Three Ways to Become a More Successful Investor
Apple Has Bottomed, But Should You Buy It?
One High-Potential Young Stock
When I was young, I wanted to be a brain expert … but I didn't
particularly like medicine. What I've found more interesting and
intelligible over the years is psychology, and that's come in
mighty handy in the investing business.
Psychology, of course, is what moves stocks. Sure, the media
will pretend that it's fundamentals that move stocks, but it's
not. Fundamentals don't buy and sell stocks; people buy and sell
stocks. And people, as we all know, are not always rational.
But people can be taught! Ideally, you get a great education
when you're young, because the younger you are, the more
teachable you are. But there's no reason that you can't learn at
any age, given sufficient motivation and perseverance.
For this knowledge, we are indebted to those brain experts who
did go through medical school, and who continue to discover more
about the amazing bundle of nerves we carry inside our skull.
They tell us that when we're young, the brain is amazingly
malleable, that it's a cinch to learn French when you're six
years old. And they tell us that as we age, learning new skills
gets just a little bit harder every year.
But we are always capable of learning, and what typically
fades before the ability to learn is the desire. We get set in
our ways. We get comfortable. And we see little benefit to doing
things differently than we've done before.
But I'm a strong believer in life-long learning. And today I'm
going to give you three lessons on becoming a better
Note: It's not enough to just read the list and say, "Yeah,
I'm going to do that." To learn these habits, you have to
practice them. You have to put in the time. In essence, you have
to train your brain to think in new patterns.
It's the same thing in any profession.
The more a baseball player takes batting practice, the more
efficiently he makes the necessary connections in his brain, and
the better his hand-eye coordination, reflexes and the like. They
call it muscle memory, but it all happens in the brain.
The same is true of a piano player; he's using small muscles
instead of big muscles, and he's also using the part of the brain
that recognizes, tempo, pitch, tonality, rhythm and more.
It's true of the geologist interpreting seismic data in a hunt
And it's true of the mailman, who learns the names and
addresses on his route by simple repetition, whether he tries to
In brief, all this learning happens because neurons in the
brain produce impulses, which carry tiny electrical currents.
These currents cross the synapses between neurons with chemical
transporters called neurotransmitters, and the more often the
same paths are used, the more efficient those pathways
Unfortunately, pathways left unused get progressively less
efficient, which is why if you've never learned a foreign
language, you're going to have a heck of a time doing it once
you're past middle age.
So here are the three habits that will make you a better
One: Learn to keep your losses small.
Think of investing as a pinball game at the arcade. You pay an
entry fee, and as long as you have credits, you can continue
playing. If you're good, your credits increase. But if you fail
to make the right moves, and your credit drops to zero, you can't
play anymore. In the investing world, where the credits are real
dollars, you never want that to happen. So when the trend turns
against you, you sell and take a loss.
When you take a loss, the world doesn't end. You're left
holding cash, which is a very good thing, and that cash is the
entry fee to the game's next round.
Sure, taking losses means admitting you were wrong, and that's
a tough thing to do the first few times. But with practice, your
ego learns to let go. You accept that small losses are necessary
if you're going to have the entry fee for the next game. And you
learn to take losses quickly and easily.
Sometimes stocks you sell will bounce back and move on to new
highs. That's life. But the key is getting out of that one stock
that just keeps falling and falling. Lost opportunity is far less
painful than lost money, so learn to sell quickly.
Two: Learn to look at charts.
We're all raised as fundamental thinkers, and thus most
investors focus on fundamentals, reasoning that if a company has
growing revenues and earnings, its stock should increase.
But stocks do not move on fundamentals alone. They move
because of hopes and dreams, fear and greed. And the best way to
see how investors are feeling is to watch the charts.
Now, chart-reading is not easy. And it's not a perfect
science; there is no perfection in investing. But the more charts
you look at, the more you come to recognize the patterns and
rhythms that matter. We call it "looking for familiar faces," or
patterns that we've seen before that usually lead to an upmove or
a downmove. Over time, charts become your friends, and if you
look at enough of them, over time, you'll one day find that you
are unable to buy a stock without first getting a good look at
Three: Learn to imagine how big success might be
Over the years, some of Cabot's best winners have come from
companies that provided a revolutionary product or service to the
mass market. A decade ago it was Amazon (
), which started by selling books but eventually came to sell
almost everything. If you had the foresight at the beginning to
see that possibility, you might have been an earlier buyer of
More recently, Tesla Motors (
) has been a big winner for readers of Cabot Stock of the Month,
in part because I saw big potential in its revolutionary products
and in part because I believed in the chart, which was uptrending
when I first recommended it more than a year ago.
