a decisive, big-volume breakout above 41 before buying,
and use a stop around 37.
All the best,
Cabot Market Letter