Stock Market Video
Advantages of Being an Individual Growth Investor
Who Knows What's Hiding In The Bushes
In Case You Missed It
In this week's Stock Market Video, I talk about the challenge
of getting into a bull market early enough to make good use of
it. It's always easier if you have a way (like Cabot's market
timing indicators) to recognize the bull early on. A bull market
is a great opportuniy, but it also makes it necessary to pick
your spots. Stocks discussed:
), Five Below (
), LinkedIn (
Lions Gate Entertainment (
Click here to watch the video!
Advantages of Being an Individual Growth
If you've ever thought about how you-one lone individual out
there making your investment decisions on your own-can possibly
hope to beat the results of a large mutual fund, here's how.
Yes, it's true that a big investment company has enormous
resources. Analysts can dissect every number about the target
company, figuring out the history of the company's revenues,
earnings, cash flow, free cash flow, working capital, debt,
overhead, liabilities, taxes, expenses, productivity, raw
materials, competition, etc. They can figure every valuation
ratio in the book and even invent more. They can also visit every
company whose stock is under consideration, getting face time
with management and taking the temperature of employees. In other
words, they have access to lots of information.
In the final analysis, however, big mutual funds have three
disadvantages that give a small, individual investor a fighting
First, most mutual funds operate under guidelines that
require them to remain invested at all times.
Investment guidelines are contractually binding and specify
what money managers may and may not invest in. Most stock funds
are required to have 95% or more of the fund's money invested in
the prescribed asset classes at all times.
The advantage for you, the individual investor, is that you
can jump out of the market and go to cash when stocks are sinking
like a rock. The manager of the small-cap value or large-cap
growth fund, on the other hand, can only move toward the best
stocks in that class. Lots and lots of stocks are doing well
right now, but the whales will still be in the market even when
it rolls over and dies.
The subscribers to Cabot growth stock newsletters, by
contrast, spent much of the worst of the Big Bear Market of 2008
sitting in cash-the much better alternative.
Second, mutual funds are big.
When they buy, stocks go up and when they sell, they go down.
This is a problem for a big fund that wants to dump a stock. But
they have very skilled people who can unwind a position over a
period of weeks without having the market notice … much.
Unfortunately, the stock market often doesn't wait weeks to
knock a stock off its pedestal and grind it into the dust. So
while you're pushing the button to sell a plunging equity, the
big investor has to decide whether to join you in selling
immediately (thus pushing the stock lower and probably scaring
off potential buyers) or trying to parcel out sells in hopes of
avoiding a price collapse.
The real disadvantage for the big investor here is that they
must try to predict the future, steering their funds toward where
they think markets will be months from now. As I've said here
many times before, predicting the future is not something anyone
has ever been able to do consistently over time.
So, your first two advantages are that you can go to cash and
Your third advantage is that you're really trying to
make money, while the mutual fund manager is just trying to
beat an index.
This may not sound important, but it's actually an enormous
The mutual fund manager has an index that has been designated
as the benchmark for the fund. So a large-cap growth fund manager
is trying to earn a few percent more than the S&P 500 Index,
which will put the fund into the top quartile of funds in that
To beat a benchmark, the manager uses most of the fund's money
to buy exactly the same stocks in the same weighting in the
relevant index, right down to a 10th of a percent, stock for
stock. Then the manager makes bets by under- or overweighting the
fund's holdings of a few stocks versus the index. Some managers,
especially those of small-cap funds, will sometimes make
out-of-benchmark calls by buying stocks that aren't in the
Ultimately, however, it's the benchmark that's setting the
course, with the manager just trimming the sails a bit.
As an individual growth investor, your advantage is obvious.
Not only are you not charging yourself a management fee, you're
free to buy whatever you want, regardless of index, sector,
industry, country, capitalization or style.
So, to summarize, what are your advantages as an individual
You can go to cash when market conditions deteriorate.
You can move in and out of stocks quickly.
You can manage your money to make money, not just beat a
Here's this week's Contrary Opinion Button. Remember, you can
always view all of the buttons
by clicking here.
Who Knows What's Hiding In The Bushes
No one knows. The future is unwritten. All you can do is play the
odds, by being aware of what investment systems work, by being
aware of the fundamentals (past, present and possible-future) of
the company you are investing in, and by being aware of what the
charts are saying, about both the broad market and your
The only reliable way to predict the future is to wait until it
becomes the present. That's cheating, of course, because then
it's the present. But if you think of how many people there are
who don't even know what's going on in the present, you're still
ahead of the game.
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 3/4/13-The Future of the
Editor Chloe Lutts of Dick Davis Investment Digest looks at
the future of stocks using the work of several of the investing
writers who appear in the Digest. The consensus is that bull
markets can always last longer than experts think they can.
Cabot Wealth Advisory 3/5/13-Apple: Not
Measuring Up to Expectations
In this issue, I took a look at how quarterly earnings
announcements can be the source of huge unexpected movement in
stocks, both good and bad. I also wrote about two companies-
Qihoo 360 (
) and Seaspan (SSW)
-that were reporting that day. (Seaspan came out on top).
Cabot Wealth Advisory 3/7/13-Fiscal Cliff,
Cabot Stock of the Month editor Tim Lutts writes in this issue
about the value of a little rebellion now and again and the
danger of someone filling the power vacuum. Tim also gives the
ninth of his "hold forever" stocks:
Stratatys Corporation (SSYS).
Have a great weekend,
Editor of Cabot China & Emerging Markets Report
And Cabot Wealth Advisory