Admittedly, it's not easy to think creatively about where
companies might go. But when you do, you'll find that you can
more easily justify investing in revolutionary companies, and
that's where some of the biggest profits are made. So practice it
. . . starting today. Look at each stock in your portfolio and
ask yourself, "What are the growth opportunities for this
With practice, you'll train your brain to more readily
identify these big profit-makers, and you'll find yourself being
an early buyer of revolutionary world-changing companies.
Which brings us to Apple.
, as most investors are aware, is now 40% off its high of last
year. That fact alone makes it a bargain in some investors'
books. But I don't like to buy stocks just because they're cheap;
I like to buy stocks because they're going up-and if they're
cheap, so much the better. So is Apple going up or not?
Consider this chart of AAPL's daily trading action.
You can see the big high-volume drop in late January, when
first quarter earnings were disappointing. And you can see the
same thing again three months later, when second quarter earnings
disappointed again and the stock hit a low of 382.
But look at the pattern since. There's a higher low at 420,
which mirrors the low of early March. And there's a higher
low-just last week-of 430, which mirrors the low of the
In short, the odds are good that AAPL has just built a reverse
head-and-shoulders pattern. (The head is at 390, the shoulders at
420 and the biceps-impressive but not required-are at 430).
So the odds are very good that Apple could see upside from
But should you buy it?
I say probably not, and here's why.
Many of the people buying Apple today are doing so with the
memory of the stock as a great investment. They want to relive
those days, whether they profited the first time around or
But AAPL is not only one of the most well-known brands in the
world, it was also the most popular stock in the world not long
ago. And it was the tiny decrease in that popularity, more than
anything else, that kicked off the stock's downtrend. So one
question to ask yourself now, if you're considering investing in
Apple, is this: "Who is going to be buying this stock and driving
it back up?"
It won't be people who are just learning about the business,
which is often a great driver of young stocks, and it won't be
people who are developing a better opinion of the company. So who
does that leave? Only bargain-hunting professional investors.
Yes, they can do the job alone, but not as well. In short, I'd
rather have a stock that can benefit from the actions of all
So, instead of buying Apple, because of its past great
products and past great history as an investment, what I
recommend instead is trying to find the next Apple, the next
great growth stock that captures the investing public's
That takes some imaginative thinking, and it's easier to
simply remember the past (see tip number Three above). But if you
try, you might find something like the stock recommended
The company is Yelp, and its symbol is
, which is easy to remember. Here's what Mike Cintolo wrote about
it back on May 5 in Cabot Top Ten Trader.
"The company is becoming the 21st century, interactive version
of the yellow pages; it's essentially the de-facto search engine
that connects local businesses with consumers who are ready to
buy. One study showed that just having a decent presence on Yelp
can boost sales by about $8,000, with that number tripling if
it's combined with marketing efforts. All of this is leading to
more businesses signing up, which is attracting more individuals
to the site, which is leading to greater and greater advertising
opportunities. Revenue growth has been rapid, as has the growth
in reviews (now 39 million, up 42% from a year ago), monthly
unique visitors to the site (102 million, up 43%) and active
local business accounts (45,000, up 63%). These days, much of the
viewership is taking place on mobile devices, and Yelp has a
burgeoning business in that area; 45% of the firm's searches in
Q1 came on mobile devices, and Yelp's mobile app is used on more
than 10 million devices. Today, most of the revenue is in the
U.S., but the company now has operations in 21 countries (New
Zealand is the latest), so there's every reason to expect years
of growth ahead. Earnings remain in the red, but that's because
management is investing; cash flow is already positive and the
bottom line should hit the black during the next couple of
quarters. With competition at bay (Yelp is the hands-down leader
in content and viewership), we think this is a good, sustainable
In sum, Yelp has a great growth story. Yet as a company, it
has nowhere near the mind-presence or reputation of Apple. But as
millions more people use its site, it might get there! And in
that POTENTIAL for increased perception lies the potential for
great stock performance.
Yours in pursuit of wisdom and wealth,
Editor of Cabot Stock of the Month
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